Today we would like to present an interesting matter from our experience.
Taxpayers are natural persons, Polish tax residents. They planned to buy real estate abroad. The efforts were advanced, the property was selected, the advance was paid. Unfortunately, a thorough check revealed some legal issues. They were so important that it was decided to withdraw from the transaction.
Therefore, the taxpayers obtained compensation from the seller. Therefore, a doubt arose as to where the tax should be paid on it?
Pursuant to Article 3 sec. 1 of the Polish PIT Act, natural persons, if they have their place of residence in the territory of the Republic of Poland, are subject to tax liability on all their income (revenues) regardless of the location of the sources of income (unlimited tax liability).
Importantly, however, the above regulation, according to Article 4a of the above-mentioned Act, is applied taking into account double taxation treaties to which the Republic of Poland is a party.
The double taxation treaties concluded by Poland are based on the OECD Model Convention. It provides that income obtained by a person residing (in our case) in Poland from immovable property located in another country (i.e. the country of his location) may be taxed there.
At the same time, the agreements define that the term “immovable property” has the meaning in accordance with the law of the Contracting State in which the property is located. This term includes, in any case, the affiliation to immovable property (…), rights to which the provisions on immovable property apply. Use of real estate and the right to variable or fixed benefits for exploitation (…).
In addition, the agreements only give possible examples of the use of immovable property, for example, rent.
What is also important, the agreements establish the concept of so-called other income – i.e. income not explicitly mentioned in other provisions of the agreement. They are subject to taxation in the taxpayer’s country of residence (here in Poland).
In the situation we are interested in, we are talking about income obtained not from the “classic” form of use of immovable property (lease, lease, sale), but from another title, i.e. from compensation related to the failure to complete the real estate purchase transaction.
According to the author, it is therefore not income from real estate, but other income – which would make Poland the place of taxation, because:
- the real estate was not acquired and then disposed of;
- The compensation itself is due for improper performance of the contract, and not for the disposal of the property.
The above is indirectly confirmed by the following individual interpretations of the Director of the Tax Chamber in Warsaw dated:
- 20 August 2015, file ref. no. IPPB4/4511-606/15-6/JK): “income from the exercise of rights to inheritance in the form of the sale of the inheritance and from the receipt of compensation for expropriated real estate (in Poland) does not constitute income from real estate but other income”;
- 25 January 2016, file ref. no. IPPB4/4511-1319/15-4/JK3: “income obtained from the sale of rights and claims to real estate covered by an expropriation decree by a non-resident is subject abroad (not as income from the sale of real estate).”
Therefore, according to the author, the compensation received from the seller for rescission of the contract for the purchase of real estate located abroad will be subject to personal income tax on the territory of Poland.
