Two sides of a coin, American Investor, Spring 2015
Sale and leaseback of an occupied building
Sale and leaseback transactions are a common practice on the Polish real estate market. The essence of the transaction is that the owner sells a property (e.g. a building) but the seller continues to occupy the property as the lessee or tenant under a lease or tenancy agreement with the buyer as the lessor or landlord. The main benefit for the seller is to free up cash frozen in real estate, which can then be used to finance current operations or devoted to other investments. Meanwhile, the buyer invests its capital and obtains a constant stream of rental income from the property. Sale and leaseback transactions are often a major element of restructuring programs seeking to restore or improve the seller’s liquidity. They can also serve as a form of tax optimization, as the relatively low write-off for depreciation of the building is replaced by a higher deduction for the rent currently being paid by the former owner under the lease or tenancy.
An interesting example is sale and leaseback transactions involving buildings where the premises are occupied by several lessees. In that case, under Art. 678 §1 of Poland’s Civil Code, as a result of the sale of the building, by operation of law the new owner of the building steps into the shoes of the previous owner as a party to the lease relationships for the spaces in the building. At the same time, under a tenancy agreement concluded along with the sale agreement, the new owner delivers the building to the seller in exchange for the tenancy rent and gives the former owner the right to use the building and collect the benefits flowing from the property. Such benefits without a doubt include the rent collected from the lessees under their lease agreements.
Under Civil Code Art. 509 §1, a creditor may assign a claim to a third party without the debtor’s consent unless it would be inconsistent with a statute, a contractual reservation, or the nature of the obligation. This means that in this case, if the leases do not contain restrictions against assigning rights under the lease, it may be recognized that as a result of conclusion of the tenancy agreement the landlord has assigned to the tenant the rights and claims arising out of the leases. It is also possible to transfer the obligations under the leases by obtaining the consent to such transfer from the individual lessees. But sometimes this solution can be difficult to carry out. Obtaining the consent of all lessees in the building may be time-consuming if there are many lessees, and not all of the lessees may be willing to provide their consent.
Who receives payments?
So often the parties to the sale and leaseback transaction for a building occupied by lessees decide to proceed without obtaining consent from all of the lessees to transfer the obligations under their leases. But this decision generates uncertainty about which entity is entitled to receive payments under the leases and required to issue invoices to the lessees for performance of lease services and pay tax on the receivables: the new owner which is a party to the lease agreements, or the former owner—now a tenant entitled to collect the benefits of the tenancy?
On one hand, it may be said that in that case the entity entitled to collect lease rent from the lessees and to issue invoices to the lessees for performance of lease services is the landlord (i.e. the new owner of the building). An argument in favor of this position is the fact that the obligations arising under the leases continue to rest with the landlord. The most important obligation of the landlord (which is also the lessor under the leases) is primarily the duty to perform lease services, i.e. to ensure the lessees full use of the premises they occupy in the building in the manner described in the lease agreement. Thus if the landlord continues to bear the obligation to perform the service of leasing the space, it may consistently be recognized that the landlord is also the entity entitled to charge a fee for the service performed. This position was adopted by the Director of the Warsaw Tax Chamber in a tax interpretation issued on 25 July 2005 (No. 1401/HTI/4407/14-18/05/EN), finding that the most salient fact is that despite assigning to the former owner its right to receive rent under the leases, the landlord continues to be the lessor, i.e. the provider of lease services, which obligates it to issue invoices documenting performance of the lease services.
On the other hand, it may be argued that in this case the entity entitled to collect rent from the lessees and to issue invoices to the lessees for performance of lease services is the tenant (i.e. the former owner of the building). As a result of the agreement concluded for tenancy of the building, the landlord (i.e. the new owner of the building) will not de facto perform lease services, but the lease services will be performed only by the tenant. The landlord will perform only the service of tenancy of the property. This position was adopted by the Supreme Administrative Court in its judgment of 30 June 2009 (Case I FSK 781/08), which was issued as the result of an appeal from the tax interpretation referred to above. The court did not agree with the position of the tax authority. Instead, the court held that in the case of VAT, what is subject to taxation is the services that are actually performed, and therefore in a case where in connection with the terms of the tenancy agreement, it is the tenant that will actually perform the service of leasing the space and collect rent from the lessees for this service, then the tax obligation rests on the tenant as the VAT payer. In consequence, it is also the tenant that will be obligated to issue VAT invoices documenting the performance of the lease services.
All things not settled
Currently there are no other judgments or tax interpretations addressing the issue discussed above which would indicate an established line of interpretation by the tax authorities or the courts. The tax interpretation and judgment discussed above were both issued in the same case. There continues to be a risk of inconsistent positions of the tax authorities and the courts on this issue, which unfortunately is a fairly common situation in Poland. Therefore, to be fully protected from a tax perspective, the taxpayer has no option but to apply for an individual tax interpretation. In this situation that appears to be the only good solution.
Published in: American Investor, Spring 2015