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The Warsaw Voice » Real Estate » January 7, 2009
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Avoiding CommonPitfalls
January 7, 2009   
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As numerous tax tables and law summaries are available from advisors (please contact us if you want these), I would rather use these few column inches to feature some pieces of more practical advice from our rich and varied casebook. For 17 years I have been advising businesses in Poland guiding over 100 new international entrants into overwhelmingly successful investments in this market, many dozens of them developers. This particular issue of the Voice is tailored for the building sector, so the issues here are selected for you.

Almost all pitfalls can be avoided if investors use their advisors early and often, and give them the remit to advise them with the presumption of no prior knowledge of the market, not keep their involvement to a minimum. In nearly all cases, investors' difficulties arose from making assumptions about this country, especially the one where: "if Poland is in the EU, then surely things must be the same as in my country"-an assumption based on a lack of awareness of the permitted diversity in the way laws are interpreted throughout the EU, and in the speed of their enactment.

The first pitfall can be choice of vehicle. Some developers have tried to avoid company ownership altogether, wishing to set up the kinds of joint or fiduciary ownerships of properties that you get in many Western countries. These investors need to understand that such things base on highly evolved trust law. Trust law is something that came into the Anglo-Saxon system from the Normans and it is reflected in Polish law only in a limited way-for instance the unit trust company laws. This means that some shared ownerships in a property, or having nominees holding it "on behalf of" the "real" owners are not effective and highly risky. Therefore corporate vehicles are best, in particular special-purpose vehicles (SPVs) where each building or project has its own company (some investors even make limited partnership structures around each property for tax reasons, involving more than one company per building). The advantages, such as being able to sell the building on without value-added tax (VAT) occurring (only the lower tax on civil-law transactions-podatek od czynno¶ci cywilnoprawnych, or PCC), are offset with some disadvantages, such as the absence in Poland of tax groups. The famous "Marks and Spencer" case has not yet been implemented, so losses in one company in a group will not be offset against profits in another, and there are transfer pricing regulations which (nota bene) operate as much within Poland as between Poland and other tax regimes so that artificially transferring profits to allay losses within your Poland group is also a riskier strategy than you might expect.

Another question is when to set up the vehicle company? The need to start making monthly returns for all taxes, even when there are zero returns, and also for income tax and VAT, not just personal taxes, means that off-the-shelf companies have never been popular here. Getting a company made for you should be possible in one to two months, but most business can be done in the name of a company "under formation." The usual error is for investors to set up their companies too early, not realizing that this will give them monthly accounting costs even if their project is delayed. The more drastic but less common error is for people to have to sign their land deal in the next few days but not yet have a company to do it with. Many sellers will not sign a land deal with a partly-formed company, despite the fact that theoretically it is valid.

Another issue developers usually ask about is timing for reclaiming input VAT. The answer depends on whether you are building to sell or building to rent. If you build to rent, the regime is easier-you are building a fixed asset, the accounting for the build is as for a fixed asset and you can reclaim and receive input VAT back much faster, regardless of whether a sale is made or not. If you are building to sell, then you are building your stock, and, just as with any kind of stock, you get your input VAT back by selling the stock on with output VAT on it, receiving the output VAT from buyers, but offsetting input VAT and not transferring the full output VAT to the tax office. That means you have to be selling before getting it back. You may well ask, what happens if I start building to rent and then "change my mind" and build to sell? The answer is I know someone who did this back when VAT was still in its infancy, and they got away with it. I can't envisage it being so easy today. In any event, if such a situation actually occurs, expect the onus of proof to be on you, not the tax office, for how such a state of affairs came about. You may then have to pay back the input VAT and interest.

I'm told I can't write too much today, but there are dozens more such issues to talk about. All I have time to say is that the initial consultation at our firm is free and without obligation…

David J. James
Vice-President and International Liaison Partner at Grupa Strategia
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