Tax depreciation in real estate companies

Since 1 January 2022, Poland’s CIT Act has been amended to include new regulations limiting the use of tax depreciation by real estate companies. Tax depreciation write-offs cannot now be higher than the depreciation write-offs recognised under the accounting laws and charged to the profit/loss of a business in a given fiscal year. This means that tax-deductible depreciation write-offs cannot be higher than the depreciation write-offs made by real estate companies for accounting purposes.

Many real estate companies have an accounting policy in place whereby they classify their property as investment property at fair market value. Such property is not classified as fixed asset and is not depreciated for accounting purposes. However, for tax purposes, such property is classified as fixed asset subject to tax depreciation.

The new limitation has raised doubts as to whether it applies to real estate companies which for accounting purposes disclose their property as investment.

So far, the tax authorities issued individual tax rulings in which they specified that in such situations a real estate company is not allowed to classify tax depreciation write-offs as tax deductible costs as it does not recognise depreciation write-offs for accounting purposes (their value is “0”).
A different opinion was presented by the Provincial Administrative Courts (WSA) in their first rulings in this matter (rulings of the Provincial Administrative Court in Warsaw of 31 January 2023, ref. No. III SA/Wa 1788/22; III SA/Wa 2356/22; III SA/Wa 2355/22, and the ruling of the Provincial Administrative Court in Poznań of 1 February 2023, ref. No. I SA/Po 752/22). The Court found the new regulation limiting the tax depreciation write-offs to lack precision and ruled that tax depreciation of investment property should not be disallowed. The Court cited a draft bill which read that the purpose of the regulation is to harmonise tax and accounting depreciation write-offs and that investment property is not depreciated for accounting purposes at all. The Court also concluded that if the objective of the legislator was to impose the restriction also on groups of investment property, then the regulations introducing the limitation should be more precise.

The rulings have not yet been published and the above reasoning is based only on the statement of reasons given orally. Most likely, they will not have an immediate effect on the position of the tax authorities. It can be expected though that the tax authorities will complain against the rulings to the Supreme Administrative Court. Nevertheless, we hope that they are the first sign that a favourable change of the position of administrative courts is underway.

Considering that the property depreciation write-offs are often the main component of the calculation of tax-deductible expense at real estate companies, perhaps clarification of the provisions of the CIT act can be expected.