Are you about to negotiate a letter of intent (LOI) for your real estate acquisition process and do not have a budget for tax advisors yet? Here are 5 basic tips on what to remember in order to run it smoothly.
#1 Remember about due diligence reference
The phrase “subject to satisfactory due diligence” may save you some concerns once you agree on something in LOI, but then some obstacles are discovered during due diligence. In particular, it may refer to tax DD, as taxes are rather continuously changing in Poland. So if there is an option, do not forget to insert this phrase for tax-related points of LOI.
Depending on how you plan to acquire your target project, tax consequences differ. In particular, the distinction between asset deals and share deals is important. While acquiring via asset deal, you want to make sure the transaction is VAT effective (and that you do not bear the whole cost of transfer tax) and that no liability for the vendor’s tax arrears is transferred. You may also like to ensure that even some potential risks are covered and that you use all the available ‘nice-to-have’ tax risk management instruments (like split payment for VAT or payment of the price only to the bank account indicated on the so-called ‘white list’ of taxpayers).
On the other hand, while acquiring via a share deal, you may need to address all the DD findings by representations/warranties and indemnities, as well as to agree if you are willing to pay for any tax benefits utilizable in the future when you are already the owner. If not, sometimes it is already being mentioned in the LOI, so that you create an anchor for negotiations.
Tax & Accounting Trends for Real Estate
Subsribe to our real estate newsletter to receive a free-of-charge PDF with some practical examples of tax phrases used in LOIs in Polish real estate market.
#3 Tax ruling or tax insurance (asset deal)
It is a common market practice to secure asset deal transactions with a tax ruling. This tool is an application to the Polish tax administration, where you present quite a detailed background of the transaction, outline your interpretation of its taxation, and wait for the answer. A standard time to receive the answer is 3 months. You need also to count ca. one month for the advisors to learn the whole background, gather the required documents, and agree on the wording of the application for a tax ruling. The positive outcome of the tax ruling is frequently a condition precedent to closing.
In case you are in a hurry and there is no time for filing for a ruling, but still, do not want to bear all the VAT risk on your shoulders, you may consider tax insurance tailor-made for your transaction. It is more expensive than the whole ruling, but you may exercise it within one month.
To avoid any misunderstandings with the vendor, make sure you address this topic in LOI.
#4 Split of costs
In case the tax ruling is negative and there is no VAT on real estate acquisition, then it is usually subject to 2% transfer tax, formally burdening the buyer. However, you may commercially agree with the vendor that within the purchase price you split such potential costs 50:50. The same may concern e.g. costs of tax insurance premium.
#5 DTA and LCGT
For share deal acquisitions deferred tax assets (like tax losses to be carried forward or costs presented as accruals), and deferred tax liabilities (e.g. positive fx differences to be recognized tax-wise on Closing or later) very often are subject to negotiations. The same concerns LCGT (latent capital gain tax) which may be understood as a difference between the market value of the asset and its current net tax value, multiplied by the current tax rate. It happens that the buyer requires to share this future LCGT burden and split it in some proportion between the parties.
