SAC once again on depreciation limits for real estate companies

From the beginning of 2022, a provision limiting the amount of depreciation allowances made by real estate companies was introduced into the CIT Act. It allows depreciation write-offs on buildings and premises (group 1 of the NIT) to be recognised as tax deductible costs, but only up to the amount of balance sheet write-offs.

Depreciation limits – what the dispute is about?

The aforementioned regulation has been the axis of disputes between taxpayers and tax authorities, which have quite consistently argued that, in the absence of depreciation deductions for balance sheet purposes, the tax depreciation limit is ‘0’.

The Provincial Administrative Courts (in most cases) have understood the issue differently. The rulings emphasised that the limitation provided for in Article 15(6) of the CIT Act applies only if the property is considered a fixed asset for balance sheet purposes. This restriction should not apply at all when, for balance sheet purposes, the property is recognised in a different manner (e.g. recognised at fair value). It has been argued that Article 15(6) of the CIT Act does not apply when the company does not make the depreciation allowances provided for therein in accordance with accounting regulations. Thus, the limitation of Article 15(6) of the CIT Act should not apply in such a factual situation.

SAC- first approach: does the absence of balance sheet depreciation mean the absence of tax deductible cost?

In January 2025, two judgments of the Supreme Administrative Court appeared, which presented a third approach. The SAC stressed that the thesis that depreciation write-offs cannot be included in tax deductible costs (otherwise known as tax deductible expenses) in the absence of making them under the Accounting Act is incorrect. However, in the further part of the justification, the SAC indicated that a hypothetical value of depreciation write-offs made on the basis of the provisions of the Accounting Act should be established, and then the actual write-offs should be compared with the established hypothetical write-offs (if necessary, making an appropriate adjustment).

This approach of the SAC has further exacerbated the uncertainty as to the correctness of the conduct by real estate companies when they treat real estate as investments for balance sheet purposes and consequently do not make depreciation write-offs for balance sheet purposes. All the more so as the need for such a comparison with notional values does not arise from the CIT regulations.

SAC – second approach: no requirement of balance sheet depreciation for CIT cost deduction

Once again, this issue was addressed by the NSA at a hearing on 5 March 2025. This time, however, the NSA followed the theses of the Provincial Administrative Courts  and did not build its own legal constructions complicating taxpayers’ correct accounting for depreciation.

The SAC explicitly pointed out that Article 15 Section 6 of the CIT does not contain the condition that real estate companies, in order to make tax deductible depreciation write-offs included in costs, must also depreciate the given real estate on the balance sheet. The court emphasised that the legislator had not introduced a ‘0’ limit for such real estate companies. On the other hand, it agreed with the Provincial Courts’s thesis that  the limit outlined in Article 15(6) thereof, regarding the treatment of tax depreciation as a tax-deductible cost, should not be applied when a property is classified as on-balance sheet as investment real estate and no write-offs, as defined by accounting regulations, are made against the entity’s financial result due to the property being valued at market value.

SAC:  a favourable ruling for taxpayers

The SAC also pointed out that the January judgments of the SAC, although favourable for companies, introduced unnecessary complications as to the need for comparative operations. The Judges in this case did not share the correctness of the construction of the ruling in the January cases.

We await the written justification of this ruling and are pleased that the NSA has recognised that one of the main values of any law is its clarity, predictability and transparency.

This will certainly enable taxpayers to correctly account for their obligations to the state budget.