Investing in real estate is often seen as a stable and profitable business, but what to do when the need to reorganize or sell these assets arises? The key issue is whether the real estate can be considered an organized part of an enterprise (OPE), which would allow the transaction to be carried out with tax benefits. The article presents what conditions must be met by an activity related to real estate in order to be treated as an OPE and what elements are necessary to consider this activity as properly organized and separated.
Many of our clients have believed and still believe that the real estate industry is a good business. Real estate will not be stolen, it is constantly gaining in value and can bring stable income with relatively little involvement of forces and resources on the part of the owner – a good solution for the company’s side business.
However, it is often necessary to recover the invested funds or organize the business, e.g. due to the planned sale of the main part of the business or the need to obtain additional financing. When thinking about this type of activity, we often consider operations such as mergers, divisions of companies or other transactions that have an enterprise as their subject. Such solutions allow for (relative) simplicity of the transaction (the possibility of transferring many components of the enterprise in one legal transaction) and are tax neutral. However, the question arises whether we can implement standard reorganization measures with respect to real estate investments while maintaining their tax neutrality?
Tax neutrality of business transactions
An enterprise is an organized set of intangible and tangible assets intended for conducting business activity. Tax laws also define the concept of an “organised part of an enterprise” (OPE) and, according to this definition, in order for a given asset to constitute an OPE, it should meet the following conditions:
1. it should be a set of tangible and intangible assets, including liabilities,
2. This set must be characterized by an appropriate degree of separation:
– financial – i.e. such a separation that allows for the allocation of economic events (e.g. revenues, costs) to a given activity;
– organizational – through the existence of such relationships between individual components that will allow these components to be treated as a team that can independently perform specific economic tasks, and
– functional – such that the set of components included in the OPE could constitute an independent enterprise independently performing the tasks it performs within the enterprise.
If a set of assets meets these criteria and is an organized part of an enterprise, then transactions on such a set of assets may be tax neutral.
The real estate itself cannot be an OPE …
The jurisprudence of administrative courts clearly indicates that real estate in itself does not create a structure capable of independent business activity. For this assessment, the number of properties sold or the fact that the property being sold was the subject of a lease and the lease agreement (i.e. the rights and obligations arising from this legal relationship) is transferred to the purchaser of the property by operation of law.
Thus, one advantageously purchased real estate and one advantageously concluded lease agreement is definitely not enough to safely consider these components as an OPE. Such a result will only be possible if…
… part of the enterprise will be organized
In order for the activity related to the rental of real estate to be considered an OPE, it is necessary to determine whether this activity is properly organized and separated within the activities of the entire enterprise. It is worth paying attention to several key aspects:
- In addition to real estate, does this activity also include other assets (e.g. furniture, installations or other equipment of the property) and non-material assets (e.g. contracts for the provision of utilities, security services, telecommunications services, technical services, plant care, waste collection and management)?
- Are those tangible and intangible assets linked in such a way that they are used to carry out the activities of the lease or to carry out the main activity of the undertaking?
- Is there a dedicated team of people dealing with real estate and lease agreements (e.g. daily administration of real estate, contacts with construction supervision authorities, tenant debt collection)?
- Are there receivables (e.g. receivables from tenants) and liabilities (e.g. related to financing obtained for the purchase or investment in real estate) related to the activity in question?
- Is it possible to assign specific revenues and costs, receivables and liabilities to the activity in question?
- Is the activity related to administrative decisions concerning real estate?
- Are separate bank and accounting accounts kept for this activity?
- Have formal decisions been made at the level of decision-making bodies separating the activity in the area of real estate rental from the other activities of the company?
These questions are only guidelines, but they clearly imply that only by organizing the real estate lease process and “encapsulating” it with an appropriate structure of assets and human resources, it may be possible to consider this activity as an organized part of the enterprise.
For further information, contact:
Agnieszka Modras, Junior Partner
Gorazda, Świstuń, Wątroba i Partnerzy adwokaci i radcowie prawni, Kraków
e:lp.moc.wsg@sardom.akzseinga
#WLNadvocate #Poland #Krakow #law #legal #lawfirm #corporatelaw #commericallaw #contracts #business #realestate #propertylaw #finance #investing