American Investor, Winter 2014
In a tenant’s market, signing bonuses for entering into a lease raise interesting tax issues
In the world of commercial real estate, leases contain a great many provisions that go beyond areas addressed by the Civil Code. But often a key question is an array of financial incentives offered by landlords seeking to let their space at a time when supply continues to be high in Poland’s largest cities. In the case of office space, in addition to rent, key business issues in the lease negotiations include the manner in which operating costs are paid, the length of rent abatements, and the fit-out budget for adapting office space to suit the tenant’s needs—as well as an additional incentive in the form of a one-off “signing bonus” to tenants for entering into a lease with the landlord for space in a specific building.
There is an increasingly common practice of landlords offering tenants a payment upon signing the lease—not to cover fit-out expenses, but just for agreeing to lease the particular space from the landlord. This happens most often in the case of new buildings whose commercialization—or even construction—is just beginning, and the landlord wants to sign up the first tenants, which is often a condition for obtaining external financing for the project. The parties agree on payment of a one-off amount to the tenant for signing the lease, at the beginning of the lease term, often before the space has been completed and delivered to the tenant.
When a fee is paid for conclusion of a lease, the question arises how such a payment should be treated and what the VAT consequences are. Unfortunately, there is no simple answer to this question because of the differing views of the tax authorities and the administrative courts.
Fee is not subject to Vat…
Recently Poland’s Supreme Administrative Court took a position on the taxation of payments for conclusion of a lease. In the judgment of July 2, 2013 (Case No. I FSK 1218/12), the court held that if a landlord makes a payment to a tenant merely for concluding the lease, and not in exchange for any additional action or waiver by the tenant, there is no service being performed which would be subject to VAT.
In its ruling, the court cited the reasoning presented by the European Court of Justice in Commissioners of Customs & Excise v. Mirror Group plc (Case C-409/98, judgment of October 9, 2001), in which the ECJ held that if a tenant merely undertakes to become a tenant and to pay rent, even in exchange for a payment from the landlord, the tenant is not performing a service for the landlord. Consequently, the payment by the landlord is not subject to VAT. In the Polish case, the court below had taken a similar position (Province Administrative Court in Warsaw, judgment of May 24, 2012, Case No. III SA/Wa 2381/11).
…except when it is subject to Vat
Perhaps the July 2013 judgment of the Supreme Administrative Court will bring about a change in the views of the tax authorities on this issue, which before that were clearly different.
On March 7 and 13, 2013, the director of the Warsaw Tax Chamber issued two individual interpretations (IPPP2/443-1305/12- 5/RR and IPPP1/443-100/12- 2/AW) finding that payment of money to a tenant just for entering into a lease constitutes a service for payment within the meaning of the VAT Act and is thus subject to VAT. The reasoning was that when the tenant is provided an incentive to enter into the lease by payment of additional consideration, a contractual relationship is entered into different from conclusion of the lease itself, in which the tenant agrees to accept the landlord’s conditions in exchange for a one-time payment of money. The tax authority found a clear connection between the fee paid by the landlord and the behavior of the tenant in accepting the terms of the agreement proposed by the landlord. Because the amount received by the tenant is tied to its specific behavior, it constitutes a fee for a service performed by the tenant.
This discrepancy between the positions of the tax authorities and the administrative courts generates uncertainty among taxpayers planning to carry out similar transactions. This may cause a dispute between the tenant, which may prefer to charge VAT on the payment for conclusion of the lease and issue a VAT invoice accordingly, and the landlord, which does not want to accept this solution because it has doubts whether it can deduct the VAT.
How to reduce the risk?
As long as the tax authorities treat a payment to the tenant for conclusion of the lease as a service subject to VAT and the administrative courts find there is no service being performed for the payment, the interested parties will be forced to seek solutions to minimize the tax risk on both sides of the transaction.
One possible solution is for the parties to apply for tax interpretations of their own. (Each entity must apply for its own interpretation because an interpretation, when issued, will protect only the applicant which sought the interpretation). If the tax authority issuing the response is the director of the same tax chamber and the applications are filed at the same time, it should be expected that the interpretations will be mutually consistent, i.e., if the tax authority finds that the tenant should charge VAT on the fee, it should also find that the landlord has a right to deduct the same VAT. Such a pair of interpretations would protect both parties to the transaction and confirm that they had settled the VAT correctly. If there were a tax audit in the future, the tax authorities would be bound by the interpretations and a VAT adjustment could not be made, even if the position of the tax authorities had later changed. This approach could be more difficult if the competence to issue the interpretations lay with two different tax authorities.
Another possible solution was hinted at by the Supreme Administrative Court in July 2013. It stated that in certain instances payment for conclusion of a lease may be regarded as payment of a fee for performance of marketing services. As it indicated, this would be the case if, for example, upon approval of the tenant, the landlord decides to take relevant marketing initiatives aimed at conclusion of further leases. The tenant would be performing a marketing service if upon presentation by the landlord of an offer to lease commercial space in the building, the tenant agrees, in exchange for a financial incentive, to the use of its image or logo to increase the attractiveness of commercial space in the building in the eyes of other potential tenants. This solution would be available primarily in the case of commercialization of new buildings or conclusion of leases with anchor tenants.
The increasingly frequent offer of financial incentives by landlords for tenants to enter into leases is not an easy solution from the tax perspective, but there are approaches available enabling the parties to minimize the tax risk and safely use such incentives.
Miejsce publikacji: American Investor, Winter 2014