What are the consequences of paid disposal of residential and commercial real estate, movable property and property rights, used in business activities - taxed on a general basis, lump sum on registered income, or in the form of a tax card?

Despite what appear to be clearly formulated regulations on the rules of taxation of income from the sale of assets used in business activities, in practice there are a number of doubts about this issue.
Pursuant to Article 14(2)(1) of the Law on p.d.o.f., income from business activity also includes income from the paid disposal of certain assets used for business purposes and in the conduct of special departments of agricultural production. The assets referred to above are:

a) included in the records of fixed assets and intangible assets:
- fixed assets and intangible assets,
- assets whose initial value does not exceed PLN 3,500, but is higher than PLN 1,500

b) not included in the records of fixed assets and intangible assets:
- cooperative ownership right to a commercial premises or a share in such a right,
- assets whose initial value does not exceed PLN 3,500, but is higher than PLN 1,500.
What is important here is that the asset in question was actually used in business by the entrepreneur. If the asset (e.g., a storage building purchased by a general partnership) was not used in business, was not entered in the records of fixed assets and depreciation allowances were not made, then the income from its sale will not be treated as business income, but as income referred to in Article 10(1)(8) of the op.d.o.f., taxed with a flat tax of 10%.

Disposal against payment

The aforementioned provision of Article 14(2)(1) of the Law on p.d.o.f. refers to a disposal for consideration. This term is understood primarily as a sale. Disposal for a consideration is also considered to be an exchange. For example, a taxpayer will have business income from the exchange of a non-residential property used for business activities for a plot of land developed with a residential building.
The contribution of tangible and intangible assets as the subject of an in-kind contribution to a company is also considered a disposal for consideration. However, in the event that such a contribution is made to a capital company, the provision of Article 17 paragraph 1 item 9 of the P.D.O.F. Act, concerning income from cash capitals, will apply. However, there may be doubts as to whether making an in-kind contribution to a partnership gives rise to income and an obligation to pay tax. For example, according to a letter from the Tax Office in Mielec dated April 2, 2004, No. III-415/9/04, if the contribution of assets as a contribution to a civil partnership involves the transfer of ownership to the other partners for a consideration (the establishment of joint ownership), income from the sale taxed under the general rules will arise. However, the prevailing view is that making a contribution to a partnership does not give rise to income taxable to the contributor (cf. also Article 10(2)(2) of the Law on p.d.o.f.).

Residential property sales

Pursuant to Article 14(2c) of the Law on p.d.o.f., income from business activity does not include income from paid disposal used for business purposes:

• of a residential building, a part thereof or a share in such a building,
• dwelling unit constituting a separate property or a share in such a unit,
• land or an interest in land or the right of perpetual usufruct of land or an interest in such right, related to the building or premises,
• of a cooperative ownership right to a dwelling or a share in such a right, and
• the right to a single-family house in a housing cooperative or a share in such a right.

Thus, the disposal of residential real estate used in the taxpayer's business activities for consideration does not give rise to business income. The same taxation rules apply to the disposal of such real estate as to the disposal of non-business property. Upon paid disposal of such real estate, income will arise that is taxable in accordance with the rules set forth in Article 10, paragraph 1, item 8 of the P.D.O.F. Thus, if the real estate is disposed of before the expiration of five years counting from the end of the calendar year in which the acquisition or construction took place, then the tax on income from the disposal of such real estate will be determined in the form of a lump sum of 10% (Article 28 of the P.D.O.F. Law). In addition, the regulations allow in this case to take advantage of the subject exemption. Thus, if the taxpayer selling the property allocates the funds obtained from the sale within 2 years for residential purposes, then he will not have to pay tax (Art. 21.1.32(a) and (e) of the p.d.o.f. Act).
If the residential property is disposed of after 5 years, counting from the end of the calendar year in which it was acquired or built, then the income will not be taxable.
Despite the taxation rules described above, numerous questions arise for taxpayers regarding the taxation of, for example, income from the sale of land used in business, or a guesthouse.

Examples
1 Marian R. is engaged in business activity. In 1995, he purchased real estate (land with a non-residential building), which he used in his business activities. In June 2005, he intends to sell the property indicated above. The property was taken out of business in May 2005. Marian W. doubts whether the sale of the land together with the building, which he has owned for 10 years, will be taxable.
Pursuant to Article 14(2)(1) of the PIT Act, income obtained from the sale of the real estate in question constitutes income from business activity and is subject to taxation in accordance with the scale contained in Article 27(1) of the Act (or at the rate of 19%, if the taxpayer has elected to tax income from business activity with a flat tax). Income from the sale of real estate used in business activities should be reported for the month of income in the PIT-5 (or PIT-5L) return, together with other business income, and taxed according to the applicable tax scale (or 19% flat tax).
However, in the case at hand, the provisions of Article 10(1)(8) of the Law on p.d.o.f. do not apply, as six years have not passed since the property was withdrawn from business activity. The exclusion from Article 10, paragraph 2, point 3 of the p.d.o.f. Act applies here, according to which the provisions of Article 10, paragraph 1, point 8 of the Act do not apply to the paid disposal of assets used in business activities, as referred to in Article 14, paragraph 2, point 1 of the Act. As can be seen from the above, it does not matter when the fixed asset was purchased by the entrepreneur. The sale of a fixed asset used in business activities even 20 years after its acquisition will always result in taxable business income.

2 Bożena W. is the owner of a boarding house. She is engaged in the business of renting out rooms, but intends to sell the entire boarding house. How will its sale be taxed? Bożena W. has doubts whether the income from the sale of the "boarding and lodging facility," which is a fixed asset used in business activities, should be taxed with a flat tax of 10% (Article 10(1)(8) of the Law on p.d.o.f.) or as income from business activities.
When classifying a property as either residential or non-residential, the regulations of the Decree of the Council of Ministers of December 30, 1999 on the Polish Classification of Building Objects (PKOB); Journal of Laws No. 112, item 1316, as amended, should be taken into account. According to PKOB, hotels, motels, inns, boarding houses and other similar buildings providing accommodation, with or without restaurants, are classified in Section 1, Division 12 Non-residential buildings (hotel buildings). Due to this classification, the income from the sale of the guesthouse should be considered business income.

Sale of equipment

In the wording of Article 14(2)(1) of the Law on p.d.o.f., the legislator did not specify the rules for taxing income from the sale of assets with a value equal to or less than PLN 1,500. Pursuant to § 3(7) of the Regulation of the Minister of Finance of August 26, 2003 on keeping a tax revenue and expense ledger (Journal of Laws No. 152, item 1475, as amended), tangible assets not classified as fixed assets are treated as equipment. In accordance with the position taken by the Ministry of Finance, income from their disposal should be taxed under Article 14(1) of the P.D.O.F. Act.
Due to its low value, the equipment may often be located outside the company's headquarters. In such a case, however, one should keep in mind the provision of Article 23(1)(49) of the p.d.o.f. Act, according to which expenses incurred for the purchase of gradually consumable tangible assets of an enterprise that are not included in fixed assets and are unreasonably located outside the seat of the enterprise, or serve the personal purposes of the taxpayer, cannot be included in deductible expenses.

Sale of assets used for less than a year

In addition to equipment with a value equal to or less than PLN 1,500, the legislator in Article 14(2)(1) of the Law on p.d.o.f. did not list assets, with a value higher than PLN 3,500, which were not included in the records of fixed assets and intangible assets, used in business activities for less than 1 year. For example, an entrepreneur buys a machine or car that he intends to use in business for less than 1 year, and later sells it. The taxpayer has the right not to enter assets used for less than a year in the fixed assets register, and the expenses for their acquisition can be directly charged to deductible expenses. However, the tax authorities take the position that in the case of the sale of such assets, income taxable under the rules set forth in Art. 10(1)(8) of the Law on p.d.o.f. arises.
On the other hand, a different situation arises if the fixed asset sold, with a value of more than PLN 3,500, was used in business activities for more than a year, and was not included in the fixed asset register.

Example
Witold K. is engaged in business activities taxed under the general rules. In his business activities, he uses a truck with a capacity of up to 3.5 tons, with an approval, purchased from the spouses' joint marital property. The car is used exclusively in business activities, is not depreciated and is not shown in the fixed asset register.
It follows from Article 14(2)(1) of the Law on p.d.o.f. that the condition for the occurrence of income from business activity is, in the case of paid disposal of fixed assets, their inclusion in the fixed assets register. If an asset used in business activities is not included in this record, no income from non-business activities will arise. Therefore, the sale of a truck not included in the fixed asset register does not give rise to income from business activity, but under the provisions of Article 10(1)(8) of the Law on p.d.o.f., it will give rise to income from paid disposal.

Sale of assets after business withdrawal

Taxable income also arises if the taxpayer is no longer engaged in business activities or has withdrawn assets previously used in such activities and transferred them for personal use. If a taxpayer has withdrawn an asset from his business and then intends to dispose of it, business income will arise if 6 years have not elapsed between the first day of the month following the month in which the assets in question were withdrawn from business and the date of their disposal against payment. After 6 years, income from the paid disposal of such an asset will not be taxable.
Taxable income will also arise after the dissolution of a civil partnership, when the partners sell fixed assets used by them in business activities conducted in this form. The sale of fixed assets will also be taxed if it takes place after the liquidation of the partnership. Despite the fact that the taxpayer will no longer be engaged in business activities, he or she must show income from the sale of such an asset by filing an appropriate declaration on the PIT-5 or PIT-5L form.

Sale of property by taxpayers taxed on lump sum on registered income

The rules for the disposal of assets by taxpayers taxed on a lump sum from registered income are regulated in Article 12 of the Law on Lump Sum Income Tax on Certain Income Earned by Individuals (hereinafter referred to as the Lump Sum Income Tax Law). The taxation rules depend on the type of asset disposed of. Income from the disposal of movable property and real estate is taxed differently.
Moveable items
A flat-rate registered income tax of 3 % is levied on income from the paid disposal of used in business activities:
movable assets that are fixed assets, included in the list of fixed assets,
assets, the initial value of which does not exceed PLN 3,500 and is not less than PLN 1,500, not included in the records of fixed assets.
The disposal of the above assets withdrawn from business activities is also subject to a flat tax of 3 %, if no more than six years have elapsed between the first day of the month following the month in which the asset was withdrawn from business activities and the date of disposal. Disposal of an asset after six years of withdrawal from business activity is not taxable.

Example
Marian S., who is a carpenter, withdrew the milling machine from his business on February 26, 2002. He did not use it due to the fact that he had already purchased a more modern model. Marian S. intends to sell the old milling machine in July 2005. In this situation, he will be required to pay a flat tax of 3 % on the income. Only the sale of the milling machine in March 2008 would not result in an obligation to pay tax on it.
Property rights and utility properties
Disposal of property rights or usable real estate used in business activities by taxpayers paying a lump sum on registered income is taxed differently.
The assets indicated above include:
a) included in the list of fixed and intangible assets:
- fixed assets and intangible assets,
- assets, the initial value of which does not exceed PLN 3,500 and is not less than PLN 1,500,
b) not included in the list of fixed and intangible assets:
- cooperative ownership right to a commercial premises or a share in such a right,
- assets, the initial value of which does not exceed PLN 3,500 and is not less than PLN 1,500.

The paid disposal of such assets is subject to a flat tax of 10 % (pursuant to Article 28 of the Law on p.d.o.f.). The obligation to pay the tax will arise if the assets disposed of have been withdrawn from business, and no more than six years have elapsed between the first day of the month following the month in which the asset was withdrawn from business and the date of disposal.

Residential property used in business activities
The consequences of the paid disposal of residential real estate used in business activities are regulated by Article 12(10a) of the Law on Lump Sum Tax. If the paid disposal of residential real estate used for business activities occurs within 5 years from the end of the calendar year in which it was acquired or constructed, then a 10% lump sum tax will have to be paid (pursuant to Article 28 of the Law on lump sum tax). Disposal for consideration after 5 years will not be subject to tax.

Sale of assets by taxpayers taxed on the form of tax card

The Law on Lump Sum Income Tax does not explicitly specify how the taxation of entrepreneurs paying tax in the form of a tax card should look like when they dispose of assets used in their business activities. It should be assumed that income from the paid disposal of such assets is taxed according to the rules arising from Article 10, paragraph 1, item. 8 and Article 28 of the Law on p.d.o.f.
Therefore, income from the paid disposal of movable property used in business activities should be taxed at the rate of 10 % if the sale is made before six months from the end of the month in which the acquisition of the property took place. If the sale is made after 6 months from the end of the month in which the item was acquired, the income received will not be taxable.
In the case of paid disposal of residential real estate and commercial real estate and related rights used in business activities, the income earned therefrom is also subject to 10% lump-sum income tax. However, the obligation to pay tax does not arise if the property is sold more than 5 years after its purchase.

Legal basis: the Act of July 26, 1991 on Income Tax on Natural Persons (Journal of Laws of 2000 No. 14, item 176, as amended), the Act of November 20, 1998 on Lump Sum Income Tax on Certain Income Earned by Natural Persons (Journal of Laws No. 144, item 930, as amended).