The accession of Poland to the European Union in 2004, attracted an unprecedented lot of foreign investment, especially those who decided to invest their means at the real property market. Thus a lot of real properties were bought, particularly in the period when credit was easily accessible (that is before the credit crunch, especially from October 2004 to mid 2007). The above brought about a huge rise in the property prices ? which, at the very end of the day, was what made it to a lot of investors ? who were then able to take profits from their investments by selling their properties (and rightly so).
However, this was where tax problems started to loom for such investors.
Let me start off with saying that such situations are covered by Polish law. Of that, the Law of 1991 on personal income tax (?the Law?) regarded a gainful sale of real properties as the source of revenue if such a sale came into being before the lapse of 5 years from the end of a calendar year, when the real property concerned had been purchased or build. According to the Law, the taxation to burden such a sale was to amount to 10 % of the acquired revenues (that is of a sale price, not of income), to be paid within 14 days at a competent Polish tax office.
The very same Law provided for ways to legally avoid the payment of the tax resulting from a sale of a real property.
The first one is simple ? wait until a lapse of a period of five years, counted from the end of a calendar year when the real property concerned had been purchased or build. A sale of a real property executed after such the period will be exempt from taxation by income tax.
The other exemption is more complex. Generally speaking it could only regard real properties that were purchased before 1 January 2007. The exemption was drawn up to be dependent on fulfilment of some conditions. First of all, it was to concern those revenues that were to be reinvested (or a part of them) in the purchase of real properties set out in the Law or, generally speaking, in their expansion or renovation. Apart from that, the revenues could have been reinvested in the repayment of a credit or a loan (as well as of the interest thereof) that were taken out for a purposes connected with the above-mentioned real properties.
Secondly, the revenues were to be reinvested within 2 years of the date of sale. Moreover, to avail himself of the exemption, an investor would have to submit – within 14 days of the date of sale – a declaration that he was going to make use of the entitlement. Last but not least, the revenues from a sale of a real property were to be reinvested in the purchase of real properties only situated in Poland.
A practical importance laid in the fact that exemptions regarded substantial amounts of money ? as the taxation was levied on the revenue (and not on mere income) of the sale.
Suppose an investor bought an apartment in the centre of Krakow in 2005 at a price of 400,000.00 PLN (which was possible at the time), refurbished it mildly and sold it at 800,000.00 PLN three years later. He would have to disburse 80,000.00 PLN to pay the Taxman in the absence of an exemption.
To avoid such an outcome, the investors started to make use of their entitlements described above. That in turn gave rise to several problems. One of the issues was undoubtedly a question of a repayment of credit taken out to buy a real property, since a lot of the properties were being bought using an easily accessible credit. At a moment of a resale, such a property was usually still burdened with a substantial mortgage, arising from the credit. The payment of the sale price was therefore being divided: some of it would repay the credit and the rest of it would go the seller`s account. Thus, not only was the credit being repaid before the very sale was completed but also the money was reinvested into real property which in fact was owned by the seller himself and which was itself a direct object of the sale.
The above, on the face of it, was not entirely compatible with the wording of relevant provisions of the Law. Moreover, it was not clear, whether the revenues could have been ?reinvested? in the real property which was actually being sold (as opposed to a reinvestment in the subsequent purchase of a different real property).
The answers to the above-mentioned doubts were contained in several tax interpretations issued by various tax offices. There stems from them that taxpayers who allotted the revenues from a gainful sale of a real property for repayment of a credit which had been taken out to buy the property which was a subject of sale were entitled to avail themselves of the exemption if the property in question fulfilled the conditions laid down in the Law (that is, generally speaking, that the property was bought before 1 January 2007, the reinvestment was being made within 2 years of sale, the property was situated in Poland).
Thus, a foreign investor, who used the revenues (or a part of them) from a sale of a real property which he bought before January 2007 to repay the mortgage burdening the object of that very  sale was entitled to be exempt from the tax from the revenue that was reinvested in the repayment of the mortgage.
Finally, I would like to emphasize that a taxation of a sale of real properties purchased on 1 January 2007 and later differs significantly from what was said above. To that end, I highly recommend that you have a browse at Monika Skocz?s article in our blog in that matter. It is to be found here.

This entry was posted on Thursday, 07-01-2010 at 12:49 by Marcin Kiełbasa and is filed under How to invest in Poland. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.