Courts side with taxpayers: entrepreneurs who derive profits from long-term rentals will save on real estate tax

From this article, you will learn:

• Who determines the real estate tax rates?
• What jurisprudence the courts used to decide what real estate tax rate should be applied to residential buildings intended for rent by entrepreneurs?
• What group of taxpayers can benefit from a change in the current jurisprudence?

Entrepreneurs who deal in long-term rentals have reasons to be happy. On July 12, 2023, the Supreme Administrative Court issued a very important judgement in which it found that if a given property meets housing needs, the increased real estate tax rate for buildings related to business operations cannot be applied to it. According to the court, it is not important whether the housing needs are met by the taxpayer or by the person to whom the taxpayer rents the property. 

The issue of real estate taxation: who determines the tax amount?

In accordance with applicable law, in Poland the amount of real estate tax is determined by the councils of individual municipalities by way of resolutions.

The Act on Local Taxes and Fees specifies the maximum tax rate, dividing real estate into two groups: residential real estate and real estate related to running a business or occupied for the purpose of running a business. 

And the above phrase: "real estate related to running a business or occupied for the purpose of running a business" has been the cause of disputes between taxpayers and the tax office for years. The issue aroused great emotion because the commercial property tax can be over 28 times higher than the residential property tax. 

The current line of jurisprudence regarding the real estate tax rate

So far, the courts have held that if the property is rented by an entrepreneur conducting business activity consisting in renting premises, such an entrepreneur must pay commercial real estate tax, i.e. charge the higher of the two possible rates.

The courts argued that if the business activity of an entity is conducted thanks to a given premises (because it is the subject of lease), this means that the premises are related to the conduct of this activity. Thus, the courts found that when it comes to tax on residential buildings, the most important thing is not the function of a given premises, but the perspective of the entrepreneur and whether he conducts business activity in the field of renting premises. 

Light at the end of the tunnel for taxpayers renting residential buildings

The Supreme Administrative Court, in its judgement of July 12 2023, ref. no. III FSK 250/23, changed the unfavourable case law and ruled that real estate rented for residential purposes is subject to residential real estate tax even if the rental is carried out as part of a business activity. 

The judgment's justification emphasizes that it is irrelevant whether the residential function in the leased premises is carried out by the taxpayer or by someone who is a tenant of the premises. The most important factor for applying a lower tax rate is that the property meets the housing needs. 

Importantly, the Supreme Administrative Court's judgement is only hope for those taxpayers who deal in long-term rentals. The Court compared short-term rental to the provision of hotel services, which cannot be considered as related to meeting housing needs - thus, taxpayers still cannot apply a lower tax rate to short-term rental property. 

The Supreme Administrative Court's judgement does not guarantee that subsequent court judgments will be equally favourable for taxpayers conducting business activities in the field of long-term rental. However, it should be emphasised that the Supreme Administrative Court is an authority, therefore taxpayers can hope that both the tax authorities and provincial administrative courts will not fight with them for higher tax rates. However, if a dispute arises, the Supreme Administrative Court's judgement will certainly be a favourable argument from the perspective of taxpayers.