When should the first fee for conversion of perpetual usufruct be paid?
The authorities have 12 months to issue certificates confirming the conversion of perpetual usufruct into ownership (2 January 2020 is the deadline for issuing them). Therefore, the parliament has established a transitional provision according to which the fee for 2019 is to be paid by 29 February 2020. However, is it worth taking advantage of this extension? And will the high discount for conversion continue to be applicable? What about the property tax—will it also change?
As of 1 January 2019, the right of perpetual usufruct of land developed for housing purposes expired by operation of law. Certificates issued by competent authorities (e.g. the executive of the county, village, town or city) are supposed to confirm this fact. This means that as of 1 January 2019, the perpetual usufructuary is no longer bound by an agreement which had given rise to the obligation to pay the perpetual usufruct fee to the owner of the land, i.e. the State Treasury, commune, county or province. At the same time, the perpetual usufruct fees paid so far have somehow been automatically converted into fees for converting perpetual usufruct into ownership.
Annual “conversion” fees (similar to the previous perpetual usufruct fees) should be paid by each 31 March for a period of 20 years. However, this deadline does not apply to the fee for 2019, which has to be paid before the end of February 2020. This results from a special transitional provision (Art. 20(1) of the Conversion Act of 20 July 2018 (full title: Act on Conversion of the Right of Perpetual Usufruct of Land Developed for Housing Purposes into the Right of Ownership of the Land). The introduction of such an exception was driven by the relatively long period (12 months) for issuing official certificates confirming the conversion and, at the same time, determining the amount of the fee due on this account.
Perpetual usufruct fee or conversion fee?
At this point, there is a doubt which of the above fees should be paid for 2019 (fee for perpetual usufruct or conversion fee), and thus by what date (31 March 2019 or 29 February 2020) it should be paid.
Until he obtains a certificate from the competent authority, the perpetual usufructuary is not sure whether his right of perpetual usufruct has been converted into ownership, and if so, exactly which fee should be paid, and into which account. According to the Conversion Act, the certificate is the only confirmation of change in the legal status, and therefore it is possible to state unequivocally that the rights to a given piece of land have been converted only when the authority has issued it. The regulations set specific requirements which must be met by real estate subject to conversion, and therefore a simple assumption cannot be made here that this applies to each individual plot (for example, despite the recent amendment, there is still a doubt in this respect related to garages or parking lots constituting separate properties). Thus, if the authority issues a certificate and thus confirms that the land has been converted, then the person who was previously a perpetual usufructuary will be obliged to pay annual conversion fees.
On the other hand, due to the heavy burden on the authorities issuing certificates (this concerns about 2.5 million perpetual usufructuaries in the whole country), there is a real risk that many people will not receive the certificate within the prescribed 12-month period, not to mention by 31 March 2019, which is the deadline for paying this year’s perpetual usufruct fee. According to the recommendations of the Ministry of Investment and Economic Development, in such a situation, it is justified to consult the appropriate authority (competent for the location of the property and the ownership right to the land) for payment of the annual fee for 2019 in compliance with the statutory payment deadline, especially if there are doubts as to whether the right to the land has been converted.
Payment of the fee before obtaining the conversion certificate does not mean that the fee will have to be paid again later (after receiving the certificate). The payment made should be applied toward the annual conversion fee due or one-off fee (if it is finally confirmed that the conversion has taken place), or toward the existing perpetual usufruct fee (if for some reason the conversion has not taken place).
What about the discount?
It is possible to apply the discount only in the case of paying a one-off fee on account of the conversion of the right of perpetual usufruct into ownership of the real estate. On the other hand, the basis for payment of the one-off fee is the official certificate discussed above, which, apart from information about the conversion and the amount and period of payment of annual conversion fees, also contains instructions on the possibility of paying the one-off fee and the rules for paying it.
At any time during the term of the obligation to pay the annual fee, the owner of the land (the former perpetual usufructuary) may notify the competent authority in writing of his intention to pay the annual fee once in the outstanding amount. The amount of the one-off fee is the product of the fee applicable in the year in which the intention to pay the one-off fee was declared and the number of years remaining until the end of the 20-year period (the length of this period is different for business entities). The authority will inform the owner of the land in writing of the amount of the one-off fee within 14 days from notification and at the same time grant a discount if a resolution in this respect is in force. If the owner does not agree with the amount of the one-off fee, he may submit a request to the authority, within two months from delivery of the information, to set the amount of the one-off fee by way of a decision.
Therefore, in theory, under the chronology used in the act, the one-off conversion fee can be paid only after receipt of a certificate confirming the conversion and after written notification of the current perpetual usufructuary’s intention to pay it. This is the only situation that gives rise to the grant of a discount. In addition, the discount is granted by the competent authority (e.g. the executive of the village, town or city), which means that the usufructuary cannot claim the discount on his own.
Is it worth waiting until 29 February 2020?
However, it is not excluded that the usufructuary can pay a one-off fee adjusted for a possible (self-calculated) discount before receipt of the certificate, even though it is not yet certain whether the land has been converted and exactly how much to pay. In practice, such a fee (similarly to the annual fee for 2019 paid before obtaining the certificate, as mentioned above) should be credited (after the certificate is issued) against the future one-off fee or the current perpetual usufruct fee (depending on whether the conversion takes place).
An earlier payment may be justified, in particular in the context of the wording of Art. 20(2) of the Conversion Act, which is a transitional provision and concerns a situation where a certificate confirming the conversion of land owned by the Treasury is delivered after 31 December 2019 (which in practice is likely to affect many people). This provision stipulates that in such a case the former perpetual usufructuary should announce his intention to pay the one-off fee in 2020 by 1 February 2020. If the one-off fee is paid by 29 February 2020, a 60% discount is granted. The question arises whether the amount of the discount is rigid in this situation, despite the January amendment of the Conversion Law resulting in the addition of Art. 9(3a), which requires the level of the discount on State Treasury land to be aligned with municipal discounts (e.g. under regulation no. 9 of the Masovia province governor of 20 March 2019 increasing the discounts to 98% and 99%, and similarly under resolution no. LXXV/2128/2018 of the Warsaw City Council of 18 October 2018). Since this is a transitional provision, the authorities may treat it as an autonomous provision independent of the rest of the act, and thus not giving rise to the application of a higher discount. However, it should be noted that it applies only to land of the State Treasury. On the other hand, in the case of municipal land, the discount is applied in the amount provided for in the relevant local government resolution.
But there is another reason for haste in the case of both municipal real estate and real estate of the State Treasury. According to the act (Art. 9(3)–(4) in conjunction with Art. 7(7)), the discount is variable and is calculated on the amount remaining to be paid. This means that the entire conversion fee will have to be paid for the first year after 2019. Thus, in 2020, the discount should be calculated on the value of only 19 years rather than 20 years, which will naturally affect the amount of the discount.
Additionally, if the owner is in arrears with the payment for 2019, it may turn out that in the short term he is charged two fees, for 2019 and 2020. The deadline for paying the conversion fee for 2020 is no longer as exceptional as for 2019, and falls on 31 March 2020.
What about the property tax?
Nothing will change in this respect. The conversion of the perpetual usufruct right into an ownership right is only a change in the legal form and does not affect the amount of the property tax. The basis for property tax on land is its area, which after the conversion will still be the same. It will only be held on a different legal basis, but that is not relevant from the point of view of taxation. The Local Taxes and Fees Act does not differentiate rates depending on whether the land is held in perpetual usufruct or owned by the taxpayer.
In other words, as in previous years, natural persons should wait for an ex-officio decision determining the amount of property tax and then pay the tax, and legal persons should, as in the past, pay the tax calculated in their declaration to the office without being summoned.
On the other hand, certain doubts may be aroused by the obligation provided for in the Local Taxes and Fees Act (Art. 6(6)) for the taxpayer to submit information in connection with the occurrence of circumstances justifying the emergence or expiry of a tax obligation. In this case, from a literal point of view, the existing tax obligation will expire (due to the end of perpetual usufruct) and, at the same time, a new tax obligation will arise (due to the creation of the ownership right), which would justify the need to submit such information to the relevant tax authority. It seems, therefore, that it will be necessary. On the other hand, if a taxpayer fails to comply with this obligation, the authority should call upon the taxpayer to comply with it. The taxpayer should not be threatened with any sanctions in this respect, since, as explained above, the conversion of the legal form of land does not result in a change in the amount of tax. It seems that the best solution would be for the parliament to introduce a transitional provision lifting this obligation and thus dispelling these doubts.
The owner of an apartment in Warsaw has so far paid PLN 900 each year (by 31 March) as a perpetual usufruct fee for the land on which the apartment building is located. Additionally, he has been paying PLN 150 per year in property tax. On 2 December 2019, the owner receives a certificate from the authorities confirming the conversion of the right of perpetual usufruct of the land into ownership, and informing the owner at the same time about the annual conversion fee of PLN 1,000. The owner could pay this fee for 20 years by 31 March of each consecutive year (except for the fee for 2019, where he would have to pay by 29 February 2020), but decides that he wants to make a single payment and, on the day following receipt of the certificate, notifies the office of his intention to do so. After 14 days, he receives a notice from the authorities that the one-off fee will be PLN 20,000, and after applying the discount (98% for both municipal and state land in Warsaw) the fee will be PLN 400. The owner should pay this one-off fee by the end of 2019 to avoid having to pay an additional first annual conversion fee for 2019 (PLN 1,000). After paying the one-off fee, the owner will no longer pay any fees for perpetual usufruct (which has expired), but still has to pay property tax (the current amount of PLN 150 or other amount depending on the assessment decision in a given year).
Even before receiving the certificate, the owner may calculate on his own and pay the fee in 2019, preferably after consultation with the competent authority for the property. This fee should then be counted toward the conversion fee or one-off fee (with a possible surcharge or underpayment, if it turns out that the one-off fee calculated by the office is different).
Although the Conversion Act stipulates that the conversion fee or one-off fee should only be paid upon receipt of a conversion certificate and even provides a special deadline (29 February 2020) for payment of the fee for 2019, at the same time it does not prohibit early payment. Moreover, advance payment of the fee may be justified in view of the real risk of not obtaining the certificate within the foreseen 12-month period (or even until the end of February 2020), and the risk of receiving a lower discount. Although when paying the fee early the taxpayer cannot be sure whether the conversion has taken place, there should be no obstacle to counting it toward the future conversion fee or the existing fee for perpetual usufruct (depending on whether the conversion has taken place). These changes related to the conversion of perpetual usufruct do not have any impact on the amount of property tax or how it is paid. At most, they may result in the taxpayer having to submit information to the tax office for the purpose of this tax.
Dr Przemysław Szymczyk, adwokat, Real Estate, Reprivatisation and Private Client practices, Wardyński & Partners