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The Warsaw Voice » Real Estate » September 30, 2009
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Tax Matters
September 30, 2009   
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When the economy is slowing down and the real estate market is focused on restructuring processes, including cost-cutting and current indebtedness refinancing, there is still some room for tax planning in order either to improve cash balance in real estate companies or to avoid cash leakage due to unnecessary tax payments.

In real estate entities, the focus on the increase of cash from tax settlements mostly takes the form of reviewing past situations requiring tax payments where those can be recovered in part or in whole. In principle, the changeable standpoint of Polish tax authorities on certain tax matters opens the window for such opportunities. The basket of opportunities varies from real estate tax, through income tax to transfer taxes.

The real estate tax, despite being charged to tenants via service charges, as an inherent and significant cost of the business operations of real estate entities, is closely monitored to let one look for any refunding opportunities, such as reclassification of assets from buildings to structures, recognizing incorrect assessment of the taxable base for structures, and so on. Income tax opportunities mostly involve the reclassification of non-deductible costs to tax deductible costs or disregarding for tax purposes certain elements of revenues, such as forex results, where in both cases the potential cash to be obtained equals 19 percent of such reclassification. Finally, the transfer tax recovery opportunities include the reclassification of the asset acquisition transaction to non subject to transfer tax or financing activity where transfer tax was mostly unnecessarily paid on internal financing either in earlier years from the parent entity to the subsidiary, or, currently, from the cash-generating subsidiary to the parent entity.

Thus, the above opportunities always refer to past events which obviously may also impact future events.

Nevertheless, one of the current major issues in the real estate business is the refinancing of assets. The way such refinancing is performed may affect, from the tax perspective, cash leakage. In general, in a very simple form the refinancing is executed via amendment to currently binding loan agreements as well as via conclusion of new agreements and replacement of previous ones. From the legal perspective the form of refinancing may be of lesser weight, unless there are many mortgages established on a single property or other commercial arrangements which exert influence on the form of debt refinancing.

In consequence, proper tax planning may bring cash benefits in exchange for the insignificant costs involved.

Crystallization of foreign exchange differences
Projects are financed with loans or credit granted in foreign currency. Debt restructuring may result in crystallization of foreign exchange differences on the loan principal, which, for tax purposes, can be either positive or negative. Due to the fact that for tax purposes the foreign exchange results are recognized when effectively realized and not on an accrual basis (unless the accounting principals apply, which is rather seldom) not in all cases can the generation of additional significant foreign exchange results for tax purposes be considered a desired solution.

Therefore, project refinancing should be carefully structured since due to recent high volatility of foreign exchange rates, the tax deductible cost or tax income crystallized in this respect may be crucial.

Commission on debt refinancing
Bank commissions constitute a significant cost of debt refinancing. The treatment of the commission for tax purposes would vary depending on the purpose for which the loan is drawn. In particular it could be recognized at the moment when paid, and can increase the initial value of the fixed asset (if connected with the same), or can be recognized for tax purposes over the life span of the credit. Taking into consideration the foregoing, this issue should be taken into consideration in connection with debt restructuring.

Interest tax deductibility
Interest constitutes tax deductible cost when paid or compound to the loan principal unless it increases the initial value of the fixed asset.

However, the treatment of interest may differ in the cases connected with credit refinancing-especially when the interest has accrued only on the initial credit. Depending on whether the debt is effectively repaid or extended, the interest may be recognized respectively either as cost or not. Should any tax loss occur or increase due to the debt refinancing, if the real estate vehicle is not capable of absorbing tax losses in the future, this tax asset would be effectively lost.

Withholding tax
In general, Poland imposes a 19 percent withholding tax on any interest payment. This is reduced or eliminated either based on the Interest and Royalty Directive (which would be fully applicable in Poland from July 1, 2013) or Double Tax Treaties.

The withholding tax is usually viewed as the cost of financing transaction due to the fact that the lender is not able to credit the withholding tax against income tax. Most Double Tax Treaties concluded by Poland provide for exemption from withholding tax for the interest paid abroad where the bank is the lender. However, not all Double Tax Treaties provide for such a privilege. In addition, the withholding taxes are mostly levied under respective Double Tax Treaties for the payment of interest on non-bank loans.

Taking into consideration substantial amounts engaged in debt restructuring and the influence of tax implications on potential cash inflow to the company, structuring of financing may be of great importance from the tax perspective. From the legal perspective the form of refinancing may be of lesser weight, unless there are many mortgages established on a single property or other commercial reasons exist.

Bartosz Miszkurka, Advocate, Partner, KPMG Legal
Katarzyna Nosal-Gorzeñ, Director, M&A Tax, KPMG Tax
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