Life annuity contract - should it be taxed?
An annuity agreement is one of the forms of real estate ownership transfer. Taxpayers have trouble determining whether life annuity contracts are taxable.
Life annuity contract - characteristics
A life sentence is a type of contract provided for by the legislator in the Civil Code. It is a special contract that transfers the ownership of real estate.
Pursuant to Art. 908 § 1 of the Civil Code, if, in exchange for the transfer of ownership of the property, the buyer undertook to provide the vendor with lifetime maintenance (contract for life imprisonment), he should accept the vendor as a household member, provide him with food, clothes, accommodation, light and fuel, provide him with appropriate help and care in illness and arrange for him a funeral at his own expense in accordance with local customs.
It follows from the aforementioned provision that the life imprisonment contract is therefore a binding, paid and reciprocal contract. The subject of the service on the part of the vendor (life annuity) is the transfer of property ownership. The act does not limit the possibility of transferring the ownership of real estate in exchange for the establishment of life annuity only to real estate (land or premises). In order to perform the contract, it is also permissible to transfer a share in joint ownership and the right of perpetual usufruct.
In summary, life imprisonment is the transfer of ownership of a dwelling (or building) in exchange for the right to lifetime housing and care provided by the new owner of the property.
The life annuity contract should be - under pain of nullity - concluded in the form of a notarial deed.
Life annuity agreement and taxation
The transfer of ownership of real estate under an annuity agreement is a source of income from the sale of real estate or a part of it, or a share in real estate, and therefore it may be subject to taxation, because the income from the sale of real estate should be included in a separate source of income, which is income from sale for consideration:
a residential building, its part or share in such a building,
a residential premises constituting a separate real estate or a share in such premises,
land or a share in land or a perpetual usufruct right to land or a share in such right, related to the above-mentioned building or premises,
a cooperative ownership right to a dwelling or participation in such a right, and
the right to a single-family house in a housing cooperative or participation in such right.
Taxation of the income from the sale of such real estate will occur only if they are sold before the lapse of 5 years, counting from the end of the year in which they were acquired or built. It would seem that the life annuity contract will result in the necessity to tax the sale of real estate (if it took place within 5 years of the acquisition), but it is not.
An agreement on life imprisonment as a mutual and payable agreement assumes the sale of real estate in exchange for the fulfillment by the buyer of the benefits referred to in this provision. In fact, the buyer of real estate may not provide the seller with any services, if there is no need to meet them, he may provide services with a value lower or equal to the value of the real estate, but also, depending on circumstances, with a value significantly higher than the value of the purchased real estate. In other words, at the time of acquiring the property, it is not possible to determine the value of the benefits in relation to the property being purchased. Therefore, since the value of the benefits cannot be determined, the tax base cannot be determined, and thus there are no grounds for paying personal income tax on the sale of real estate under an annuity agreement, although it was sold before the end of five years from the end of the year, in which it was acquired.
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This position was confirmed by the Supreme Administrative Court in the resolution of November 17, 2014, file ref. II FPS 4/14, stating that in the case of the sale of real estate under an annuity contract, it is not possible to determine the income from the source referred to in Art. 10 sec. 1 point 8 lit. a) the PIT Act on the terms resulting from Art. 19 paragraph 1 and sec. 3 of this act. In the justification of the cited judgment, it was emphasized that the legislator did not say that the entitlement to life annuity under this contract is the price for the transfer of property ownership. This is obvious, because although both the sales contract and the contract of life imprisonment are mutual contracts in which the performance of one party is equivalent to the performance of the other and, subjectively speaking, they are equivalent in nature, the duration of the benefits in the contract of life imprisonment may be different, and this means that it is impossible to equate them with the price, if only for this reason. For this reason alone, the rules for determining the market value under Art. 19 paragraph 1 and sec. 4 of the Personal Income Tax Act.
A similar position is also presented by the tax authorities, an example of which may be the Director of the Tax Chamber in Warsaw, who in a letter of May 2, 2015, file ref. IPPB4 / 4511-163 / 16-4 / MS2 says that:
(...) the transfer of ownership of real estate under an annuity agreement is a source of income from the sale of real estate or a part of it, or a share in real estate pursuant to Art. 10 sec. 1 point 8 of the Personal Income Tax Act. However, despite the existence of a source of income with which the tax obligation arises (sale of real estate against payment), as well as the determination of the entity liable to pay the tax (annuity), it is not possible to determine on the principles resulting from art. 19 paragraph 1 and 3 above the Income Act from the sale of real estate by way of an annuity agreement. Since it is not possible to determine the tax base on the basis of an annuity agreement, this means that if the Applicant transfers to his daughter the property right described in the application by way of an annuity agreement, he will not be obliged to pay 19% of personal income tax (...) .