Undepreciated investment value as an expense
Before starting the operation of the premises (not owned by the entrepreneur), entrepreneurs often carry out adaptation works to their own needs. Their costs should be treated - as a rule - as an investment in a third party fixed asset and depreciated. The problem arises when the entire value of the investment has not been depreciated and the contract has been terminated. Therefore, in the following article, we will discuss whether the undepreciated value of an investment can be considered an expense.
Pursuant to the provisions of both Income Tax Acts, depreciable fixed assets are owned or jointly owned by the taxpayer, acquired or manufactured on their own, complete and fit for use on the date of acceptance for use:
structures, buildings and premises owned separately,
machines, devices and means of transport,
- with an expected period of use longer than one year, used by the taxpayer for the purposes related to his business activity or put into use on the basis of a rental or lease agreement.
Fixed assets are also, irrespective of their expected period of use, investments in foreign fixed assets accepted for use, hereinafter referred to as "investments in foreign fixed assets" (Article 22a (2) (1) of the PIT Act).
An investment in a foreign fixed asset under the Civil Code
Pursuant to Art. 676 of the Civil Code, if the tenant has improved the rented item, the tenant, 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-mentioned regulations that, from the point of view of civil law, the owner of real estate becomes the owner of the investment from the moment of making investment outlays on his real estate. In other words, when the lessee incurs outlays on the property he owns, the adaptation and modernization works incurred by him become the property of the lessor by operation of law.
Undepreciated value of investments versus exclusion from costs
However, losses arising from the liquidation of non-fully depreciated fixed assets are not considered as tax deductible costs, if these assets have lost their economic usefulness due to a change in the type of activity.
Thus, in a situation where fixed assets in the form of investments in foreign fixed assets have not lost their economic usefulness as a result of a change in the type of activity, the non-depreciated value of the investment may be recognized as costs.
This position is also confirmed by tax authorities, an example of which is the individual interpretation of the Director of the National Tax Information, ref. 0111-KDIB2-3.4010.36.2017.2.KB, from August 18, 2017, in which we can read:
(...) in the case at hand, the termination of the lease agreement was in no way associated with the loss of economic usefulness of the investments made by the Applicant in foreign fixed assets, or with a change in the type of business activity conducted by the Applicant. Also the planned disposal of the incurred expenditure constituting investments in a foreign tangible asset pursuant to Art. 676 of the Civil Code, will not lead to the loss of economic usefulness of the investments made by the Applicant in foreign fixed assets, or to a change in the type of business activity conducted by the Applicant. As a consequence, there will be no grounds for applying Art. 16 sec. 1 point 6 u.p.d.o.p. and exclusion on this basis from tax deductible costs of the value corresponding to the value of non-depreciated investments in foreign fixed assets. Thus, the non-depreciated value of an investment in a foreign fixed asset may be included by the Applicant as tax deductible costs (...).
Leaving the outlays on the basis of VAT
In the field of VAT, it should be considered whether leaving the investment outlays should be subject to VAT. Taxable with this tax are, among others: the paid delivery of goods and the paid provision of services within the territory of the country.
Pursuant to Art. 7 sec. 1 of the VAT Act, the delivery of goods is understood as the transfer of the right to dispose of the goods as the owner.
Goods should be understood as things and their parts, as well as all forms of energy (Article 2 (6) of the Act).
However, pursuant to Art. 8 sec. 1 of the VAT Act, the provision of services is understood as any service for a natural person, legal person or organizational unit without legal personality that does not constitute a supply of goods, including:
the transfer of rights to intangible assets, regardless of the form in which the legal transaction was performed;
an obligation to refrain from performing an action or to tolerate an action or situation;
provision of services in accordance with an order of a public authority or entity acting on its behalf or an order arising from the law.
Leaving the investment outlays in the fixed asset by the tenant, without receiving any remuneration, does not constitute either the delivery of goods to the landlord (or subsequent tenants), or the provision of services. This is a non-taxable activity. This position is confirmed by the tax authorities, an example of which is the letter of the Director of the Tax Chamber in Bydgoszcz of March 6, 2013, no. ITPP2 / 443-1515 / 12 / AK, where we read:
(...) The landlords are not interested in taking over the expenditures made by the Company, as they are closely related to the needs and nature of the Company's activities and remain useless for the landlord's activities. The company plans to leave the outlays it has made in the premises abandoned as a result of the termination of the contract without remuneration, with the consent of the landlord.
In the described situation, since the expenditure made by the Company related to the subject of the lease, which was the property of the landlord, leaving the expenditure (improvements) in the property will not constitute a transfer of the right to dispose of the goods as the owner, as they are not owned by the Company. This activity will also not be a free provision of taxable services, because everything related to the rental of real estate used in the Company's operations is also related to running the business, including events related to the termination of the lease. In the present case, the first of the conditions set out in Art. 8 sec. 2 of the Act (...).