On 30 September 2020, an extensive set of proposed amendments to tax laws was submitted to the Polish Parliament. We have already written about how general partnerships and limited partnerships are to be taxed. In this article, we describe the planned form of taxation of income from the sale of real estate companies and related doubts.
What is the current situation?
If a non-resident transfers shares in a company with at least 50% of the value of its assets constitutes real estate in Poland, the seller must pay income tax in Poland. This obligation may be excluded under a relevant tax treaty. However, most of the tax treaties Poland is a party to allow Poland to collect tax in such circumstances (sometimes after fulfilling additional requirements).
How is it supposed to be?
The proposed amendment introduces the concept of a “real estate company.” This is defined as an entity, other than a natural person, obliged to prepare a balance sheet, in which the market value of real estate in Poland or rights to such real estate constitutes at least 50% of the market value of the entity’s assets.
If shares of a real estate company, so defined, are disposed of, and at least one of the parties to the transaction is not a Polish resident for tax purposes, then the real estate company (the subject of the transaction), will be obliged to remit the income tax on this disposal. The deadline to remit the tax is the 7th day of the following month.
If the company does not learn of the “transaction amount,” it will be liable to remit tax calculated on the market value of the transferred shares. Thus an income tax will become a revenue tax.
Additionally, real estate companies with no registered office or place of management in Poland will have to appoint a tax representative. Companies with tax residence in another EU country will be exempt from this obligation. The tax representative, whose appointment is mandatory even if no transfer of shares is planned, will be jointly and severally liable with the real estate company for payment of this tax.
Why the change?
The express pace of work on the bill (the deadline for submitting a position in public consultation was cut to two days) did not allow for an in-depth analysis of all practical aspects of the amendment. The objections to the bill may be divided into two main groups. The first group refers to issues of systemic importance.
In the Polish tax law system, the remitter’s role is assigned to entities making certain payments or acting as intermediaries in the payment of certain amounts and possessing knowledge of specific payments, the reason for making the payment and its effects, and in a position to deduct the tax from an amount paid to the taxpayer. Thus the remitter does not finance the tax payment for the taxpayer. For example, the employer deducts the employee’s income tax and a company paying a dividend deducts the shareholder’s income tax. A company whose shares are transferred takes no part in the transaction or the settlement of the price. Therefore, it is not clear what the role of the real estate company as a remitter derives from, or where the real estate company is supposed to take the funds from to pay the tax. (An element of the definition of a remitter is “collection of tax from the taxpayer”; it follows that effectively the tax should be financed by the taxpayer, not the remitter.) Significantly, at the time when the remitter in this structure is required to remit the tax for the taxpayer (i.e. the former shareholder), the company is already operating in a new shareholding structure and may have no link to the previous shareholder who has earned income from the transfer of shares.
The Ministry of Finance claims that the bill is intended to facilitate tax enforcement by shifting the burden of paying tax to a Polish entity. Thus it is incomprehensible why, if a Polish entity transfers shares to a foreign buyer, the real estate company should act as the remitter. Again, the real estate company’s obligation to act as a tax remitter arises only if at least one of the parties to the transaction does not have its registered office in Poland.
Additionally, in the event of transfer of shares by one of multiple shareholders in a real estate company, the economic burden of the tax falls indirectly on the shareholders who have remained in the company. Since the company is liable to pay tax and has limited possibilities for recourse against the outgoing shareholder, the amount of tax paid may de facto reduce the value of the remaining shareholders’ shares.
The second group of objections concerns issues relating to the settlement of tax itself. The proposed regulations leave unaddressed a number of important issues the newly minted remitters will have to face.
The first difficulty will arise at the stage of determining whether a given company is a “real estate company.” This will require an annual determination of the market value of all assets. We could imagine that a typical manufacturing company might be deemed a real estate company because the value of the property used for manufacturing represents a significant item in the company’s assets. In the course of public consultation, a solution was proposed linking the status of a real estate company to generating most of the company’s income from real estate (e.g. lease income). This solution was rejected by the Ministry of Finance. The way of defining a real estate company, separated from the intention to transfer shares, is of particular importance for companies not based in Poland or another EU country. Failure to appoint a tax representative may be costly for them, as the fine can be as high as PLN 1 million.
The second challenge is to establish that the transaction has taken place. This is relatively simple in the case of a limited-liability company, where the shareholder must inform the company of the transfer of shares. Even in this case, however, the shareholder has two weeks to notify the company. Therefore, if a transfer takes place at the end of the month, the notification may be received by the real estate company after the deadline for remitting the tax. The matter is further complicated in the case of listed companies, as a listed real estate company would have to identify each transaction in its shares and remit income tax on such transaction.
The third difficulty is how to calculate the amount of the tax liability. In theory, a company that is the subject of a transaction may not know the transfer price of its shares, let alone the cost of their acquisition. There is also no reason for the shareholder to disclose this information to the company, especially when it ceases to be a shareholder and would have to disclose the business secrets of the buyer, which often would be a market rival. Determining the taxable income would be even more complicated in other cases of disposal, such as in-kind contribution. Problems may also arise from the reference to the concept of “transaction amount”; a lack of knowledge of this amount makes it necessary to tax the entire market value of the shares.
There is also no guidance on whether and how to combine income from the transfer of shares in a real estate company with other capital gains and to offset tax losses from this source. The position of the Ministry of Finance expressed during the public consultation suggests that netting such amounts will be impossible. Therefore it seems that, intentionally or not, the Ministry of Finance is singling out a new and independent source of income.
It is also unclear how the company is to obtain funds for remitting the selling shareholder’s income tax. Placing the company in the role of the remitter should mean that the economic burden of the tax lies with the taxpayer. Under a teleological interpretation, the transfer of funds for payment of the tax should not be regarded as a financial gain giving rise to revenue on the remitter’s part, as it does not lead to enrichment of the real estate company. However, the lack of a clear regulation on this issue opens the door to unfavourable interpretation of these provisions.
Finally, appointing a real estate company as the tax remitter in transactions with a cross-border element raises the question of the connection between this legislation and tax treaties. If the transferor is a resident of a country that does not have a real estate clause in its tax treaty with Poland, will the real estate company be able to refuse to collect the tax? And if so, on what basis? This question, like so many others, remains unanswered.
Jakub Macek, attorney-at-law, tax adviser, Tax practice, Wardyński & Partners