Commercial real estate law and rules in Poland

There are no specific limitations as regards ownership of property. Natural persons, legal persons (corporations) and organisational units not having legal personality but which have been granted the legal capacity by virtue of statutory law may own real estate. Owners of real estate include: individuals, corporations (such as property funds, developers, insurance companies, banks and other financial institutions), the State Treasury and local governments.

There are no restrictions preventing companies and individuals from the European Economic Area (EEA) which includes EU members, Switzerland and Norway from acquiring real estate with the exception of agricultural land and forests. Companies incorporated in the EU controlled by companies and individuals from outside of the EEA are considered as EEA companies and are subject to the same rules. Obtaining an ownership title to forest and farmland (or the right of perpetual usufruct) requires the consent of the Minister of Internal Affairs. According to the EU Accession Treaty this limitation will not apply to EEA companies from 1 May 2016. A property sale agreement for agricultural land or forest executed without a required permit is invalid. Foreigners from EEA countries may acquire. without limitation, shares in Polish companies owning real estate in Poland, notwithstanding that it is farmland or forest. Foreigners from outside the EU must obtain a permit to purchase shares in companies owning any properties in Poland.

Ownership is the broadest title a legal person can hold in relation to property under Polish law. Ownership can be equated with freehold title under Anglo-American legal systems.

There are two parallel types of title register in Poland: the Land and Mortgage Register (księga wieczysta) and the land register (ewidencja gruntów i budynków). The Land and Mortgage Register is maintained by the courts and is broken down into four sections:

• Section I – physical description of the property and lists the rights benefiting the property
• Section II – owner (and perpetual usufructee, where appropriate)
• Section III – all encumbrances other than mortgages or restrictions in disposals
• Section IV – mortgages

According to the “principle of public faith of mortgage registers”, everybody may rely on the contents of the mortgage register with respect to registered rights.

Land registers, in contrast to the mortgage register, have a technical function. Land registers are maintained by administrative authorities (powiat) and the main purpose of them is to describe the physical features and the designated use of the land and buildings.

Subject to limited restrictions, ownership is freely transferable. Agreements on transfer of ownership title and perpetual usufruct title must be entered in the Land and Mortgage Register.

The largest Polish landowners are the public bodies, i.e. the State Treasury and local authorities (mainly municipalities). The acquisition of real estate from public bodies (or granting perpetual usufruct on their land) is regulated by the same civil law regime as transactions between individuals. However, due to the public status of the land, it is additionally subject to some specific restrictions, e.g. an obligation to dispose of land via public tenders.

In certain cases, public bodies may have a statutory pre-emption right relating to properties put up for sale. If such a property is sold without observing this right, the sale is invalid. This involves first of all the municipality’s pre-emption right (almost always waived) applying mainly to the sale of undeveloped land previously acquired from the State Treasury or from the local authority or undeveloped land held in perpetual usufruct. In addition, under certain conditions, a pre-emptive right is vested in tenants of agricultural land. If there are no qualifying tenants, the pre-emptive right may be exercised by the Agricultural Properties Agency. A sale of agricultural land in violation of the Act or without notifying the entitled tenant or the Agency is null and void

Property interests which exist in Poland include:

• Ownership (freehold) (własność) – the broadest right in property, enjoying full constitutional protection
• Perpetual usufruct (użytkowanie wieczyste) – a strong and stable right in property, the closest relation to ownership of all property rights
  Perpetual usufruct may only be created on land belonging to the State Treasury or local authorities. Currently it can be created by contract only. Perpetual usufruct title can be inherited, transferred to third parties and encumbered (with a mortgage, easements or usufruct). The perpetual usufructee holds freehold title to buildings and other constructions erected on the land. In comparison with the wide powers granted to the holder of the perpetual usufruct right, the owner of the land (the State Treasury or the local authority) is limited: it cannot encumber the property or sell it to an entity other than the holder of perpetual usufruct. Only the holder of the perpetual usufruct right is entitled to use and collect income from the land.One of the fundamental differences between perpetual usufruct and ownership is that perpetual usufruct is supposed to be created for a defined specific purpose (e.g. the development of a project or conducting a particular activity) as set out in a perpetual usufruct contract. If the holder of the title breaches the provisions of the contract or decision establishing perpetual usufruct concerning the purpose, it may lead to an increase of the annual fees, or even the termination of the contract.
Another fundamental difference is that perpetual usufruct is created for a specified term (40 to 99 years depending on the purpose of its creation). If the holder demands an extension within five years before the scheduled termination date, the owner must extend the term, unless there are material public reasons for not doing so. The perpetual usufructee may also demand an extension earlier if the depreciation period of developments which are planned on the land is much longer than the remaining term of this right. 
Upon the creation of a right of perpetual usufruct by virtue of contract, the perpetual usufructee is obliged to pay an ‘initial fee’ amounting from 15% to 25% of the value of the land. Thereafter, he pays annual fees of 3% of the land value of land with commercial purpose and 1% of the land zoned for residential purposes. The percentage of those fees may be lower in certain specific cases, for example in relation to some non-profit organisations and for historic monuments.
Upon termination of a perpetual usufruct contract, the perpetual usufructee loses the right, and the land (together with the buildings and other improvements) is taken over by the owner. The owner is, however, obliged to reimburse the perpetual usufructee for the current market value of the buildings and other improvements legally made on the land
• Limited property rights:
  • Usufruct (użytkowanie) – the right to use and collect income from the property, it cannot be contractually transferred to a third party, there is no maximum time limit for which usufruct may be created:
  • Easement (służebność) – land easements (established for the benefit of each owner (or perpetual usufructee)) and personal easements (established for the benefit of a specific individual, not companies; thus not very common) or transfer easements. Land easements are transferred together with the property and personal easements may not be transferred at all. Easements are mainly established for the purpose of locating access roads or media connections (pipes, cables etc.)
  • Cooperative ownership right to residential premises (spółdzielcze własnościowe prawo do lokalu mieszkalnego) – in almost all cases concerns residential premises
  • Mortgage – the debt security instrument which allows the creditor to demand disposal of the property at an auction
  • Contractual rights to use property: lease (najem), tenancy (dzierżawa) and leasing:

The basic contractual rights allowing the use of a property are a lease (najem) and a tenancy (dzierżawa). Both can be concluded for unspecified period of time or for a maximum fixed period of 30 years (10 years in the event of a lease concluded by natural persons outside of business activity). The lease grants the right to use the object for any lawful purpose including business activity, while the tenancy grants the right to use and to collect income from the object. After the lapse of their statutory maximum terms, both contracts transform into agreements for an unspecified period of time (and are thus subject to termination on notice)

Ownership and perpetual usufruct are the only rights that are freely transferable and can be mortgaged. The ownership of buildings and other structures is always vested in the owner (or perpetual usufructee) of the land but individual premises may constitute separate properties whereby the owner of the premises also holds a share in ownership (or perpetual usufruct) of the land. Other property rights are either accessory (road easements) or are not common because of legal restrictions (e.g. usufruct).

Typical employment issues such as the transfer of undertakings, redundancies and changing terms and conditions of employment may be relevant where real estate is a component of a business enterprise being acquired, or where shares in a company which owns property are being acquired.

In the event of the transfer of property through the transfer of a business enterprise, the buyer becomes employer in all employment agreements binding on the day of transfer by operation of law. The previous and a new employer are jointly and severally responsible for all claims and liabilities arising from the employment relationship created before the transfer. The new employer is obliged to propose new terms and conditions of employment to all workers who work on a basis other than an employment agreement. The transfer of a business enterprise cannot be a reason for a termination of an employment agreement.

In the event of the transfer of shares of a company that owns property, the employer remains unchanged and consequently the company is still responsible for all claims and liabilities relating to employees and the terms and conditions of the employment agreements remain unchanged.

A sale and purchase transaction usually starts when proposed heads of terms (or letters of intent) are drafted, negotiated and agreed by the seller and the buyer. The heads of terms (or similar documents) set out the principal terms agreed between the parties and are generally expressed to be “subject to contract” and not legally binding. They form the basis of the documents to be drafted by the lawyers.

Once the heads of terms have been finalised, they are sent to the parties’ lawyers. The seller’s lawyers will usually collate all information relating to the property and send it to the buyer’s lawyers together with a draft sale and purchase agreement (contract). The form of the sale agreement will vary according to whether the property being sold is under construction or already built and the extent to which leases to tenants have already been granted. Sometimes there is a need to enter into a preliminary agreement caused by the fact that Polish law does not allow for the conditional transfer of real estate. This limitation does not apply to share deals, but due to some practical reasons (difficulty in establishing whether all the conditions are fulfilled and when the title to the shares finally passes to the purchaser) two stage transactions are also recommended in this case. The preliminary agreement should also establish clear criteria as to the rights and obligations of the seller in respect of operating the asset/target company during the interim period between the execution of the preliminary sale agreement and the final agreement. The buyer’s lawyers consider and suggest amendments to the draft sale agreement and at the same time will undertake general due diligence investigations. Once the sale agreement is in an agreed form, the seller and the buyer sign the sale agreement.

Before signing the sale agreement the buyer’s lawyers will also conduct pre-completion searches, including a protective search at the Land and Mortgage Registry, to ensure that the seller is still the owner of the property and that there are no new encumbrances affecting the property.

The preliminary agreement, as with a final agreement, must be executed as a notarial deed (for the sale of real estate) or with the signatures of the parties certified by a notary (for the sale of shares).

Following completion, the notary before whom the sale agreement was signed deals with registration of the transfer document at the Land and Mortgage Registry and the notary needs to collect and arrange payment of transfer tax (tax on civil transactions), which is assessed on the price paid for the property, if applicable. In the case of VAT, it is paid directly by the buyer to the seller who then settles it with the tax office.

An agreement for the sale and purchase of land must be in the form of a notarial deed (which means it must be read out aloud by the notary), must contain all main terms and conditions as required by the law, and must be signed by the seller, the buyer and the notary.

In addition to essential terms such as the exact description of the property and the parties a sale and purchase agreement will include the following:

• A description of all encumbrances burdening and benefiting the property
• Representations and warranties of the seller with respect to the property and to the seller’s status
• Representations and warranties of the buyer with respect to its status
• A specification of documents evidencing the seller’s title to the property
• The purchase price and the method of payment of it
• The date for delivery of the property to the buyer
• The seller’s liability for breach of warranties
• Transfer of contractor’s warranties (if a property is developed and the warranties are still in force)
• Clauses to cover ongoing management matters if the property is subject to occupational interests such as leases
• Tax provisions setting out whether the transfer of the property is subject to VAT or transfer tax (tax on civil transactions)
• An application to the court to register the buyer as the new owner of the property, the application being filed by the notary

Some of the most significant are as follows:

• Principle of public faith of mortgage registers (zasada rękojmi wiary publicznej ksiąg wieczystych) – according to this principle, everybody may rely on the contents of the mortgage register with respect to registered rights. A good faith purchaser of a registered right acquires this right as it is described in the mortgage register and from the person registered as the holder of the right (even if such person did not actually hold it). The buyer is in bad faith if the buyer knows that the Land and Mortgage Register entries are incorrect or if the buyer can easily (i.e. without any detailed searches) find out that the Land and Mortgage Register is incorrect. It should also be noted that there is a legal presumption of good faith in the Polish Civil law i.e. the burden of proof is on the party questioning good faith. Mortgage registers are publicly available for review.
• Warranty for defects (rękojmia za wady fizyczne i prawne) – statutory law protects the buyer against physical and legal defects of the property sold. The seller is responsible to the buyer if the property sold has defects which, for example, reduce its value or utility with regard to the purpose stipulated in the sale agreement. The seller is also responsible to the buyer if there are third party claims on the title or if it is encumbered with a right of a third party. There is no seller’s liability for defects if the buyer knew about the defect when the sale agreement was concluded. The parties may extend, limit or exclude the liability unless the buyer is a consumer. Exclusion of statutory liability is common in sale agreements between institutional investors. The seller has strict liability, so the seller is liable to the buyer for legal and technical defects even if the seller did not know about the defects. If the property sold has defects, the buyer may withdraw from the sale agreement or demand a reduction in the price. In order to enforce this claim, the buyer has to notify the seller immediately after discovering the defect
• Registration of perpetual usufruct – agreements on transfer of ownership title and perpetual usufruct title must be entered in the Land and Mortgage Register. Ownership title passes upon execution of the property transfer agreement and perpetual usufruct title passes upon execution of the decision of the Land and Mortgage Registry Court, but the decision takes effect retrospectively from the date on which the application to register the transfer was filed
• Change of landlord – if the property leased is sold during the period of the lease the buyer replaces the seller in the leasehold relationship. This rule is applicable to both residential and non-residential premises. The buyer of any property other than residential apartments may terminate the lease while observing the statutory time limits for notice, unless the lease agreement was concluded for a definite period of time in writing, with a certified date and the premises were delivered to the tenant

Before the acquisition of the property it is recommended that comprehensive legal, technical and limited tax due diligence of the property is carried out and in the case of acquisition through a share deal also due diligence of the property holding company (including full tax due diligence). Legal due diligence is typically carried out by specialised legal advisors. A prudent buyer is likely to commission also technical due diligence, including a survey of the building and in appropriate cases soil and geological investigations, plant and machinery tests, and environmental investigations. Tax due diligence is carried out in particular to check whether the sale is subject to VAT (23%) or transaction tax (2% non-recoverable but cost deductible or amortisable).

Title to the property will be investigated first. The buyer’s lawyers will consider the entries on the Land and Mortgage Register and in most cases documents on previous title transfers. At this stage also additional details of the interest registered at the Land and Mortgage Registry are investigated, such as mortgages, easements, pre-emption rights and other rights. It is recommended that a special check is also carried out in respect of any potential restitution claims of former owners. This concerns Warsaw in particular, which had a special nationalisation regime after the Second World War that allowed former owners to reclaim title for a certain period of time following nationalisation.

If the property is subject to leasehold or other occupational interests, the terms of the relevant occupational documents need to be considered carefully to ensure they are not contrary to the buyer’s intentions for the property and that there are no limitations on property transfers. Leases are transferred to the buyer by operation of law and the tenant does not have a termination right unless such a right is granted in the lease.

The buyer’s lawyers will review the permitting process for a developed property to check the position regarding zoning consents, environmental permits, building permits and occupation permits. 

If the seller is a company, the buyer’s lawyers will also conduct searches against the seller’s name in the companies register to ascertain whether the company is solvent and therefore able to dispose of its assets freely. Where the search result refers to security, the buyer’s lawyers will ask for confirmation that such matters do not encumber the property and that no third party consents are required for the transaction to proceed.

Remaining due diligence includes environmental matters, utilities serving the property, financial encumbrances, pending proceedings which may affect the property and insurance policies etc.

The buyer’s lawyers will report their due diligence findings to their client, raising any matter of particular importance or concern during the due diligence process.

Poland has a central title register, the Land and Mortgage Register. The Land and Mortgage Register is run through regional district courts which are responsible for specific areas of the country.

An excerpt from the Land and Mortgage Register for a particular property provides the following information:

• Section I-O “Description of the property” – the location, address, area and number of the land plot(s) comprising the property
• Section I-Sp “List of rights relating to ownership” – the rights benefiting the property
• Section II “Ownership” – the name of the owner and/or perpetual usufructee or names of all co-owners or perpetual co-usufructees
• Section III “Rights, claims and encumbrances” – all rights claims and encumbrances (except for a mortgage) affecting the property (e.g. leases and pre-emption rights)
• Section IV “Mortgage” – all mortgages encumbering the property, including the kind of mortgage, the beneficiary and the amount secured

Agreements transferring ownership and perpetual usufruct title to property must be executed before a notary. The transfer of the property as a share deal requires notarisation of signatures of the parties to the share transfer agreement.

In general, development of land requires a building permit and in many cases it also requires a planning permit and an environmental permit. The use of the completed building requires notification to the relevant authority or an occupancy permit.

If the site is not covered by a master plan, a planning permit must be obtained before submitting the application for the building permit. The law makes a distinction between planning permits for public developments and those for private schemes. “Private” planning permits are much more difficult to obtain. Obtaining a “private” planning permit requires a number of conditions to be fulfilled, including securing media connections (at least signing contracts with grid operators) and ensuring architectural compliance with neighbouring developments. The local authority architecture department has to prepare a “zoning analysis” in order to verify whether those conditions are met, and if not, whether they can be waived. The planning permit procedure may be suspended (at the city’s discretion) for up to nine months. If a master plan for a given development or territory is “obligatory”, the planning permit procedure is suspended until the adoption of the master plan.

The current form of the planning permit makes it possible for the authorities to approve only those developments which they in their discretion consider appropriate. Obtaining a planning permit may also turn out to be risky to the developer, as it has to satisfy the claims related to the restriction of use or loss of value of neighbouring plots caused by this decision. Planning permits may be obtained by any interested party, irrespective of whether such party holds a legal title to the site. They are also transferable into third parties. A planning permit specifies its validity period (usually two – three years). It expires if another entity obtains a building permit for the site, or if a master plan is adopted and the planning permit does not comply with the new plan (unless a final building permit has already been granted).

Building permits may be obtained if the project complies with the master plan and technical requirements. If there is no master plan then a building permit may be obtained if it complies with the planning permit and technical requirements. In this latter case, the building permit application must be submitted within the validity period of the planning permit. A building permit is usually composed of two basic elements: approval of the designs and permission to start the works. If the project is phased, the developer may request permission to start the works for the initial phase(s) only. In this case, the building authority must approve the “site development plan” (forming part of the building documentation) and detailed architectural designs for the initial phase. In order to obtain a building permit, the developer needs to hold a legal title to the site (not necessarily freehold – it may be even a simple lease).

The building permit documentation must be approved in advance by various authorities, including (as applicable): the sanitary inspector, environmental protection, cultural and heritage inspector, road management authority, work safety administration, fire marshal etc. A large part of the land in Poland is considered “agricultural” (the formal criterion is the relevant entry in the land register). In such a case, prior to issuing a building permit, the site should be excluded from agricultural use. This involves payments from the owner, in ten annual instalments, depending on the category of the land. In most cases, building permits are issued by the starosta (head of mid-level administrative unit called the powiat). In bigger cities, the functions of the starosta are exercised by the mayor. As with a planning permit, a building permit may be transferred to a third party, provided that it holds a title to the site and accepts conditions provided in these decisions.

An additional building permit issued by the monument restorer is required when it is proposed to do work to historically or architecturally important buildings.

Certain construction works do not require a building permit, but simply a notification to the building authority. The works may be started if the building authority does not raise any objections within 30 days from the notification. These works include among others: parking lots with no more than 10 spaces, certain temporary objects, fencing, certain advertising billboards, reconstruction and modernisation of roads, power and gas connections, irrespectively of whether such works are related to the construction of the building or work performed on an undeveloped land, except for works regarding structures entered into the register of historical monuments.

The provisions of the law on environmental information and environmental impact assessment expand considerably the scope of application of the “environmental decisions”. The law divides the investments between those which (i) may always significantly influence the environment and (ii) may potentially significantly influence the environment. For both an environmental decision will be required. Certain investments require preparation of an environmental impact assessment report due to their potential impact on the environment. The developments concerned include: most industrial facilities, parking lots or garages with usable area of 0.5 ha, shopping centres with usable area of more than 2 ha and many others. For others such requirement may be imposed by the authorities after an application for an “environmental decision” is submitted.

The developer has to obtain a “decision on environmental conditions” prior to obtaining a planning permit or filing for a building permit (and without the need to secure the title to the site). The decision on environmental conditions is valid for four years and will be binding on the building authority while granting the building permit. The four year term may be extended if the conditions specified in the decision on environmental conditions do not change and the project is developed in phases.

The use of the completed building or structure may be commenced upon notifying the relevant authority. The investor may take occupancy if the authority has not reported any objections within 21 days of the delivery of the notification. In some specified cases the notification is not sufficient and an occupancy permit is also required.

The use of building structures without notifying the relevant authorities or without the required occupancy permit is illegal. Apart from the administrative consequences of illegal use, such as a fine which may be imposed by the relevant authorities, the lack of notification or a occupancy permit causes fundamental problems concerning leasing or insuring the building.

Before a sale, insurance is generally the responsibility of the owner or perpetual usufructee of the property. However, where property is the subject of a lease or the property is a leasehold interest, the terms of the lease will prescribe which party has responsibility to insure.

As a rule, the landlord insures the building and the common areas and the tenant insures its premises fit-out. The premium paid by the landlord is usually recovered in the service charge. It is important to structure the various policies so that the scope of the insurances does not overlap. Otherwise, there may be problems with payment in the event of a claim, as there may be a dispute between the insurers as to which of them is actually bound and in what proportion.

Tenants are also usually required to insure their civil liability for any possible damage to individuals or assets which they, their employees or agents etc. may cause in their operations. Sometimes, they also take out “business interruption” insurance or participate in “loss of rent” insurance. Landlords’ policies are often assigned (at least conditionally) to lenders. Tenants’ policies may sometimes be assigned to the landlord and then further to the banks. In the event of fit-out works by the tenant, the tenant has to take out a liability insurance policy covering construction risks.

Insurance policies may either comprise a single policy for one particular property or an umbrella policy designed to cover a portfolio of properties. Insurance policies are transferable on sale with the consent of the insurer. However, usually the buyer takes out a new policy after completion.

In transactions concerning real estate, there are additional specific types of insurance. Gap insurance is concluded for the purpose of insuring against a court refusal to register the mortgage or until the beneficiary’s rights until a mortgage are registered in the Land and Mortgage Register. Title insurance may also be taken out in situations where legal due diligence leaves uncertainty whether the legal title can be challenged by third parties and only an opinion of a court could settle the matter.

Regardless of the kind of development, before the acquisition of the property the buyer must take certain environmental issues into account. The development of land in many cases requires an environmental impact assessment. As some environmental issues can play a crucial role in the development and investment process, it is advisable to undertake environmental due diligence. Acquisition due diligence may involve the appointment of environment consultants to consider documentary information and to carry out a site visit. It is important to identify potential problems early on so that there can be negotiation on price, the need for and scope of any remediation and/or the need to put in place protection in respect of any losses relating to existing contamination that may arise in the future.

Real estate may be contaminated as a result of current and former uses. Primary Polish Environmental Law, as in other European jurisdictions, contains a general rule of “polluter pays” as regards counteracting and removing pollution. This principle concerns pollution of all major areas of the environment, i.e. air, water, soil, protection from noise, electromagnetic fields, protection of animals and plants and protection of extracted minerals.

In respect of land where industrial activity has been conducted, there may be a potential risk of residual pollution of the soil. In this context, a duty to keep the land free from pollution rests with the holder of the property and is further transferred to subsequent holders. There is a statutory assumption that the holder is liable for any pollution of the soil. The current holder of real estate may be exempted from this liability if it proves that the previous holder of the real estate caused the pollution in question. If some land turns out to be polluted, the holder may be obliged to re-cultivate it at its own cost. If the current holder is successfully exempted from liability, the obligation to take appropriate steps to re-cultivate the soil will revert back to the previous holder.

Polish law requires that the price, or at least a price fixing mechanism, be agreed in the sale agreement. When the price for shares is considered, apart from the value of the asset, the parties should agree to the adjustment of the price to reflect the receivables and liabilities of the target company (i.e. net asset value). Such an adjustment is often made on the basis of the balance sheet of the company as at the date of executing the final agreement. The price established in the transfer agreement may also be adjusted to reflect progress in leasing the scheme after transferring shares or an asset. Such post-closing adjustments create certain tax and bookkeeping consequences that should be considered beforehand.

Pricing of real estate investments is a combination of the aggregate rent being paid by occupational tenants of the property and the value that investment buyers consider that a property of the specific type and location is worth at the time of valuation taking that income into account. The rent for a particular property is likely to be assessed by multiplying the area of the property by the market rental value per square metre. The market rental value will take into account factors such as the location of the property, its type and condition, and the length of the lease term. Investment properties are commonly referred to as being sold on a particular yield, meaning the investment return that will be gained from the capital sum which it is necessary to pay to buy the property. For example, where a property with an aggregate annual rent of EUR 100,000 is sold for EUR 2m, it will have a yield of 5%.

The notary and registration fees depend on various factors: in particular, on the value (price) of the property, but also on the parties (e.g. private or public bodies) and the category of the property (e.g. agricultural or commercial). They are subject to statutory tariffs and are calculated based on degressive rates with caps.

Notary fees are the fees for preparing the notarial deed. VAT is added to notarial fees at a rate of 23%. The maximum net fee for one deed is approx. PLN 16,500 (approx. EUR 4,100) but can be negotiated.

Registration fees are fixed fees of between PLN 100 and 200 (approx. EUR 30 and EUR 60) levied at the time of registration.

The transfer of real estate may be subject to either VAT or transfer tax (tax on civil transactions). VAT will apply if a business entity makes the sale, unless the property fulfils certain conditions (the building is considered “used”, or the land is not developed or zoned for development). Sales made by individuals not conducting business activities are not subject to VAT. The base rate of Polish VAT is 23% but an 8% rate applies in certain cases (e.g. sale of apartments). If the sale of real property is not subject to VAT, it is subject to a transfer tax at the rate of 2% (asset deal) or 1% (share deal). The notary is responsible for the collection of the transfer tax and registration fees as regards the sale of the property while the buyer of shares pays the transfer tax directly to the tax office. VAT is paid directly by the seller to the buyer who then settles it with the tax office.

Land buildings and structures are subject to land tax. The tax is payable by owners, perpetual usufructees, and lessees of public (state or municipality-owned properties). The tax is based on surface area in the case of land, and on the useable area in the case of buildings. The rate of the tax is defined by the city council but there is a statutory cap. Polish governments have been working on a new common property tax based on the value of the property since 1994. The introduction of the tax requires the valuation of all real estate. The process of valuation is still far from complete and there are no credible estimates regarding the date of introduction of such a tax.

Holders of a perpetual usufruct right are obliged to pay the annual perpetual usufruct fee by 31 March of each year. The annual fee is calculated on the basis of a rate applicable to the land and the value of the land (excluding the value of the buildings or other structures). The rate is 3%, if the land is designed for commercial purposes and 1% if it is designed for residential purposes. The city council may increase the fee by re-evaluating the land.

In addition, owners must participate in the costs of public infrastructure developed by local authorities. The public infrastructure fee is calculated on the basis of the increase in the value of a property due to the development of infrastructure and a percentage rate adopted by the city council (not to exceed 50%). The payment of the fee may be imposed by the city council within three years following the development of the infrastructure.

The market value of land may increase or decrease as a result of the adoption or modification of a master plan, or as result of subdivision of land. If the market value of land decreases (but the owner may still use the land in the same manner as before the master plan), then the owner (or holder of the perpetual usufruct) may demand that the local authority (the city) pay compensation equal to the decrease in the value of the land calculated as at the date of sale. Such a claim may be raised only if the owner sells or otherwise transfers the title to the land, but not later than five years from the adoption or modification of the master plan. More frequently, the value of land increases as a result of adoption or modification of a master plan, e.g. green-field is re-zoned to land on which a shopping centre may be built. In such a case, if the owner sells or otherwise transfers the title to the land within five years from the adoption or modification of the master plan, the city will charge a re-zoning fee. The re-zoning fee may not exceed 30% of the increase in the value of the land calculated as at the date of sale. The percentage for calculation of the re-zoning fee must be provided for in the master plan.

If, as a result of the subdivision of land made at the request of the owner of the land, the value of the land increases, the municipality may charge a subdivision fee within three years from the subdivision. The amount of the fee may not exceed 30% of the increase in the value. The increase in value is calculated as at the date of the city’s decision charging a subdivision fee.

Under the Act on Public Roads, owners (perpetual usufructees) of real estate must participate in the cost of construction and modernisation of public roads that serve their properties, in proportion to the traffic they generate. The construction or modernisation of the road is usually regulated in the agreement with the public manager of the road.

Properties legally recognised as farmland and forest can only be turned into non-agricultural (or non-forest) use if special conditions are met. The investor will also be obliged to pay an initial fee, and then ten consecutive annual fees (equal to 10% of the initial fee), the amount of which depends on the class of the land (or forest) and the surface of the site. The initial fee is decreased by the market value of the property, which in most cases means that it is not due at all. If the property is sold, the obligation to pay the annual fees passes to the purchaser. If the property is designated as agricultural land in the master plan, amendment of this plan (and the underlying zoning study) will be necessary to change this designation.