Impact of New Polish Deal on depreciation of commercial properties


Impact of New Polish Deal on depreciation of commercial properties

Polish taxpayers are allowed to decrease the corporate income tax base by depreciation deductions made on commercial properties. Does the Polish Deal change this rule?

REal Knowledge - about the Polish real estate market #4

Current approach

Based on the current legislation and the market practice, regardless of the accounting treatment of commercial properties used in the books, Polish taxpayers holding commercial properties are permitted to depreciate them for tax purposes.

The basic rate for buildings is 2.5% per annum, and the depreciation is based on the initial value, i.e. the purchase price or development costs. Taxpayers can also depreciate structures, whereas land is not subject to tax depreciation.

As a result of making depreciation write-offs, the taxable income is reduced, which allows for lower taxation of the taxpayer’s business activity. As mentioned above, this approach does not apply to the accounting treatment of real property whereby in practice, a fair value presentation may be used if the building is not depreciated for accounting purposes.


Changes introduced by Polish Deal

According to the amendments provided for in the Polish Deal, depreciation write-offs on fixed assets (buildings) can be tax deductible. However, in the case of real estate companies, tax-deductible depreciation write-offs on fixed assets (categorized as Group 1 in Fixed Asset Classification – in practice: buildings) cannot be higher than accounting depreciation charges made on these fixed assets in a given year.

In other words, the new regulations may be interpreted as not allowing the tax deductibility of depreciation write-offs on buildings in excess of their accounting depreciation.


Impact and further steps

The above leads to the question about buildings that are not subject to accounting depreciation at all, i.e. those recorded at fair value. Do the new regulations imply that tax-deductible depreciation will not be possible in such cases? It should not be forgotten that the restriction will negatively affect companies depreciating fixed assets for tax purposes with a higher depreciation rate than the accounting one.
Clearly, the sudden limitation on the recognition of depreciation write-offs on fixed assets acquired / developed prior to 2022 will result in a breach of the grandfathering rule.

In view of the rising doubts, real estate companies should discuss the issue with their auditor or consult their accounting team to decide on further steps. Moreover, they should also keep an eye on the market to see what approach will be most often taken in practice in that respect.

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