Real property tax: practical aspects of determining the taxable base with respect to buildings and structures

by Adam Mazur

26 May 2021

Real property tax is sometimes troublesome for taxpayers carrying on a business activity and obliged to complete detailed returns every year. The greatest challenges include determining the building’s usable area and proving that an asset included in the taxpayer’s tangible assets records can be classified as a structure.

Besides having to determine a construction’s status under tax laws (whether it is a building or structure or neither of them), which is difficult in itself, taxpayers are frequently faced with the question of how to calculate the taxable base for such a construction.

Taxable base for buildings

Buildings (or their parts) are taxed based on their usable area. According to the Local Taxes and Fees Act, a building’s usable area should be measured for real property tax purposes based on the length of internal walls on each floor level, including underground car parks, basements and lofts (except staircases and lift shafts).

Such a solution seems to be of small practical value. Taxpayers who often adapt office space for day-to-day purposes hardly ever calculate the office's usable area. Also, persons in charge of office space adaptation work are usually not aware that they should inform the accounting department about the changes.

Consequently, real property taxpayers often use invalid usable area documentation (prepared e.g. for the purpose of the construction design) which may overstate or understate the actual usable area and thus also the taxable base. With the maximum rate of 24.84 zloty per 1m2 (in 2021) this could make a noticeable difference for an enterprise. Additionally, taxpayers must disclose up-to-date information to the taxman.

Taxable base for structures

According to Article 4 of the Local Taxes and Fees Act, the base for the assessment of real property tax on structures (or their parts) used for business purposes is, first of all, the value referred to in the income tax regulations, determined as at 1 January of the tax year, which constitutes the base for calculating depreciation in that year, not reduced by depreciation charges, and in the case of fully-depreciated structures – the value of such structures as at 1 January of the year in which the last depreciation charge was made. The wording of this provision has at least two practical drawbacks.

The first one concerns the assessment of the taxable base for fully-depreciated structures. The case law which administrative courts have developed as a result of numerous disputes between taxpayers and tax authorities says that the taxable base applicable to structures is the value on which depreciation charges are made (initial value of tangible assets), no matter if the structures are fully depreciated or not. The regulations indicate that a new taxable base cannot be determined based on the market value once the depreciation is over.

The second drawback concerns the difference between the terms “structure” and “tangible asset”. Very often this will be one and the same thing, but not always. It may happen that a taxpayer classifies as a tangible asset a construction only one component of which may be treated as a structure by law. It may also happen that a taxpayer recognises a tangible asset which is a structure only together with some other assets but not on its own. The question then is whether the values of individual tangible assets should be deducted or added up to determine the taxable base. The Supreme Administrative Court (SAC) says no.

SAC’s viewpoint

The SAC held that no accounting operations may be performed on tangible assets to determine the value of structures (SAC’s judgment of 3 March 2021, file no. III FSK 919/21). So how to proceed? The SAC emphasises that whenever the initial value of a structure cannot be determined (i.e. when the structure and the tangible asset in the taxpayer’s records do not match), the taxpayer should determine the market value of the structure as of the date when the tax is chargeable. However, the law does not explain how the taxpayer should determine that value. As a consequence, we cannot rule out the taxpayer making accounting transactions on tangible assets and disclosing thus calculated value as market value. Importantly, however, this approach is correct only if the mathematical operation produces the market value.

Considering how the initial value of the tangible asset and the potential market value of the structure are calculated, it may turn out that the sum of initial values of tangible assets which make up a structure is significantly higher than the market value of that structure. In such a case, the taxpayer would overstate the taxable base, which in the case of significant value may make a dent in his budget as the tax rate is 2% of the taxable base.