Indirect ownership of real estate and the definition of a ‘real estate company’

The definition of ‘real estate company’ and the doubts related to it

According to the regulations, a real estate company is an entity, other than a natural person, obliged to prepare a balance sheet on the basis of accounting regulations, in which at least 50% of the balance sheet value of the assets (or, in the case of a company commencing operations, the market value of the assets), directly or indirectly, are real estate located in the territory of Poland or rights to such real estate, and their total value exceeds PLN 10 million. Additionally, in the case of the company that continues its business activities, the company should meet the revenue condition.

One issue that is still unclear is how to determine the value of indirectly held real estate in Poland or rights to such real estate (e.g. by holding shares in subsidiaries holding real estate). It is problematic to determine in which situations they constitute at least 50% of the balance sheet value of the assets of a given company, as one of the conditions for fulfilling the definition of a real estate company. This issue was recently addressed by the Voivodship Administrative Court in Warsaw in its judgment of 16 October 2024[1], which confirmed the interpretation of the regulations unfavorable to taxpayers and is the first judgment addressing this issue.

Determining the correct method of calculating the indirect ownership of real estate by a given company affects, in principle, the qualification of this company as a real estate company, which will consequently affect the taxation of transactions involving real estate companies as well as reporting obligations.

Tax authorities’ approach to the calculation of indirect real estate holding

Initially, the tax authorities assumed that in order to calculate the carrying amount of indirectly held real estate, the carrying amount of shares in subsidiary companies and the value of equity interests in subsidiary partnerships, in which at least 50% of the carrying amount of assets are directly or indirectly real estate located in Poland or rights to such real estate, should be taken into account.

Such a position was expressed, inter alia, in an individual tax ruling of 14 March 2022. [2]: ‘… for the purpose of determining the indicator of the share of the carrying amount of real estate located in Poland or rights to such real estate in the total carrying amount of the Company’s assets, the carrying amount of the Company’s assets which are indirectly represented by real estate located in Poland or rights to such real estate should be adopted as the carrying amount of the Company’s assets presented in accordance with the regulations of the accounting law in the Company’s books of account, in particular in the Company’s separate balance sheet as financial assets , including shares, stocks and equity interests held by the Company in, respectively, incorporated companies and partnerships, where at least 50% of the carrying amount of the assets of a given entity constitutes, directly or indirectly, the carrying amount of real property located in Poland or rights to such real property… ‘. An analogous position was contained in the tax ruling of 20 July 2023[3].

In August 2023, there has been a change of position – the tax authorities consistently indicate in the tax rulings issued that when calculating indirect possession, the value of real estate held by subsidiaries should be taken into account, instead of the value of shares, stocks or equity interests in subsidiaries, as previously assumed. This position was adopted, inter alia, in the tax rulings of 14 August 2023[4], 2 May 2024[5], 7 June 2024[6] and 23 July 2024[7] .

For example, the last mentioned tax ruling indicates the formula to be used when verifying the condition concerning the structure of assets, i.e. verifying whether at least 50% of the carrying amount of assets, directly or indirectly, was the carrying amount of real estate located in Poland or rights to such real estate. This formula has the following form:

“- Numerator: Carrying value of real estate in the Company plus carrying value of real estate that are indirect assets (calculated as the carrying value of real estate that the individual Subsidiaries hold multiplied by the Company’s percentage share in the capital or profit of the individual Subsidiaries).

– The denominator: the carrying value of the Company’s direct assets and the carrying value of the indirect assets”.

Voivodship Administrative Court confirmed the tax authorities’ new approach on how to calculate indirect real estate holdings

The line of interpretation presented by the tax authorities since August 2023 was confirmed by the judgment of the Voivodship Administrative Court (pl. WSA) in Warsaw of 16 October 2024[8]. The court confirmed that the semantics or structure of the provision[9] indicates an intention to include in the definition of a real estate company also such entities that indirectly exercise rights to real estate. In the court’s view, the position that it is the value of shares held by the company in subsidiaries that may be considered real estate companies is incorrect and not supported by the wording of the provision[9]. The clear wording of the provision indicates that it is about the carrying value of all real estate, held directly and indirectly, i.e. also through subsidiaries. The written reasons for this judgment have not yet been published.

Doubts of taxpayers

The unfavorable line of interpretation by the tax authorities may result in a significant expansion of the scope of entities fulfilling the definition of a real estate rich company and, consequently, also covered by the reporting obligation, as the value of the real estate of subsidiaries often significantly exceeds the value of shares in these subsidiaries. When reviewing the reporting obligations, we recommend taking into account the current approach of the tax authorities as well as reviewing the approach used in previous years.

As a reminder, the reporting regulations for real estate companies impose reporting obligations on real estate companies and their direct and indirect shareholders who meet certain criteria. These obligations must be performed by the end of the third month following the end of the tax or financial year of the respective real estate company. This means that for taxpayers with a calendar tax year, the deadline for reporting for 2024 will be 31 March 2025.

If you have any further questions regarding this issue, please contact the authors.

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[1] Ref. III SA/Wa 1771/24.

[2] Ref. 0111-KDIB1-2.4010.668.2021.1.AK.

[3] Ref. 0111-KDIB1-1.4010.281.2023.1.AW.

[4] Ref. 0114-KDIP3-2.4011.514.2023.3.JK2.

[5] Ref. 0111-KDIB1-3.4010.54.2024.1.AN.

[6] Ref. 0111-KDIB1-3.4010.270.2024.1.AN.

[7] Ref. 0111-KDIB2-1.4010.180.2024.2.AR.

[8] Ref. III SA/Wa 1771/24.

[9] Article 4a(35)(b) of the Polish CIT Act.