Building constructed on someone else's land - tax consequences

Service-Tax

Contracts for the lease or tenancy of real estate between taxpayers are common in business transactions. A tenant or tenant of real estate may decide to make an investment in the form of building a building or structure on someone else's land. Performing such an activity is subject to a different classification in the light of civil law and tax law.

The building was built on someone else's land and the provisions of civil law

According to the civil law principle of superficies solo cedit, everything that belongs to the land is the property of the landowner by operation of law. So if the lessee builds a building on the leased land, it becomes a component of the property on which it was erected. As it follows from the provisions of the Civil Code, a component part of a thing is everything that cannot be disconnected from it without damaging or significantly changing the whole, or without damaging or significantly changing the disconnected object. The component part of the item cannot be a separate subject of property and other rights in rem. As a result, if a building or structure is constructed on someone else's land, the ownership of these objects passes by operation of law to the property of the landlord.

Example 1.

The tenant of the property has built a farm building on the land. Pursuant to the provisions of civil law, the building is part of the land, so it is the property of the land owner, not the tenant.

Tax law regulations

The analyzed issue is presented differently in terms of tax law. Well, the Personal Income Tax Act provides that they are subject to depreciation, regardless of the expected period of use, buildings and structures built on someone else's land. A building built on someone else's land is classified as a fixed asset by law. In their case, however, the time condition does not have to be met - in other words, they are depreciated regardless of their estimated period of use. However, other requirements qualifying buildings and investments as fixed assets are still in force, so the building built on someone else's land must be owned or jointly owned by the taxpayer and are acquired or manufactured on its own, complete and fit for use on the day of taking them into use, and the taxpayer uses it for the purposes related to its business or gives it for use on the basis of a lease, tenancy or other agreement.

Example 2.

The taxpayer started building a building on someone else's land. During the construction works, he started to deduct depreciation charges.The taxpayer's action is incorrect because such a fixed asset must meet the criteria of completeness and fitness for use. Therefore, it is possible to make depreciation write-offs only after the construction is completed.

Building status after termination

You should also analyze the legal status of the building after the termination of the lease or tenancy agreement. Pursuant to the provisions of civil law, if the lessee has improved the rented item, the lessor, in the absence of a different agreement, may at his own discretion either keep the improvements for a sum corresponding to their value at the time of return, or demand restoration of the previous state. It follows from the above regulations that the rule is the possibility of keeping a constructed building as a result of reimbursement of incurred expenses. The lessor also has a claim against the landowner for reimbursement of expenses. It must be emphasized that the possibility of keeping things without the obligation to return expenses must result from the provisions of the contract between the parties.

When analyzing the situation from the perspective of the land owner, it should be pointed out that in the event of payment of compensation for the outlays made for the construction of land, there will be no taxable income on his part. Income on the part of the land owner can only arise when he takes over the building for his use and does not pay the tenant for the expenses incurred.

In the light of the provisions of the Corporate Income Tax Act, the taxpayer's income is, inter alia, the value of the things or rights received. It is determined on the basis of market prices used in the sale of things or rights of the same type and species, taking into account, in particular, their condition and degree of wear, as well as the time and place of obtaining them. Therefore, the above regulations indicate that the time of obtaining a given item is of key importance for recognizing the moment of revenue generation. In the case at hand, the owner of the land obtains the building upon termination of the lease. It is worth emphasizing that the provision referring to the moment when income arises uses the expression "receipt", "obtaining" and not "acquisition of property". According to the dictionary definition, to obtain means to receive something that has been the subject of efforts. It can therefore be seen that it is not about the creation of property rights, but about the physical and economic acquisition of a thing. As indicated above, the landlord's ownership right to the building arises upon its construction. In other words, the taxpayer should add the value of things to his tax revenues only when the benefits are actually (physically) received (see the judgment of the Supreme Administrative Court of February 5, 1997, file no. S.A./Sz 1191/96). In addition, the provisions of the Civil Code indicate that after the end of the lease or tenancy, the user is obliged to return the item to the owner. The return of the subject of the contract, i.e. in this case the land, also includes the component parts, including the building belonging to the land.

The jurisprudence of the court regarding the loss of investments in foreign fixed assets as a cost of the tenant may also shed some light on the whole matter. The dominant position in the judgments is that the liquidation of a fixed asset cannot be identified only with the physical annihilation of a thing. This concept should be applied to the sphere of the use of the fixed asset rather than to its physical attributes - although these may, of course, have a decisive impact on the possibility of its use. Therefore, it is necessary to interpret this concept more broadly, by including donation, sale, liquidation due to technical or technological wear, "moral", withdrawing it from fixed assets (judgment of the Provincial Administrative Court in Wrocław of March 14, 2008, ref. I SA / Wr 1702/07).

The above thesis, although it refers to the sphere of tenant's or tenant's rights, shows that the scope of use of a fixed asset, in the form of a building built on someone else's land, ends when the building is no longer used and withdrawn from fixed assets. This takes place on the date of termination of the contract binding the parties with regard to the lease of land. In this case, termination of the contract also determines the moment when the owner arises from the acquisition of the building.