Taxation of sale of recovered real estate


Income from the sale of recovered real estate expropriated under the Warsaw Decree may be subject to personal income tax.

Under Poland’s Personal Income Tax Act (Art. 10(1)(8)(a)–(c)), the paid disposal by a natural person of real estate, a portion of real estate or a share in real estate, or certain property rights in real estate (including the right of perpetual usufruct), within 5 years after the end of the calendar year in which the property was acquired or built, and not made as part of the taxpayer’s business activity, is subject to personal income tax. Currently PIT on this type of income is equal to 19% of the income, which is the difference between the revenue from the paid disposal and the costs of generating the revenue.

In practice there should not normally be any doubts in defining the date of acquisition or construction of the property, but determining this date can be problematic in the case of the sale of real estate which entered the ownership of the City of Warsaw under the “Warsaw Decree” (the Decree on Ownership and Usufruct of Land in Warsaw of 26 October 1945).

Under Art. 1 of the Warsaw Decree, with the aim of rebuilding and development of the capital, and particularly rapid disposal and proper use of the land, all land in the territory of Warsaw passed into the ownership of the municipality of Warsaw on the effective date of the decree. Under Art. 7 of the Warsaw Decree, the existing owner of the land or the owner’s legal successors had 6 months from the date of taking over of the property by the municipality to file an application for award of the right of perpetual tenancy (now known as perpetual usufruct) for a token rent, or the right of construction, also for a token fee.

Over the last couple of decades many people have succeeded, through long-lasting disputes with the administrative authorities, in regaining land and taking possession of buildings and other structures taken under the Warsaw Decree, exercising the possibility of establishing the right of perpetual usufruct of the land in their favour in exchange for the lost ownership. Over the years a fierce debate has raged over the tax consequences of sale of regained property by the original owners, their heirs, or persons who acquired claims to the property, or their legal successors.

It may be concluded from an analysis of the judicial rulings in tax disputes that ultimately a clear line of case law from the administrative courts has developed, according to which the tax consequences of the sale of such property depends among other factors on whether the seller is the heir of the original owners, or acquired a claim for establishment of the right of perpetual usufruct to the land from the original owners or their heirs.

In a key decision for Warsaw Decree cases, the judgment of 7 May 2002 (Case III RN 18/02), the Supreme Court of Poland held, “The legislative intent was not to impose taxation on the sale of perpetual usufruct of real estate if the sale was made by the former owner of the real estate or his legal successors who obtained perpetual usufruct in realisation of the entitlements arising under Art. 7(1)–(4) of the decree. The court recognised that in the case of these persons, there was no acquisition of perpetual usufruct, because these persons were owners deprived of their ownership by the state, and the state never complied with the obligations specified in the decree to compensate the owners of the expropriated property for the material loss they suffered. In the court’s view, this is how heirs of the former owners of the real estate should be treated if they obtained perpetual usufruct as a result of realisation of the entitlements arising under Art. 7(1)–(4) of the decree, which passed to them as heirs.”

This view is also shared by the administrative courts, e.g. judgments of the Supreme Administrative Court of 28 April 2015 (Case II FSK 425/13) and 28 September 2006 (Case II FSK 1232/05), and judgments of the Province Administrative Court in Warsaw of 29 September 2006 (Case III SA/Wa 1541/06), 5 March 2013 (Case III SA/Wa 2606/12), 28 March 2013 (Case III SA/Wa 2498/12), and 7 May 2013 (Case III SA/Wa 3072/12).

According to the administrative courts, in a case where income from the sale of real estate expropriated under the Warsaw Decree is obtained by an heir of the original owner, the income may be subject to PIT if the sale of the property by the legal successors of the owner occurs within 5 years after acquisition of the real estate, understood to mean the time when the heir obtained the right to pursue the return of the property.

The date of acquisition of the real estate by such an heir should thus be the date of acquisition of the inheritance which included the rights and claims connected with the real estate. Therefore, if the inheritance was acquired prior to 31 December 2010, the income from sale of the real estate in 2016 will not be subject to PIT. This position is also reflected in tax interpretations issued in individual cases of taxpayers, e.g. interpretations issued by the director of the Warsaw Tax Chamber of 17 April 2015 (no. IPPB2/4511-142/15-6/PW) and 27 March 2015 (no. IPPB4/415-1036/14-5/MS). In such case, the date the heir (or the original owner) acquired the right of perpetual usufruct of the land is irrelevant from the point of view of Art. 10(1)(8)(a)–(c) of the PIT Act.

The tax consequences of the sale of real estate under the PIT Act are different if the real estate is sold by a person who acquired the claim for establishment of the right of perpetual usufruct of the land from the original owner or his heirs through purchase or gift. Then the relevant date is the date of acquisition of the right of perpetual usufruct of the land from the City of Warsaw as a result of realisation of the acquired claim, regardless of the date of acquisition of the claim itself.

In the case law of the administrative courts, e.g. the Supreme Administrative Court judgment of 6 November 2015 (Case II FSK 2124/13) and a number of other rulings, the judges also rely on principles of reason and fairness, taking the view that if for the seller of real estate that was subject the Warsaw Decree the acquisition of the real estate did not constitute quasi-restitution of ownership (e.g. because the seller purchased a claim under Art. 7 of the Warsaw Decree), then the date of acquisition of the real estate should be assumed to be the date of acquisition of title (e.g. the date of the agreement establishing the right of perpetual usufruct), rather than the date of acquisition of the claims from the original (expropriated) owners or their legal successors. In such a situation, the taxpayer selling the real estate did not previously lose the real estate under the Warsaw Decree either directly or indirectly (for example because the property was not included in the inheritance received by the person). Thus the legal and tax situation of a taxpayer to whom the property was delivered in perpetual usufruct as a consequence of the taxpayer’s purchase of the claim is different from the situation of a taxpayer for whom the right of perpetual usufruct was established as a sort of restoration, even if incomplete, of the person’s original asset position which was diminished by operation of the Warsaw Decree.

Aldona Leszczyńska-Mikulska, Private Client Practice, Wardyński & Partners