The Polish Real Estate Guide Edition 2015 Poland - EY · The Polish Real Estate Guide Edition 2015 Poland The real state of real estate. 1 2 Preface page 1 ... tool on the state of

The Polish Real Estate GuideEdition 2015

Poland The real state of real estate

1

2

Preface

page 1

Polish Real Estate Market1.1. Officemarket 3

1.2. Retailmarket 10

1.3. Warehousemarket 15

1.4. Residentialmarket 19

1.5. Investmentmarket 23

1.6. KeycitiesinPoland 30

Legal and tax aspects of investing in real estate2.1. Legalbackground 44

2.2. Investmentvehiclesandstructures 50

2.3. Realestatefinancing 61

2.4. Acquisitionofrealestate–assetdealandsharedeal 74

2.5. Developmentandconstruction 88

2.6. Operationandexploitation 99

2.7. Exitingtheinvestment 107

2.8. Saleandleaseback 108

2.9. Duediligenceaspartoftheacquisitionprocess 110

4

3Accounting aspects of investing in the Real Estate market3.1. Polishaccountingregulations 121

3.2. SelectedAspectsofAccountingforRealEstate underInternationalFinancialReportingStandards(applicableforannualperiodsbeginningon 1January2013) 134

3.3. SelectedIFRSissuesandtheirimplicationsfor realestateentities 152

Contact

page 160

Appendix

page 170

Preface

EY, a globalleaderinassurance,tax,transaction,advisoryandlegalservicespreparedthisguidetothePolishrealestatemarket.Thisguideaimstoprovideitsreaderswitha broadviewofthemarketandthecurrentinvestmentclimate,aswellaslegalandtaxinformation,ina practicalformattohelpyoumakeinformedinvestmentdecisions.OurcombinedexpertiseinthismarkethasenabledustoproducewhatwehopewillbecomeanindispensablereferencetoolonthestateofthePolishrealestatemarket.

Inconjunctionwiththeviewscontainedinthisguide,itisimportanttoseekcurrentanddetailedinformationonthecommercialclimateatthetimeofconsideringyourinvestment,asthiscanchangeatanytime.Thisguidereflectsinformationcurrentasof1January2015unlessstatedotherwise.

Poland.Therealstateofrealestate|1

Polish Real Estate Market

1

2|Poland.Therealstateofrealestate

1.1.OfficemarketPoland–general

Followingmajorreformsin1992,Polandexperiencedaboomineconomicactivityinthe1990s.Likeothermarkets,themodernofficemarketbegantoemergewithaninitialwaveofnewofficeconstructionstartinginthefinancialandpoliticalcapital–Warsaw.

Until1996,annualsupplyremainedbelow50,000m2, whichwassubstantiallylessthantherapidlyincreasingdemand.Becauseofthedifficultlocaldevelopmentandfinancingconditions,supplywasinitiallyslowtorespond.Thesecondhalfofthedecadeshowedarapidincreaseinsupply,asPolanddemonstrateditspoliticalstabilityandsoundeconomicfundamentals.Therapidincreasescontinuedintothefirstpartofthisdecade,initiallyaddressingpent-updemandfromdecadesoflowsupply,butlaterresultinginanofficeoversupplyinmanymajorcitiesandtownsinPoland.Generally,rentswereinsteadydeclinefromthe1990suntil2005.Therunupto2009showedareversalofthistrend,withindicationsofamaturingofficemarketwherenewbuildingscometomarketinamoretimelyresponsetodemand,thusstabilizingrentsandvacancies.Althoughthefinancialcrisistemporarilyaffectedthesituation,WarsawremainsbyfarthelargestofficemarketinPolandandstillattractsmajordevelopmentactivity.Ontheotherhand,otherregionalbusinesscentershaveenteredthepathofstrongeconomicgrowth,increasinginterestinmodernofficeaccommodationeveninsmallercitiesandtowns.OnthemajorityofPolishofficemarkets2011wasoneoftheweakestyearsintermsofnewsupply.Thestrictlendingcriteriaimplementedbybanksafter2008verifiedmostoftheinvestmentprocesses.Currentlyconstructionactivityisrecoveringquickly.Theannuallevelofnewsupplyin2013amountedtonearly670,000m2,whichrepresentedsignificantlyhighergrowthincomparisontopreviousyears.Theleveloftotalcompletionsin2013wasthehighestyearlyvaluerecordedinPolandsince2000.


13,0

6,0

11,510,5

13,7

7,5

13,8

15,8

10,4

0

5

10

15

20

25

-

500 000

1 000 000

1 500 000

2 000 000

2 500 000

3 000 000

3 500 000

4 000 000

4 500 000

5 000 000

Warsaw Krakow TriCity Wroclaw Poznan Lodz Katowice Szczecin Lublin

Supply Rents Vacancy rate (%)

Rent

s in

EUR

/m2 /m

onth

Supp

ly in

m2

Source: EY

Office market in Poland

Newsupplyin2014amountedto600,000m2,buttakingpipelineintoconsideration,growingtrendshallcontinueinfollowingyears.Asfarasnewprojectsunderconstructionandproposedareconcerned,in2014thebiggestconstructionactivitywasobservedinWarsaw,Kraków,Tri–CityandKatowice.

Focus on Warsaw

ThemodernofficemarketinWarsawstartedtodeveloprapidlyatthebeginningofthe1990sinresponsetothePolishpoliticaltransitionandeconomicreforms,followedbyagrowthperiodduringrecentyears,inwhichtheWarsawareaplayedamajorrole.

Becauseofitscentralfunctionsandconvenientlocation,thePolishcapitalcityhasreceivedasignificantshareoftheinflowofforeigncapital.Largeforeigncompanies,includingvariousfinancialinstitutions,consultingcompanies,aswellasinternationalfirms,usuallychooseWarsawasalocationoftheirheadquartersinPoland.Inaddition,Warsawhastraditionallybeenthemostimportantadministrativeandbusinesscenterfordomesticcompanies.Thisledtorapid

growthofdemandformodernofficespaceinthecity,whichintheperiodfrom1990untilthefirsthalfof1998resultedin98%to100%occupancyratesaswellasoneofthehighestrentallevelsforofficespaceamongEuropeancities.

Supply

Theendof1998markedthefirstdramaticdateformodernofficespace,whenoverthecourseofoneyearthemodernofficesupplydoubledfromthe300,000m2completedbetween1989and1997to680,000m2.Twoyearslater,stockrosetoapproximately1,360,000m2andalthough54%ofthiswasinthecitycenter,2001markedtheendofthecentrallocation’sdominanceinnewannualsupply.Withtheexceptionof2003,annualdeliveryofmodernofficespaceinnon-centrallocationsexceededcentral,andthetrendcontinuedthrough2013.Attheendoffirsthalfof2013,thetotalmodernofficespaceinWarsawhasexceeded4millionm2,withnon-centrallocationsaccountingforaround70%.WarsawremainsthemostmatureofficemarketinPolandwithatotalofficestockofapproximately4.4millionm2.


Source: EY

Annual delivery of modern office space (m2) in Warsaw

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

-

50 000

100 000

150 000

200 000

250 000

300 000

350 000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Vac

ancy

rat

e

Supl

ly in

m2

Non-central City center Vacancy

Asthesupplyofnewspacereachedandsurpasseddemand,themarketsawvacancyratesrisetoveryhighlevels.Startingfrombetween4and6%in1998,thebuildingboomfrom2000to2002helpedvacancyratesriseasfaras20%inthecitycenterand16%intheoutskirts.Asthemarketstabilized,andnon-centrallocationsbecamethenormratherthantheexception,centralandnon-centrallocationsfluctuatedbackandforthbetween15and19%,withnon-centrallocationsfallingbelowthe10%mark(7%onaverage)in2004.

Regardlessoftheproportionofcentraltonon–centrallocations,theoverallvacancylevelinWarsawhassystematicallydecreasedfrom2002until2007,whencentralandnon-centralvacancyratesstoodatthe3.4%and2.9%respectively.Withthecrisescameareversalofthistrend,in2008and2009vacanciesdoubledtoover7%overall.In2010,vacancyrateremainedstableatthelevelof8%.Duetogrowingdemandforofficeaccommodationandlimitedcompletionsin2011,thevacancyrateinWarsawfellandreached6.7%.Howeverattheendof2012,approximately8.8%wasunoccupied.Duetothesignificantvolume

ofnewprojectscompletedin2014,thevacancyrateexceeded13%.Itisexpectedthatthevacancylevelwillrisewithinthenextfewyears.

Onthebasisoflocation,themodernofficestockinWarsawcanbedividedintotwogroups:centralandnon–central.Thecitycenterisboundbyul.Towarowa,ul.Grójecka,ul.Wawelska,al.ArmiiLudowej,theVistulaRiverandal.Solidarności.Themostsignificantofficebuildingslocatedwithinthisareainclude:Rondo1,Lumen,Skylight,Metropolitan,WarsawFinancialCenter,FocusFiltrowa,WarsawTradeTower,SpektrumTower,PlacUniiandAtrium1.Non–centralofficelocationsincludeMokotów,Ochota,Wola,WłochyandPragadistrict.Intheselocations,WiśniowyBusinessPark,BusinessGarden,TrinityPark,MarynarskaBusinessPark,PlatiniumBusinessPark,PoleczkiBusinessPark,CristalPark,JerozolimskieBusinessParkandLipowyOfficeParkwarrantcloserattention.

Yearlynewstockpeakedin2000when360,000m2wasaddedtosupplyandtherehasbeenyear-on-yeargrowthsince2005,when120,000m2ofnewsupplywasadded.


Major office developments completed in 2014

Name Location Area (m2) Developer

GdańskiBusinessCentreNon-central InflanckaSt.

46,000 HBReavis

EurocentrumOfficeComplexI

Non-centralJerozolimskieAve.

38,700 CapitalPark

WarsawSpireBCentralGrzybowska/TowarowaSt.

20,000 Ghelamco

NimbusOfficeNon-centralJerozolimskieAve.

19,500 Immofinanz

Atrium1Central JanaPawłaIIAve.

16,500 Skanska

ParkRozwojuINon-centralKonstruktorskaSt.

16,000 EchoInvestment

Source: EY

Accordingtoprojectannouncements,morethan300,000m2ofmodernofficespacewillentertheWarsawmarketin2015.However,thatpredictionissubjecttoanumberofvariables,asdevelopers(andtheirlenders)takeamorecautious

approachtospeculativeprojects.Itisexpectedthatsomeoftheseprojectswillbedelayeduntilsuchtimewhenreasonablelevelofpre-leasinghasbeenachieved.

Theyear2010sawthecompletionofover200,000m2ofnewstock,thoughthiswasplannedwellbeforethecrisisandtheseprojectshadsecuredfinancinginadvanceofnowstricterlendingcriteria.In2011approximately120,000m2weredeliveredtothemarket.Themajorityofspaceisinofficebuildingslocatedoutsideofthecitycenter.In2012themarketwitnessedahighergrowthinnewofficesupply,whichamountedto270,000m2.

In2013arecordamountofnewofficespacedeliveredtothemarketwasobservedexceeding300,000m2.Year2014broughtslightslowdowninnewsupplywithnearly280,000m2ofnewspace.Similarlytopreviousyears,mostofthenewofficebuildingsweresituatedinnon-centrallocations.ThereisexpectedthatWarsawwillstrengthenitspositionintermsofnewofficesupplyoverthenextfewyears.


Demand

Thedemandformodernofficespacecomesmainlyfrom:

• PolishandforeigncompanieswhoarebasedinPolandandhaveparticipatedintherapideconomicgrowth;

• newentrantsintothePolishmarket,particularlyevidentin2004,justafteraccessiontotheEuropeanUnionandagainduring2007and2008;

• thenew“ServicesandInformationEconomy”acceleratingtheneedforup–to–dateofficespace.PolandinparticularhasbenefitedfromBusinessProcessOffshoring(BPO);

• stateentitieswhicharemoreandmoreinterestedinleasingofficespaceratherthanoccupyingself-owned,oldandlowqualitybuildings.

Growthsurgedin2007,withtake–upreachingalmost500,000m2.Take-upmoderatedto525,000m2in2008and

Major office developments under construction

Name Location Total office area (m2) Developer

WarsawSpireC&A Central Grzybowska/TowarowaSt. 95,000 Ghelamco

GenerationPark Central Wronia 84,000 Skanska

Q22 Central JanaPawłaIIAve. 55,000 EchoInvestment

GdańskiBusinessCenterII

Non-central InflanckaSt. 45,000 HBReavis

Postępu14 Non-central PostępuSt. 33,700 HBReavis

AstrumBusinessPark

Non-central ŁopuszańskaSt. 30,000 Prochem

RoyalWilanów Non-central Klimczak/PrzyczółkowaSt. 28,000 CapitalPark

DomaniewskaOfficeHub

Non-central DomaniewskaSt. 27,000 PHN

EurocentrumOfficeComplexII

Non-central JerozolimskieAve. 25,000 CapitalPark

Wołoska24 Non-central Wołoska 21,000 Ghelamco

Atrium2 Central Rondo ONZ 20,000 Skanska

PrimeCorporateCenter

Central GrzybowskaSt. 20,000 GolubGetHouse

Source: EY


bytheendofthatyearsymptomsofadecliningmarkethademerged,particularlyforofficespaceintheWarsawcitycenter.In2009thetotalvolumeofleasingtransactionsamountedto210,000m2,orapproximately40%ofthepreviousyear’svolume,withamarketrelegatedtomainlysmallleasetransactions.

Currently,demandismuchlessdrivenbybusinessexpansionandratherincreasinglybytenantsrelocatingeithertoimprovetheiraccommodationortoreducecostbyoptimizingspace.Duetothecrisisin2008/2009manytenantsreducedtheirspaceandwereseekingtosublettheexcess.Thissituationchangedin2010,when,duetoamorepositiveeconomicenvironmentandoptimisticforecasts,demandhasrecovered.In2013recordofamountofofficespace(633,000m2)wereleased.In2014demanddroppedby3%to612,000m2,butaccordingtoforecastsdemandwilcontinuetoincreaseinthenearfuture.

Rents

Alongtheclassicsupplyanddemandmodel,rentsinthelate1980sandearly

1990sescalatedasPolandopeneditsborderstoforeigninvestment,andsupplyofmodernofficespacewasextremelylimited.Demandforofficespacepushedrentstotheirpeakin1991ofUSD50/m2/monthforofficespaceofrelativelypoorquality.

Withsuchlimitedsupplyavailable,therewaslittlesegmentationintheWarsawofficemarket,resultinginbothcentralandnon-centrallocationshavingsimilarrentrates.

Thefirstbuildingboomofthelate1990spushedoverallrentsdown,butitwastheintroductionofout-of-townofficeparksaround1996,thathelpeddifferentiatepricesbetweencentralandnon-centrallocations.Thelate1990snoticedrentsformoderncitycenterofficestypically25%to30%higherthanfornewofficesinout–of–townlocations.However,notallofthedifferencecanbeaccountedforbylocationalone,asnon-centrallocationswerebuiltformoreprice–conscioustenantsreadytoacceptalowerstandard.

Thesecondpartoftheboomintheearly21stcenturybroughtwithitadditionalincreasesinsupplyandafurtherdropinoverallrentlevels.Thistemporarilypushedthegapbetweenlocationscloser,butmore

Prime office rents & cumulative office supply

Source: EY

Rent

s in

EUR

/m2 /m

onth

Supp

ly in

m2

0

5

10

15

20

25

30

35

40

45

0

500 000

1 000 000

1 500 000

2 000 000

2 500 000

3 000 000

3 500 000

4 000 000

4 500 000

5 000 000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Supply


demandingclientshelpedraisethestandardofcentrallocationsandtwoaltogetherseparatemarketsemerged.

Currencieshavealsoplayedaroleintheleasingmarket.IntheearlyyearslowstandardpropertieswerepricedinPLN,withhigherstandardpropertiesgearedforinternationalclientelebeingdenominatedinDMorUSD.SinceaccessionintotheEU,theEurohasbecomePoland’sstandardreferencecurrencyforleases.Today,rentsforcentrallylocated,highqualityofficebuildingsarebetweenEUR20and24/m2/month.

CurrentrentsforprimeofficespacelocatedoutsideofthecitycenterrangefromEUR11to15/m2/month.Asexpectedinatoughmarket,newrentalcontractsarebeingsignedwellbelowaskingrates.Oursourcessuggesttypicaleffectiverentsareroughly15-25%lowerthanaskingrents.Askingrentsdependmainlyonlocation,buildingstandard,sizeandlengthofleaseterm.

Duetothegrowingdevelopmentactivityandnumberofnewprojectsscheduledforcompletionin2015,itisexpectedthattherentalratesmaydecrease,especiallyinthecentrallocations.Asaresultofintensecompetitionamonglandlords,thedifferencebetweenaskingandeffectiverentsmayincrease.

Standard lease terms

Thefollowingtermsformodernofficebuildingsareregardedascommonfeatureswithinatypicalleaseagreement:

• sincetheintroductionoftheEUR,mostnewleaseshavebeendenominatedinEUR,butpaidinPLNasregulatedby

Polishlawuntil2009(seesectiononlegalandtaxaspects);

• rentsaresubjecttoannualindexationonthebasisoftheconsumerpriceindexintheEurozone(MUICP,HICP);

• servicechargesincludingwater,electricity,heating,air–conditioning,service,cleaning,etc.areaddedtonetrentsandcalculatedaccordingtothearealeased.TheseratesgenerallyvaryfromEUR3.5to5.5/m2/month;

• achargeforcommonspaceisusuallyaddedtothenetofficespace.Thischargecalculationisbasedontheproratashareofcommonspaceused(lift,lobby,reception).Such“add–onfactors”generallyvaryfrom5%to10%oftheleasedarea;

• inadditiontorentandservicecharges,tenantsareobligedtopay23%ValueAddedTax(VAT);

• landlordsusuallyrequiretenantstoprovidearentaldepositorbankguaranteeequalto3-6monthrent;

• leasesrangefrom3to10years;typicalcontractsare5years,withatrendtowardlongerleasesforlargertenantsandnewdevelopments;

• Incentivesfortenantsarecurrentlyacommonpracticeandtheirrangeissubjecttoindividualnegotiations,whichdependmostlyonthesizeoftheoccupiedpremisesandthetermoftheleaseagreement.Typicalleaseincentivesinclude:

• rent–freeperiodofapprox.1monthper1yearofleaseormore;

• fit-outallowanceofapprox.EUR150–200perm2ofnetofficespace.


1.2.Retailmarket

Poland – General

Polishretailmarkethasundergonesubstantialchangesinrecentyears,particularlyinlargerurbanareas.Fromjustalimitednumberofstate–ownedandsmallprivateenterprisesatthebeginningofthe1990s,thesupplyhasgrowntoencompassanincreasingnumberofinternationalretailchainsandgoodqualitylocaloutlets.

Foreignshoppingcenteroperators,investorsanddevelopershavemovedacrossnationalbordersinordertoaccessneworlesscompetitivemarketsortoexploitmarketniches.Inthiscontexttheownershipofshoppingcenters,aswellasthemixofretailtenants,isbecomingincreasinglyinternational.

Intheearly1990sPolishretailsupplygrewtosatisfythedemandforfood.ThisledtothearrivalofinternationalbrandsupermarketsincludingBilla,Hit,Rema1000andGlobi.From1996on,PolandhasseenarapidexpansionofmajorhypermarketchainssuchasTesco,Hypernova,Carrefour,Auchan,Géant,E.LeclercandReal.Simultaneously,somesupermarketchainsretreated(e.g.Billa),someweresold(e.g.Hit,Géant,LeaderPrice,Hypernova,Real)andafewnewstrongbrandsappeared(Aldi,Alma,PiotriPaweł,Simply).Moreover,anexpansionofdiscountstoresrepresentedbyLidl,PlusDiscount,NettoandBiedronkahasbeenobserved.

Currently,thetotalmodernretailsupplyaccountsfor12.4millionm2.AlthoughthelargestshareintheretailmarketisheldbyWarsawfollowedbyothermaincitiessuchasTri–City,Poznań,Wrocław,Kraków,ŁódźandKatowice,investorshavebeenseekingopportunitiesinsmallercities,


thusmoreandmoreprojectsarebeingopenedandbuiltintownssuchas:Leszno(GaleriaGoplana),Lublin(AtriumFelicity,TarasyZamkowe),JeleniaGóra(GaleriaSudecka,NowyRynek),StarogardGdański(GaleriaNeptun),Olsztyn(GaleriaWarmińska),Kalisz(GaleriaAmber),Ełk(BramaMazur)andPiła(GaleriaVIVO!).

Modernretailspacecompletedin2014amountedtoaround450,000m2. Majornewopeningswithspaceabove40,000m2includedAtriumFelicity(Lublin)andGaleriaWarmińska(Olsztyn).Majorprojectsinthepiplinewithopeningplannedinyears2015-2016areGaleriaPosnania(Poznań),ZieloneArkady(Bydgoszcz),TarasyZamkowe(Lublin)andSukcesja(Łódź).

Developer’sactivityinsmallandmediumcitieshasbeenobservedforafewyears.Theactualamountofspacethatwillbedeliveredtothemarketin2015willdependuponavailabilityoffinancingandtenantdemandforretailspace.Apartfromthemedium-sizeretailprojectsthemarketistendingtowardstheopeningof“stripmalls”(conveniencecenters)-smallretailparkswithanareanotexceeding5,000m2,oftenlocatedintheregionalcitiesandconstitutingcompetitionforregularshoppingcenters.

Asinpreviousyearsin2014trendconsistingmodernizationand/orextensionofexistingshoppingmallshasbeenobservedonthemarket.Themainextensionscompletedin2014wereextensionsofGeminiPark(BielskoBiała)andCHRywal(BiałaPodlaska).Expansionsbeingunderconstructionare

AtriumPromenada(Warsaw),WolaPark(Warsaw)FactoryUrsus(Warsaw),Ogrody(Elbląg),AtriumCopernicus(Toruń),GaleriaSudecka(ex.CHEchoinJeleniaGóra),MagnoliaPark(Wrocław)andGaleriaPomorska(Bydgoszcz).

Supermarketsorhypermarketsarestillthepreferredformulaforanchortenancy,althoughanincreasingnumberofprojectsarelookingtowardsentertainmentfunctionstodecreasegroceryretailingasthebasicdemanddriver.Standardcomplementaryfunctionsstillincludegalleryshops,servicepoints,andafoodcourt.

Overthelastfewyears,newretailformattypeshavealsoemerged,includingshoppingcenterswithachoiceofinteriordecorationbrands(e.g.DomotekainWarsaw),DYIstores(Jula,Castorama,OBI,Praktiker,LeroyMerlin)andretailparks.Themarketforretailoutletcentershasbeendevelopingrapidlyoverthelastfewyears.Twelvecentersarecurrentlyinoperationinthesurroundingareasoflargercities.Theyareoperatedmainlybythreechains-FactoryOutlet,FashionHouseOutletCentreandOutletCenter.Themainschemesdeliveredtothemarketin2014wereOutletCentersinLublinandBiałystok.ThemostsignificantoutletcenterunderconstructionisextensionofFactoryUrsusinWarsaw.

Moreover,someofthelargesthypermarketoperatorslikeTescoorCarrefourhavebeenintroducingnewformatssuchasmini-hypermarketsandsupermarkets(e.g.CarrefourExpressandCarrefourMarket).


Inresponsetotherapiddevelopmentofsupermarketanddiscountchainsacrossthecountry.Astothegeographicaldistribution,developmentsfeaturingahypermarketaretypicallybuiltoutsideofthecitycenterwhiledowntownmallsusuallyofferonlyasupermarket.

Themajorhyperandsupermarketchainsintermsofsalesrevenuesinclude:MetroAG(MakroCash&Carry,MediaMarkt,Saturn),JeronimoMartins(Biedronka,Hebe),Tesco,Carrefour,AuchanGroup(Auchan,Real,Simply),SchwarzGroup(Lidl,Kaufland),EmperiaHolding(Stokrotka,Milea),ITM(Intermarche,Bricomarche),E.Leclerc.

Focus on Warsaw

TotalmodernretailsupplyinWarsawexceeds2.1millionm2, but only approximately1.6millionm2ofitcould

beconsidered“modern”retailspacesuitableforinternationaloccupiers.Thisequatestoaround1m2oftotalretailspaceperperson,whicheventakingintoconsiderationthedisposableincomeofWarsaw’sinhabitants,ismuchlowerthaninmajorWesternEuropecities,wheretheratioisonaverage2m2perperson.Modernretailspaceincludesshoppingmallsandhypermarkets,mostofwhicharelocatedoutsidethecitycenter.

Theremainingretailersoccupymostlyretailunitssituatedonthegroundfloorsofresidentialbuildingsordepartmentstoresbuiltbeforethe1990s.

LimitednewretaildevelopmentswererecordedinWarsawin2013and2014.Apartfromthe5,000m2extensionofGaleriaMokotówandopeningofPlacUniiShoppingCenter(15,500m2)(bothin2013),therewasnootherkeydevelopments.

Major shopping centers in Warsaw

Name Location Area (m2) Owner Completion

Arkadia Śródmieście JanaPawłaIIAve. 110,000 Unibail-Rodamco 2004

BlueCity OchotaJerozolimskieAve. 82,000 Singspiel PhaseI–2004

PhaseII-planned

WolaPark Wola GórczewskaSt. 73,000 InterIkeaCenter

PolandPhaseI–2002PhaseII-planned

AtriumPromenada

PragaPołudnieOstrobramskaSt. 66,000 AtriumEuropean

Real Estate

PhaseI–1996PhaseII–1999PhaseIII–2005PhaseIV-planned


Name Location Area (m2) Owner Completion

ZłoteTarasy Śródmieście ZłotaSt. 65,000

AXAREIMJVCBREGlobalInvestors

2007

GaleriaMokotów

Mokotów WołoskaSt. 62,500 Unibail-Rodamco

PhaseI–1999PhaseII–2002PhaseIII-2013

SadybaBestMall

Sadyba PowsińskaSt. 27,000 KlepierreGroup 2000

Klif Wola OkopowaSt. 17,800 AEWEurope 1999

PlacUniiShoppingCenter

Mokotów PuławskaSt. 15,500 InvescoReal

Estate 2013

Source: EY

IntherecentyearsWarsaw’shighstreetlandscapehasrecoveredandgainedimportance,althoughincomparisontootherEuropeancapitalsthereisstillmuchtobedone.Highstreetsarelocatedacrossthecentralquadrantofthecity.TworetailcategoriesdominatethehighstreetsprofileinWarsaw:gastronomyandclothing.Anotherwellrepresentedcategoryishealth&beauty.AlsopresenceofluxuryretailersisnoticeableinsomehighstreetsinWarsaw.NowyŚwiatStreetishistoricalaxisofthecitylinkingPlacTrzechKrzyżytotheOldTownandimportanttouristdestination.Therearenumerousrestaurantsandcafeslocatedonthestreet.PlacTrzechKrzyży,ontheotherhand,isdominatedbyprimeandluxurybrands,stylishrestaurantsandcafes.AnotherimportanthighstreetinWarsawisMarszałkowska.ChmielnaStreetispedestrianwalkwayconnecting

NowyŚwiatandMarszałkowskawhichoverflowwithcafesandrestaurants.TheopeningofthesecondmetrolineisexpectedtoenhancetheattractivenessofNowyŚwiatandŚwiętokrzyska.Primehighstreetrentsforunitsofca.100m2 oscillateinrangeEUR70-100month/ m2. UnitsincentralWarsawvaryheavilyintermsofstandardandaccessibility.ForeignanddomesticretailershavealsoestablishedastrongpresenceonthegroundfloorofbuildingsfacingJerozolimskieAvenueandMarszałkowskaStreet.ThesectionofJanaPawłaIIAvenuetothenorthoftheAtriumBusinessCenterhastraditionallybeenknownasashoppingdestinationandtodaystillfeaturesamixofmoderatelypricedstores.Smallclustersofexpensiveshopsarealsofoundinhotelarcadesandonthegroundfloorsofthemajorofficebuildings.


Currently,asaresultoflowsaturationwithretailspaceinWarsawandlowvacancyrate(approximately1,6%),highstreetlocationsaregaininginpopularity.

SeveralmoresmallshoppingcentersarecurrentlyunderconstructionwithintheagglomerationofWarsaw:FerioWawer(12,500m2),FabrykaWołomin(31,000m2)andGaleriaLegionowo(10,500m2).Additionaly,threeexistingschemesareduringextensionworks(AtriumPromenada,WolaParkandFactoryUrsus)andoneisbeingrefurbished(HalaKoszyki).

Amongshoppingcentersintheplanningphase,thereareGaleriaPółnocna(64,000m2),GaleriaWilanów(61,000m2)andNowaStacjaPruszków(25,000m2).

Retailrentratesvarywidelyanddependmainlyonthetypeofafacility,locationandquality.Over2014therentallevelwasstablewithminorupwardtrendinWarsaw’sprimelocations.Theratesforretailunitsinprimelocations,reachlevelsashighasEUR110/m2/month.

AveragerentsforsmallunitsinmodernshoppingcentersinWarsawrangefromEUR40to50/m2/monthdependingonlocation,unit–sizeandtypeofmerchandise.Primeunitsof100–150m2areletatEUR65to90/m2/month(includingrentsinZłoteTarasyandArkadia,whichrepresentthehighestretailrentsinPoland).LargerunitsleaseforapproximatelyEUR15to30/m2/month.Usuallyanchorstoreoperators

occupyingunitsofmorethan1,000m2 paymuchlessthanothers,withaveragerentsfromEUR9to12/m2/monthandevenlower,aroundEUR5to8/m2/monthforhypermarkets.ServicechargesforsmallerspacevaryfromEUR5to9/m2/month.MajortenantsarechargedEUR2to3.5/m2/month.

Standard lease terms

Standardleasetermsforretailspacearesimilartothoseintheofficemarket.However,thetypicalleaselengthforretailspaceinmodernshoppingcentersrangesfrom5to10years.Anchortenantsusuallyprefer10-yearleaseagreementswithextensionoptions,typicallyforanadditional10-yearperiod.

Withtheincreasingsupplyofretailspace,tenantshavebecomemoredemandinganddevelopersseekingattractivetenantsfrequentlyoffernotonlylowerrentalratesbutalsoincentivessuchas:

• rentfreeperiodrangingfrom1–2monthsforsmallershopsandupto6monthsforlargerunits;

• fit-outallowanceatthelevelof EUR50–200/m2forlargeunitsanduptoEUR600/m2foranchortenants(i.e.withminimum10-yearleaseagreements).


1.3.Warehousemarket

Poland – General

ThemodernwarehousemarketinPolandbeganitsdevelopmentintheearly1990s,andcurrentlyincludesover8.8millionm2ofwarehousespace.AlthoughinitiallycentralizedwithintheWarsawmetropolitanarea,themodernmarketcannowbesubdividedintosevenregions,eachofwhichhasawelldevelopedwarehousespace.Theseinclude:Warsaw,Poznań,UpperandLowerSilesia,CentralPoland(Łódź,PiotrkówTrybunalski),Tri-City,andKraków.Logisticscentersarelocatedoutsidecitylimitsandofferinggoodaccesstomajorexistingandplannedhighways.

Oneactivitythathascontinuedeventhroughthecrisishasbeenroadandinfrastructureconstruction.ThiscontinuestoboostinvestorinterestinalternativeregionsincludingSzczecin,ZielonaGóra,Lublin,Toruń,BydgoszczandRzeszów,butthesearenowmostlybuilt-to-suitprojects.Intherecentyearssituationinthefinancialmarketshasdampenedaccessibilitytofinancingwhileraisingthecostofcapital,renderingsomeinvestmentsnolongerfeasible.Thiswasevidentinthe“tightening”bywarehousedevelopers,whowerereducingspeculativeprojectsinordertofocusonmanagingcurrentstock.

Afterafewstableyears,2014broughtastrongupturntothemarket.Newsupplyin2014amountedto1.1Mm2whichismorethan14%growthoftotalmodernwarehousestockandalmost3timesmorethaninyear2013.Despitethelargenewsupply,vacancyratesdecreasedsignificantly–fromc.a.10%in2013to5,5%in2014.Rentsremainonstablelevel.

PositivetrendshouldcontinueinfollowingyearsandwillprobablyaffectalsoregionalmarketssuchasRzeszów,Lublin,BydgoszczandOpole.


The most active warehouse developers in Poland

Company Country of origin

Major locations (existing and proposed)

AIG/Lincoln USA Gliwice,Łódź,Piaseczno,Stryków,WarsawBiuroInwestycjiKapitałowych Poland Kraków,OżarówMazowiecki,PruszczGdański,

Sosnowiec

Goodman Australia Gdańsk,Gliwice,Kraków,Łódź,Poznań,Toruń,Sosnowiec(underconstruction),Warsaw,Wrocław

MenardDoswell&Company USA Błonie,Czeladź

MetropolGroup Poland Błonie,Warsaw

MLPGroup IsraelBieruń,Lublin(underconstruction),Łódź(underconstruction),Poznań,Pruszków,Tychy,Wrocław(underconstruction)

Panattoni USA

Bielsko-Biała,Błonie,Bydgoszcz,Czeladź,Garwolin,Gdańsk,Gliwice,Kraków,Łódź,Mysłowice,OżarówMazowiecki,Poznań,Pruszków,Robakowo,Rzeszów,Stryków,Święcice,Teresin,Toruń,Warsaw,Wrocław

PointParkProperties UK Mszczonów,Poznań

ProLogis USA

Błonie,Chorzów,DąbrowaGórnicza,Gdańsk,Katowice,Nadarzyn,PiotrkówTrybunalski,Poznań,RawaMazowiecka,RudaŚląska,Sochaczew,Stryków,Szczecin,Teresin,Ujazd,Urzut,Warsaw,Wrocław

SEGRO UK Gdańsk,Gliwice,Łódź,Poznań,Stryków,Tychy,Warsaw,Wrocław

Source: EY

Focus on Warsaw

TheWarsawmodernwarehousestockisdefinedaspropertieswithinapproximately50kmofthecitycenterandissplitintotwozones:

• zoneI:approximately630,000m2 in propertieslocatedwithina15kmradius(Okęcie,Służewiec,Targówek,Żerań),warehousefacilitiesinthiszonehost

mostlypharmaceuticals,cosmeticsandelectronics;

• zoneII:approximately2,150,000m2 inpropertieslocated15to50kmfromthecitycenter(e.g.Piaseczno,OżarówMazowiecki,Błonie,Teresin,Nadarzyn,Pruszków).

AlthoughtheWarsawmetropolitanareacontinuestoaccountforthelargestsingleshareinthePolishmarket(40%


oftotalspaceinPoland),thisdominancehasbeensteadilyerodingasdeveloperspushforapresencealongtheemergingmotorwaysoutsidethemajorcities.

ThetotalmodernwarehousespaceintheWarsawMetropolitanArea(ZonesIandII)isestimatedatalmost2.8millionm2 of modernspace.

In2013,around78,000m2ofwarehousespacewascompleted,whichwasover20%decreaseincomparisonto2012.IncontrarytothewholePolishmarket,newsupplyinWarsawin2014was

significantlylowerthaninpreviousyearandamountedto38,000m2.Currentlyabout51,000m2ofwarehousespaceisunderconstructioninWarsawarea.Futuresupplyishardtopinasdevelopersmovetoclientfocusedbuilt-to-suitprojects.

Themajorityofspaceleasedinmoderndistributioncentersislettologisticscompanies,whichsub–letspaceandprovidetheirtenantswithfullservice,includingpackaging,loading,customsclearanceandtransportation.

Examples of class A modern warehouse developments in Warsaw area

Project LocationArea (m2) [existing / proposed]

Developer / Owner Completion

DiamondBusinessPark Piaseczno 57,000 AIGLincoln 2001-2007

EuropolisParkBłonie Błonie 178,000 MenardDoswell/

CAImmo 2006–2012

MilleniumLogisticParkPruszkówII Brwinów 80,000

/302,000 MLPGroup 2007-2014

PanattoniParkOżarów Ożarów 67,800 Panattoni 2009

PanattoniParkPruszków Pruszków 85,300 Panattoni 2007-2009

PlatanPark Warsaw,Ursynów 53,000 PlatanGroup 1998–2001

ProLogisParkBłonie Błonie 153,000 ProLogis 1999–2008

ProLogisParkTeresin Teresin 159,000 ProLogis 2000–2005

ProLogisParkWarsawI

Warsaw,Okęcie 39,000 MenardDoswell/

ProLogis 1995–1997


Project LocationArea (m2) [existing / proposed]

Developer / Owner Completion

ProLogisParkWarsawII

Warsaw,Targówek 38,300 ProLogis 2006

ŻerańPark Warsaw,Żerań 52,000 ApolloRida/

Prologis 1999–2000

SEGROBusinessParkWarsawŻerań

Warsaw,Żerań 49,900 ApolloRida/

SEGRO 2005–2011

Source: EY

In2013thedemandforleasablewarehousespaceinWarsawareaamountedtoapproximately344,000m2 anddecreasedc.a.23%ascomparedto2012.In2014demandincreasedmorethan150%reachingamountof863,000m2–thehighestscoreinPoland.

Themostsoughtafterunitsizesare1,000–3,000m2, usually leased in office/warehousefacilitiesofabove10,000m2,locatedinlogisticsparks.Areaslargerthan10,000m2areusuallyleasedbylogisticsoperators.

VacancyratesinWarsawhavedecreasedtothelevelof7%comparingtothe14%in2013.

Warsawbigboxrentsstayonthestablelevelandfor2014arecurrentlyquotedatthefollowinglevels:

• zoneI:EUR4.0to5.5/m2/month;

• zoneII:EUR2.0to3.2/m2/month.

Incentiveshavealsomoderated,withonemonthforeachyearofleasetermbeingageneralbenchmark.Inadditiontorent,tenantsareobligedtopayservicechargesforpropertymanagement,maintenance,propertytaxandsecurity.AfixedamountpaidinadvanceandadjustedannuallyonthebasisofactualcostsvariesfromEUR0.7to1.3/m2/month.


1.4.Residentialmarket

Poland – current picture

Year2014wasthebestyearforresidentialmarketsincethefinancialcrisisof2008.Recordlevelofsaleswasobserved.Themarketwasdrivenbymanyfactorswhichcumulateinthatyear,especiallylowinterestrates,newgovernmentprogram“MieszkaniedlaMłodych”andannouncementofnewrestrictionsformortgagegrantingtobeimplementedin2015aswellasstableprices.

ThestockofunitsforsaleonthePolishprimaryresidentialmarkethasbeenrisingseveralyearsinarowuntilthebeginningof2012.AsforQ42012,aggregatedstockofunitsforsaleinsixmainagglomerations(Warsaw,Kraków,Poznań,Wrocław,TricityandŁódź)accountsforapprox.41,000dwellings,whichmeans27%dropincomparisontothesameperiodin2011.Itisaconsequenceofthe“DeveloperAct”enteredintoforceinApril2012.Afterevenworseyear2013(approx.35,000dwellingsattheendoftheyear),2014broughtupturnreaching45,000dwellings.

Onthedemandside,mortgagefinancinghasbeenhamperedbyregulationsbythePolishFinancialSupervisionAuthority(KNF),restrictinggenerallendingtermssuchascreditworthinessandforeigncurrenciesloans,leadingtotheascendanceofPLN-denominatedloans.Ontheotherhand,thedemandisdrivenbyexceptionallylowinterestratesandthenewmortgage-assistancescheme“MieszkaniedlaMłodych”.Howevertheprogramwasintroducedinthebeginningof2014itwillhavemajorimpactinfollowingyears.AlthoughspecifictypeofapartmentsfulfillingMdMprogramparametersareavailableonthemarketthereishugedisproportionregardingpricelimitswithinthecities.


Poland - fundamentalsInthelasttwodecadesPolishresidentialmarketgrowthhasbeendrivenbytheoverallgrowthofthecountry’seconomy,mortgagefinancingdevelopmentaswellaspositivedemographictrends.

Oneoftheturningpointsdeterminingthemarketshapewastheboomperiodof2004-2007,triggeredbytheEUaccessionandresultinginflowofinvestors,mortgagefinancingreleaseandhistoricallylowinterestrates.Theboomreshapedthestateoftheresidentialmarket,pumpingupthepricesofhousingandofresidentialland.

Despitethecontinuingneedforadequatehousing,demandstillreliesonaffordability,andtocapoffafewgoodyearsofstrongpricegrowth,2007markedanotherturningpoint.Moderationinlate2007ledtostagnationin2008,whichultimatelygavewaytopricedecreasesin2009.

AccordingtodatapublishedbytheCentralStatisticalOffice,over143thousandunitshavebeendeliveredin2014(1.2%lesscomparedtothesameperiodof2013),outofwhich58,8thousand(41%)wereconstructedbydevelopers,and76,6thousand(53%)byindividuals.Theremainingsupplywasdeliveredbyhousingcooperativesandmunicipalities,whoseshareremainsmarginal.Althoughnumberofdelivereddwellingsin2014wasabitlowerthaninpreviousyear,therewasasignificantincreaseinbuildingsstarted(16%)andissuedbuildingpermissions(13%).

ThePolishresidentialmarketispresentlythelargestinCentralandEasternEurope,however,itstilllagsbehindwesternEUmembersintermsofquality,ageofstockandlevelofmarketsaturation.

Moreover,statisticalindicators,suchasnumberofresidentialunitsper1,000inhabitants,usablefloorareaperoneinhabitantandperaverageresidentialunit,arebelowtheEuropeanaverage.

AmajorobstacleconstraininghousingsupplyinPolandismainlyadministration-drivenandconsistsofthelimitednumberofzoningplans,coveringbelow30%ofcountry’sarea.Ineachsinglecase,lackofzoningplanresultsinatime-consumingadministrativeprocedure,whichtakesfromafewmonthsuptoevenayear.Itisnecessarytoobtainzoningdecision(WarunkiZabudowy),beforethebuildingpermitcanbeappliedfor.

Focus on Warsaw

Warsaw’sresidentialmarketremainsthemostdevelopedinPoland:demandisdrivenmainlybyin-migration,thehighestincomelevelinPolandandthelowestunemploymentrate.EmploymentandeducationpossibilitiesinWarsawareamagnetforyoungpeoplefromotherregionsofPoland,resultinginthedominanceofmultifamilydevelopmentsintheWarsawresidentialmarket.Morethan10%ofPolishresidentialsupplyisprovidedonWarsawmarket.Theshareofnewhousingunitsinsingle-familydevelopmentsbuiltinWarsawremainsunder1%.Currentlythemarketisdeterminedbyrisingvolume


oftransactions,resultingmainlyfromlowinterestrates,savingswithdrawalandreinvestmentaswellasfinancingrestrictionswhichstartedfrom2014andwillbetightenedinfollowingyears(sincethebeginningof2015owncontributionshallbeatleast10%anditwillbeincreasedby5percentagepointsin2016and2017).

Aftertherecordyearof2001,completedunitsinWarsawfluctuatedbetween10,000and15,000p.a.forseveralyears.Followingtheboomperiod,unitcompletionsincreasedto19,049andto19,482,for2008and2009,respectively.However,in2009unitstartswerestarklycurtailed,resultinginthedeliveryofonly12,462dwellingsin2010and9,408in2011.Inthebeginningof2012thesituationontheresidentialmarketwasmainlyinfluencedbyaveryhighsupplyofdwellingsreleasedinJanuary-Aprilperiod.Thiswasmainlydrivenbyintroductionof“DeveloperAct”intheendofApril.Theyear2013showedamoderatedeveloper’soutput:accordingtothedataprovidedbytheCentralStatisticalOffice,nearly13,200apartmentswerecompleted.

Accordingtomarketdata,theprimarymarketinWarsawinQ42014offeredover18,000unitsforsale,outofwhich3,500havebeenalreadydelivered.Warsawremainedthemostexpensiveresidentialmarketwithanaverageapartments’transactionpriceofapprox.7,300PLN/m2.

Buyerspayonaverage7.5%lessthaninitialprice.Thismainlyconcernsthesecondarymarketandisalsoduetobetteralignmentofdemandandsupply,aswellaslargenumberofcompletednewresidentialinvestments.AccordingtoNationalBankofPolandtheaverageaskingpriceofapartmentsontheprimarymarketinWarsawiscurrentlyatthelevelof7,900PLN/m2,whilethehighestaveragepriceswereobservedinŚródmieście(PLN11,400/m2)andthelowestinBiałołękadistrict(belowPLN6,000/m2).ApartfromŚródmieście,themostexpensivedistrictsinWarsawremainMokotów,Ochota,Bielany,UrsynówandŻoliborz.

Similartotherestofthecountry,demandonWarsawmarketisontheupturnduetolowinterestratesandgovernmentsupportbutthereisathreatofaslowdownaftermortgagefinancingregulationsthatwillbetightenedgraduallyinfollowingyears.


1.5.InvestmentmarketInitially,developmentofPolishcommercialinvestmentmarkettrailedbehindtherestoftherealestatemarket.Investorswerefewandyieldswereinthedoubledigits.Itwasnotuntil2004andtheadventofEUmembershipthatthesituationimproved.ThatyearmarkedthebeginningofanintensivefouryearperiodofforeigninvestmentinthePolishmarket.Overthisperiod,thevolumeoftransactionsaveragedjustunderEUR4billionayear;afarcryfrom2001whenforeigninvestmentsweremoreorlesslimitedtotheWarsawofficemarket.Furthermore,theearlyyearssawthecommercialinvestmentmarketplaguedwithalackofavailableinvestmentschemes,ormismanagedandoverrentedpropertieswithhighvacancyrates.Theincreasingnumberoftransactionshasnotonlystabilizedinvestments,butcompletelychangedthestructureofyields(downward)andprices(upward).

Thequestionforinvestorsgoingforwardis,whetherPolandwillbouncebackfromthe2008and2009droporwhetherthefundamentalsofpricinghavechangedforever.Earlyindicationssuggestsustainedcomeback.

WarsawremainsanimportanttransactionmarketinPolandperceivedbymanyinvestorsascore,butsmallerscalepropertiesinsecondarytownscontinuetogainground.In2014thetotalvolumeofinvestmenttransactionsinPolandamountedtoapproximatelyEUR3.1billion.Itis6%lessthanin2013butitisstillthesecondbestvaluesince2006whenhighestvolumeeverwereachieved.Themajorinvestmentactivitywasobservedinwarehouseandofficesectors.

Transactionvolumeslooksettorise,supportedinlargepartbyinternationalinvestment,butalsoPolishcapitalseemstocatchup.In2014aPolish


closed-endinvestmentfundacquiredaEUR140mlnwarehouseportfolio.ThetransactionwasoneofthebiggestmadebyPolishinvestor.

Major investors

Themainplayersontherealestateinvestmentmarketareforeigninvestmentfunds,andtoalimitedextentinsurancecompanies,banksandwealthyforeignindividuals.

ThePolishActonInvestmentFundsallowsPolishoperatedandregisteredfundstoinvestinrealestateorincompaniesholdingrealestateassetswithoutanyspecificlimitations;asinthecaseofArka(BZWBK),BPH,KBCandSkarbiec.

ThemajorityofrealestateinvestmentfundsoperatinginPolandareforeignfundstreatingtheirpropertiesasinvestmentsinaccordancewiththelegal

regulationsoftheircountriesoforigin.TheirsubsidiariesinPolandworkunderthestandardregulationsoftheCodeofCommercialCompaniesandthusinvestmentsinrealestatearesubjectonlytotheActonPurchaseofRealEstatebyForeigners.Priorto2005theinvestmentmarketwasdominatedbyGerman,American,andAustrianplayers.AfterEUaccessionPolandwitnessedaninitialinfluxofIrishinvestors,lateraccompaniedbySpanishandBritishinvestors.By2009thetrendseemedtohavereversed;GermanfundshaveemergedwellintactwhiletheIrish,andevenmoresotheSpanishinvestors,appeartobehamperedbytheirownmarketsbackhome.

ThelargestrealestatefundsactiveinPolandincludeBlackstone,CAImmo,IVG,DEKA,CBREGlobalInvestors,GriffinandRREEF.

0

1000

2000

3000

4000

5000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

in m

ln E

UR

Total investment volume in all sectors (office, retail, warehouse) 2000–2014


Major real estate funds investing in Poland

Name Segment Major Assets in Poland

AEWCapitalOfficeWarehouseRetail

GoodPointPuławska,WarehousesinGliwice,KlifWarsaw,KlifTri-City,AtriumTowerinWarsaw

AIBPoloniaPropertyFund/PeaksideCapital

Office Retail Warehouse

AtriumPlazaWarsaw,AtriumCentrum,WiśniowyBusinessPark,FashionHouseOutletsinSosnowiec,GdańskandWarsaw,DiamondBusinessPark,WarsawDistributionCentre

Allianz RE Office Retail

SilesiaCityCenter,WarsawFinancialCenter,PlatiniumBusinessPark

AtriumEuropeanRealEstate

RetailRedutaShoppingCenter,PromenadaShoppingCenter,GaleriaDominikańska,FocusParkinBydgoszcz,LublinFelicity

AvivaCentralEuropeanPropertyFund

Office Retail

Irydionofficebuilding,Shoppingmalls(FocusMall)inPiotrkówTrybunalski,ZielonaGóra,Rybnik

AxaGroup Retail ZłoteTarasyShoppingCenter-partialinterest

Azora Office

AquariusBusinessHouseinWroclaw,CristalPark,MokotówPlaza,HarmonyOfficeCenterComplexinWarsaw,GreenOfficeComplexandAvatarinKraków(JV)

BlackRock Retail CHKarolinkainOpole,PogoriainDąbrowaGórnicza

Blackstone Retail Warehouse

Shoppingmalls:TwierdzaKłodzko,GaleriaLeszno,MagnoliaPark(Wrocław),TwierdzaZamość(Zamość),WzorcowniaWłocławek,GaleriaPestka(Poznań),GaleriaTęcza(Kalisz),warehouseportfolioinŁódź,Łazy,Błonie,Czeladź,Gliwice,Kraków,Piaseczno

CAImmo OfficeWarehouse

PoleczkiBusinessPark,SaskiPoint,SaskiCrescent,SiennaCenter,EuropolisParkPolandCentral,EuropolisParkBłonie

CBREGlobalInvestors

OfficeWarehouseRetail

WarsawDistributionCentre,ManhattanBusiness&DistributionCentre,IdeaIdea,CHSarniStok,CHOgrody,ZłoteTarasy-partialinterest,GaleriaMazovia,WarsSawaJunior,KingCrossPraga,ProstaOfficeCenter,TrinityOfficePark



DEKA Immobilien

Office Retail Hotel

Atrium1,AtriumCity,BemaPlaza(Wrocław),NorthGate,MokotowskaSquare,ForumGliwice,IbbAndersiaHotel(Poznań),Andel’sHotel(Kraków),InternationalBusinessCenter(Warsaw),IntercontinentalWarsaw(50%)

GriffinRE Office Retail

DHRenoma,CentrumBiuroweLubiczI&II,MicrosoftHouse,NordicPark,BliskiCenter,PrimaCourt,PhilipsHouse,BatoryOfficeBuildingI,GreenHorizon

Heitman Office Retail

MarynarskaBusinessPark,EMPARK,GaleriaTarnovia,GaleriaMalta

ImmofinanzOffice Retail Warehouse

SilesiaLogisticPark,ŁopuszańskaBusinessPark,STOP.SHOPLegnica,IO-1,CrownTower&Point,BramaZachodnia,Equator,BokserskaOfficeCenter,ParkPostępu,EMPARK

Invesco Office Retail

PlacUnii,ZaułekPiękna,GaleriaKazimierz,CrownSquare

IVG Office Retail

CHPlatanZabrze,CHSosnowiec,DrukarniaBydgoszcz,BTA,NorwayHouse,VictoriaBuliding,JerozolimskieBusinessPark,JerozolimskieOffices,Nowogrodzka21,Miodowa10,Metron,Ujazdowskie10,LePalais,Feniks,RoyalTraktOffices

KulczykSilversteinProperties

Office Retail

StratosOfficeCenter,PlacMałachowskiego,Mazowiecka2/4,ETHOS,UfficioPrimo,WartaTower,KruczaHouse

London&CambridgeProperties

Retail Warehouse

CHZieloneTarasy,CHEchoPiotrkówTrybunalski,CHEchoRadom,CHEchoTarnów,CHEMKA,Logistic&BusinessParkBydgoszcz,CentrumLogistyczneJasin

PZUTFIRetail OfficeWarehouse

GaleriaJeziorak,GaleriaEchoPabianice,AlmaNowyTarg,GreenTowers,PanattoniWarehousesŁódź,Gdańsk&Wrocław



RREEF OfficeRondo1,Metropolitan,GreenConrer&NordeaHouse,GrunwaldzkiCenter,KopernikOfficeBuildings,NefrytWarsaw,TopazWarsaw,Focus

SEBInvestment Office

PhilipsBuildingŁódź,ArkonskaBusinessParkGdańsk(partlysold),UniversityBusinessCenter,RiversideParkWarsaw,SalzburgCenterWarsaw,TrinityParkIII,MarynarskaPoint2

StarwoodCapital Office KatowiceBusinessPoint,T-MobileOfficePark,

ŁopuszańskaBusinessPark,QuattroBusinessPark

TristanCapitalPartners

Office Retail

WarsawFinancialCenter(JV),Jantarshoppingcenter(JV),MokotówNova,Arena,CHBorek,CHDąbrówka,GaleriaTurzyn,Zakopianka

Unibail-Rodamco Retail GaleriaMokotów,Arkadia,WarszawaWileńska

Union InvestmentRE

Office Retail

DominikańskiOffice,Senator,Manufaktura,ZebraTower,HorizonPlaza

Valad Retail Warehouse

TechnicznaIndustrialPark,RaszynBusinessPark,PiasecznoBusinessPark,BłonieBusinessPark,GazowaIndustrialPark,CityPoint,CHSter,CHRondo,CHKrokus,CHKingCross,CHTulipan,CHKometa

Source: EY

Overthepastseveralyears,economicdevelopmentsandpoliticalstabilityhaveplayedakeyroleintheincreaseoftransactions,notingsuchfactorsas:

• EUmembership;

• fallingPLNinterestrates;

investorsseekingtobuyathighyieldsandsellatloweryields,expectingconvergencewithEUlevels(i.e.capratecompression).

Whilerisingpricesfromcapratecompressionhaveexceededeventhemostaggressiveexpectations,bythethirdquarterof2007theeconomyhadlostsomeofitsmomentum.

By2008financialturmoilaroundtheglobehadplacedmanyinvestorsinthe“waitandsee”mode.Recentfewyearsshowthatinvestmentmarketisontheriseagain.Howeveritismorestableandlessaggressivethanbefore2007.


Office properties

CapitalizationrateshadseenasteadydeclineinWarsawfromthedoubledigitdaysof1995to2002.Theybrokethe10%markforthefirsttimein2003,andwentontoshedroughlyapercentagepointayearuntil2007,whendealsaslowas5.5%werestruckforthebestperformingproperties,andprimeofficeyieldshoveredbetween6and6.5%.

In2009onlyafewtransactionstookplace,mostlyinitiatedbeforethecrisis.Years2011,2012and2013showedasignificantincreaseinactivityofinvestors.Capitalizationratesgenerallyappeartobearound6%-7%.In2014primeofficeyieldsforCBDlocationswereintherangeofthesamelevelasyearbefore.

Major office building transactions in Poland, 2014

Building Location Seller Purchaser

Rondo I Warsaw BlackRockRealEstate RREEF

Matropolitan Warsaw Aberdeen RREEF

LipowyOfficePark Warsaw CAImmo WPCarey

KatowiceBusinessPoint,T-MobileOfficePark,ŁopuszańskaBusinessPark

Katowice,Warsaw Ghelamco StarwoodCapital

Group

FDSPlaza,LightHouse,QuattroForum,WinogradyBusinessCenter,RedTower,Alfa Plaza

Warsaw,Łódź,Wrocław,Poznań,Tri-City

ArkaBZWBK OctavaFIZAN

Ambasador Warsaw KronosRealEstate Hines

PlacUnii WarsawLiebrecht&wooD,BBIDevelopment

InvescoRealEstate

LibraBusinessCentreI Warsaw MermaidProperties

ViennaInsuranceGroup

Dominikański Wrocław Skanska UnionInvestmentRE

Kapelanka Kraków Skanska ReinoPartners

LubiczOfficeCenter Kraków PeaksideCapital GriffinRE

AquariusBusinessHouse Wrocław EchoInvestment Azova

Source: EY


Intermsofregionalcities,investorsaremorecautiousandprefertobuyA-classproperties,wellleasedandcentrallylocatedinlargecities.Whilein2011noinvestmenttransactiontookplace,in2012and2013severaltransactionsintheregionalcitiesweremade.Year2014broughtsignificantincrease,officeinvestmentvolumeinregionalcitieswasdoubledcomparingto2013,reachingEUR400million.

Retail properties

Significantinvestmentsintheretailmarketdidnotstartuntil2001.ThefirstmajortransactionswereinvestmentsbyRodamcoinGaleriaMokotówandinZłoteTarasythattookplacein2003,withcapitalizationratesatthelevelof9–10.5%.

SincethattimenearlyeverysignificantpropertyinWarsawandotherPolishcities

hasbeenthesubjectofatransaction.By2005capitalizationrateswerepusheddownwardtoroughly8%andcontinuedthisdownwardtrendthroughQ3,2008whentheyrangedbetween5.7%and6.5%.Duetothecrisis,thecapitalizationrateshasincreasedbyapproximately1–1.5%.

Afterveryintensiveyear2013,year2014appearstobepullbackforthemarket.Volumein2014was2.5timeslessthaninpreviousyear,butprognosisarethatthisisonlytemporaryslowdownandyear2015shallbecomparableto2013.In2014thelargestretaildealsincludedPoznańCityCenter,FocusMallBydgoszczandGaleriaMazoviainPłock.Themajormodernretailtransactionsarepresentedinthetablebelow.Capitalizationratesgenerallyappeartobearound7.5-8%.In2014primeretailyieldsinPolandwereintherangeof5.75-7%.

Major modern retail transactions, 2014

Building Seller Purchaser

PoznańCityCenter Trigranit,EuropaCapital,PolskieKolejePaństwoweS.A. ResolutionProperty,ECE

GaleriaMazovia Lewandpol CBREEuropeanShoppingCentreFund

FocusMallBydgoszcz AvivaInvestors AtriumEuropeanRealEstate

PlacUnii Liebrecht&wood,BBIDevelopment InvescoRealEstate

GaleriaPiła RankProgress ImmofinanzGroup

GaleriaOstrowiec USS FirstPropertyGroupNovaPark(50%) CaelumDevelopment Futureal

Source: EY


Warehouse properties

Thewarehousemarkethashistoricallybeenperceivedastheleastmatureoftherealestatesectors,withonlyafewsignificanttransactionsclosed.Thelowtransactionlevelmayhavebeenpartlyexplainedbythelargenumberofbuilt-to-suitpropertieswhichareeitherowner-occupiedorpresoldbyfundsbeforeconstructioniscomplete,thereforethesetradesnevershowuponthetransactionradarscreen.After

thecrisisyear–2009–whenonlyonetransactionwasregisteredinthemodernwarehouse/industrialsector,2010showedamajorincreaseininvestoractivity.In2011therewereonlyafewinvestmenttransactionsobserved.In2012and2013asignificantincreaseinthenumberofindustrialtransactionswasobserved.Year2014continuesthetrendwithvolumeofEUR700millionsand17%annualgrowth.Capitalizationratesforthemodern,bestperformingpropertiesarearound8%.

Major warehouse space transactions, 2014

Building Location Seller Purchaser

Warehouseportfolio Mysłowice,Stryków,Robakowo StandardLife LogiCor

PramericaandPanattoniportfolio

Błonie,Czeladź,Gliwice,Kraków,Łazy Pramerica LogiCor

Tescowarehouse(BTS) Gliwice Invesco Prologis

ŻerańParkI Warsaw Heitman PrologisBokserskaDistributionPark Warsaw Immofinanz UK&European

InvestmentsPrologisParkSosnowiec Sosnowiec Prologis Hines

PrologisParkGliwice Gliwice Invesco Prologis

Warehouseportfolio Pruszków,Łódź,Poznań

TristanCapitalPartners,AEW,AlphaIndustrial

Segro,PSP

Idea Idea I, II, III Warsaw BPHTFI CBREGlobalInvestors

PanattoniBusinesParkPortfolio

Łódź,Gdańsk,Wrocław Panattoni PZUTFI

CastoramaBTS Łódź Invesco Prologis

EuropolisParkPortfolio Błonie,Łódź CAImmo,EBRD P3,IvanhoeCambridge

PanattoniParkI Błonie,Wrocław StandardLife Hillwood

PanattoniPark Bielsko-Biała Invesco Hillwood

Source: EYPoland.Therealstateofrealestate|29

1.6.KeycitiesinPoland

WARSAWPopulation 1,729,000

Unemployment 4.3%

Majorindustries Tradeandservices

Majorcompanies Accenture,BankPekao,BGŻ,mBank,BritishAmericanTobacco,Budimex,Bumar,Citibank,Coca-Cola,ColgatePalmolive,Deloitte,EY,FranceTelecom,GeneralMotors,GrupaŻywiec,GTC,HutaArcelorWarszawa,IBM,ING,KompaniaPiwowarska,KPMG,KraftFoodsPolska,MostostalExport,Nestle,PGNiG,PKO,BP,PLLLOT,Polkomtel,Procter&Gamble,PwC,PZU,RBS,RWE,SamsungElectronicsPolska,Shell,Skanska,Strabag,Unilever

Office sector

Rental level (m2/month) EUR21–24(class–Aspace)EUR11–13(class–Bspace)

TotalofficeStock 4,4millionm2ofmodernspace

Currentsupply(selectedbuildings)

AdgarPlaza,Ambassador,Atrium1,AtriumComplex,BusinessGarden,CatalinaOfficeCenter,CristalPark,DeloitteHouse,EMPARK,Equator,Eurocentrum,Focus,GdańskiBusinessCentre,HarmonyOfficeCenter,HorizonPlaza,FeniksOfficeBuilding,Focus,IO-1,JerozolimskieBusinessPark,KonstruktorskaBusinessCenter,KopernikOfficeBuidlings,LipowyOfficePark,Lumen,MarynarskaBusinessPark,MarynarskaPoint,Metropolitan,MilenniumPlaza,MokotówBusinessPark,MokotówNova,MokotówPlaza,Nefryt,NorthGate,OkęcieBusinessPark,ParkPostępu,PlatiniumBusinessPark,PoleczkiBusinessPark,PlacUnii,Rondo1,SaskiCrescent,SaskiPoint,Senator,Skylight,TrinityPark,TulipanHouse,WarsawFinancialCenter,WarsawTradeTower,WilanówOfficePark,WiśniowyBusinessPark,WolfMarszałkowska,ZebraTower


Futuresupply(selectedbuildings)

ArtNorblin,AstrumBusinessPark,Atlantic,Atrium2,BalmoralBuisinessCentre,BusinessGardenIII-VII,Cedet,CentrumMarszałkowska,CopernicusSquare,DomaniewskaOfficeHub,EmparkMokotówBusinessParkVega,Eqlibium,EurocentrumOfficeComplexII,Flandersnextphases,GenerationPark,GrójeckaOffices,Grzybowska43,HalaKoszyki,Infinicity,KarolkowaBusinessPark,LibertyTower,LibraBusinessCenterII,LincolnPark,MennicaTower,MokotówOne,Neopark,ParkRozwojuII,PlatiuniumBPVI,Postępu14,Proximo,PrimeCorporateCenter,Q22,RomaTower,RoyalWilanów,SiennaTowers,SilverTower,SouthPark,SpinnakerTower,Vector,WestPoint,WestStation,Wołoska24,WarsawSpire

Generalvacancylevel 13%

Retail sector

Rental level (m2/month)

EUR90–100forprimeshoppingcenterunitsuptoEUR75-90forprimestreetunits

Totalretailstock 1,8millionm2ofmodernspace

Currentsupply Arkadia,BlueCity,CHBemowo,CHJanki,AtriumReduta,AtriumTargówek,CHWileńska,DomTowarowyBraciJabłkowskich,FortWola,GaleriaMokotów,KingCross,Klif,M1Marki,AtriumPromenada,PlacUniiShoppingCenter,SadybaBestMall,WolaPark,WolfBracka,ZłoteTarasy,AuchanŁomianki,GaleriaBrwinów,FactoryOutletUrsus,GaleriaRembielińska,FashionHousePiaseczno,FactoryOutletAnnopol

Futuresupply GalerioLegionowo,GaleriaWilanów,GaleriaPółnocna,FactoryUrsus,NowaStacja,HalaKoszyki(reconstruction)

Warehouse sector

Rental level (m2/month) EUR2.5–5.0

Totalwarehousestock 2,8millionm2


CurrentandplannedsupplyinWarsawarea

AnnopolLogisticPark,CityPoint,DiamondBusinessParkPiaseczno,DiamondBusinessParkWarsaw,EuropolisParkBłonie,KrakowskaDistributionCenter,ŁopuszańskaBusinessPark,ManhattanBusinessandDistributionCenter,MilleniumLogisticParkPruszków,PanattoniParkOżarów,PanattoniParkBłonie,PanattoniParkGarwolin,PanattoniParkPruszków,PanattoniParkTeresin,PlatanPark,ProLogisParkBłonie,ProLogisParkNadarzyn,ProLogisParkSochaczew,ProLogisParkTeresin,ProLogisParkWarsaw,TulipanParkWarszawa,ŻerańPark,GoodPoinPuławska

KRAKÓWPopulation 760,000

Unemployment 5.2%

Majorindustries Tourism,steelworksandmetallurgy,tobacco,pharmaceuticals,IT

Majorcompanies

Bayer,BP,CanPack,Capgemini,Coca–ColaNiepołomice,ComArch,Delphi,Google,HSBC,Hutaim.Sendzimira,InternationalPaper,Motorola,PhilipMorris,Pliva,Shell,StateStreet,UBS,Vistula&Wólczanka,Wawel

Office sector


EUR14–15.5(class–Aspace) EUR12–14(class–Bspace)

Totalofficestock 651,000m2ofmodernspace


AlmaTower,AlstarOfficeCenter,Avatar,AzbudBusinessCenter,Bonarka4Business,BramaBronowicka,BumaSquare,CBiICopernicus,CentrumBiuroweEuromarket,CentrumBiuroweKazimierz,CentrumBiuroweLubicz,CracoviaBusinessCenter,DiamantePlaza,Edison,EnterprisePark,Fronton,G21,Galileo,GreenOffice,K1,KazimierzOfficeCenter,KrakówBusinessPark(Zabierzów),M65,Meduza,Newton,NowaKamienica,Onyx,Pascal,Portus,QuattroBusinessPark,RondoBusinessPark,VinciOfficeCenter.

Futuresupply AlejaPokoju5,Axis,Bonarka4BusinessE,F,G,DotOffice,EnterpriseParkII,GOCenter,OpolskaBusinessPark,OrangeOfficeParkII,ParkClub,QuattroBusinessPark(nextphases),Topos,WawelHQ


Generalvacancylevel 6%

Retail sector


EUR65-75forprimeshoppingcenterunits EUR50–80forprimestreetunits

Totalretailstock 750,000m2ofmodernspace

Currentsupply GaleriaKrakowska,GaleriaKazimierz,CHKrokus,CHZakopianka,M1Kraków,IKEA,KrakówPlaza,CHCzyżyny,SolvayPark,FuturaPark,CHDekadaPark,Castorama,CHWielicka,Bonarka,GaleriaBronowice

Futuresupply SerenadaShoppingCenter

Warehouse sector

Rental level (m2/month) EUR3.75-4.50

Totalwarehousestock 189,000m2

Currentandplannedsupply

LogisticCenterKrakówI,II,III,KrakówAirportLogisticsCentre,MARRBusinessPark,MKLogisticsPark,PanattoniParkKraków

POZNAŃPopulation 547,000

Unemployment 3.2%

Majorindustries Foodprocessing,electrotechnical,chemical,automotive,retail,services(includingfinanceandbanking),constructionindustry,locationofmajortradefairsinPoland

Majorcompanies AluplastAustria,Beiersdorf,Bridgestone,Carlsberg,CPCInternational,Enea,FranklinTempletonInvestments,GlaxoSmithKline,IKEA,KompaniaPiwowarska,LorensBahlsen,MAN,MiędzynarodoweTargiPoznańskie,Nestle,Volkswagen,Wrigley,Wyborowa


Office sector


EUR14–15(class–Aspace) EUR11–13(class–Bspace)



AndersiaBusinessCentre,AndersiaTower,CentrumTulipan,CityPark,Delta,DwórHamburski,GaleriaMM,Globis,JetOffice,KupiecPoznański,Kwadraciak,MaltaHouse,MaltaOfficePark,NickelTechnologyPark,NobelTower,NoweGarbary,NoweJeżyce,Okraglak,Omega,PGKCentrum,PoznańFinancialCenter,PoznańskieCentrumBiznesu,Rataje164,RBHouse,SkalarOfficeCenter,SzyperskaOfficeCenter,Temida,WinogradyBusinessCenter

Futuresupply BałtykTower,BusinessGardenPoznań,Maraton,Ubiq

Generalvacancylevel 13.7%

Retail sector


EUR70–80forprimeshoppingcenterunits EUR45forprimestreetunits


Currentsupply StaryBrowar,PoznańPlaza,KingCrossMarcelin,KupiecPoznański,Auchan–SwadzimandKomorniki,ETC–Swarzędz,CHM1,IKEA,CHFranowo,GaleriaPanorama,CHPiątkowo,FactoryOutlet–Luboń,GaleriaPodolany,GaleriaPestka,CHMalta,GreenPoint,GaleriaSucholeska,GaleriaMalta,PoznańCityCenter,ParkHandlowyFranowo,GaleriaMM

Futuresupply Posnania,CHMetropolis,GaleriaA11

Warehouse sector



Totalwarehousestock 1,023,000m2

Currentandplannedsupply

CLIPPoznań,DoxlerBusinessPark,MillenniumLogisticParkPoznań,PanattoniPoznańI,II,III,PanattoniRobakowo,ParkMagazynowyLogit,PointParkPoznań,ProLogisParkPoznańI,II,III,ProLogisParkWrześnia,TulipanParkPoznańI,II,SegroLogisticParkPoznań,AmazonWarehouse

TRI–CITYPopulation 747,000

Unemployment 5.6%

Majorindustries Maritimeindustry,fuelindustry,construction,foodprocessing,tourism,IT

Majorcompanies BalticMalt,BaltisInvestment,BayerSSC,BlueMedia,Bomi,DGT,DrCordesmeyer,ElektrociepłowniaWybrzeże,Elektromontaż,Energa,Fazer,GdańskaStoczniaRemontowa,GdańskieZakładyNawozówFosforowych,GEMoneyBank,GrupaLotos,HydrobudowaGdańsk,Hydroster,IKEA,IntelTechnologyPoland,JyskPolska,LidoTechnologyPoland,LPP,LufthansaSystems,MetroAG,MostostalGdańsk,Neste,PepsiCo,Satel,Shell,Siarkopol,StoczniaPółnocna,STUErgoHestia,ThomsonReuters,Tengelmann

Office sector




Currentandplannedsupply(selectedbuildings)

Akwarium,AlfaPlaza,Alchemia,ArkońskaBusinessPark,BCBBusinessPark,CentrumBiuroweHossa,CentrumKwiatkowskiego,CentrumBiuroweNeptun,CityArkade,IdalHouse,Grunwaldzka413,Grunwaldzka417,Grunwaldzka48-50,Ka5,ŁużyckaOfficePark,MorskiParkHandlowy,Nordika,OfficeIsland,OliviaBusienssCentre,OperaOffice,PasażPrzymorze–Kołobrzeska32,PianoHouse,TrytonBusinessHouse,WAN–Śląska,ŁużyckaPlusSadowaBusinessPark,Sanipor,Vigo,Waterside



Retail sector


EUR35–50forprimeshoppingcenterunits EUR25–45forprimestreetunits EUR8–12forretailparkunits

Totalretailstock 619,130m2ofmodernspace(24shoppingmalls)

Currentsupply Smallshopsandboutiquesalongshoppingstreets(ŚwiętojańskainGdynia,DługaandGrunwaldzkainGdańskaswellasMonteCasinoinSopot).Modernshoppingcenters:GaleriaBałtycka,AuchanPortRumia,CHKlif,Batory,ETCGdańsk,CityForum,KrewetkaCinemaCity,AlfaCenter,MadisonShoppingGallery,CHManhattan,CentrumKwiatkowskiego,CHWzgórze,MatarniaRetailPark,OsowaShoppingCenter,CentrumRodzinneWitawa,FashionHouseGdańsk,Castorama,Real,Tesco,SelgrosCashandCarry,TescoChełm,IKEA,CHOliwa,GaleriaPrzymorze,CentrumHaffnera,SzperkGdynia,CHRiviera,MorskiParkHandlowy,CentrumKowale

Futuresupply ForumRadunia

Warehouse sector

Rental level (m2/month) EUR3.0–3.5

Totalwarehousestock 210,600m2

Modernwarehousestockunderconstruction

ProLogisParkGdańsk,CentrumLogistycznePruszczGdański,PanattoniParkGdańsk,SEGROLogisticsPark,7RLogisticParkGdańsk,PortGdyniaWarehouse

ŁÓDŹPopulation 709,000

Unemployment 10.8%

Majorindustries Textile&clothes,foodprocessing,mechanicalengineering,chemicalproduction,tradefairs


Majorcompanies ABB,Amcor,Bosch–SiemensHausgeräte,HP,CacaoBerry,Coca–Cola,Dell,GrupaAtlas,Fujitsu,Idesit,Infosys,Nordea,Phillips,PolishPharmaceuticalGroupPollena–EwaS.A.,SanitecKoło,Textilimpex,VFPolska,Vistula&Wólczanka

Office sector

Rental level (m2/month) EUR11–14(class–A/Bspace)



AleksanderPlaza,ArmadaBusinessPark,Aviator,BusinessHouse,CentrumBiuroweZenit,CentrumBiznesoweFaktoria,CentrumBiznesoweStanley,CentrumBiznesuPracownia,CentrumBiznesuŁódź,Cottonhouse,CrossPointŁódź,FabrykaLnu,Gdańska,GreenHorizon,Inter-Mar,JaraczaPrestige,Kopcińskiego,MediaHub,OrangePlaza,OrionBusinessTower,Papiernicza,ParkBiznesuTeofilów,PrometeonŁódź,PrzędzalniaBraciMuehle,RealOffice,RedTower,Synergia,Unicity,UniversityBusinessPark,Wólczańska,Łódź1

Futuresupply Aurus,UniversityBusinessParkII


Retail sector


EUR45-60forprimeshoppingcenterunits EUR23–35forshoppingcenterunits EUR20–40forhighstreetlocations


Currentsupply SmallboutiquesalongPiotrkowskastreet,Modernshoppingcenters:Manufaktura,GaleriaŁódzka,TulipanCenter,PasażŁódzki,CHM1,E.Leclerc,CHCarrefourPrzybyszewskiego,OBI,Praktiker,Castorama,LeroyMerlin,MakroCash&Carry,SelgrosCash&Carry,CHPtakinRzgów,CHGuliwer,CHTescoBałuty,CHTescoWidzewska,PortŁódź,PtakOutlet,VisavisStreetMall,CHCarrefourKolumny

Futuresupply ŁódźPlaza,Sukcesja


Warehouse sector

Rental level (m2/month) EUR3.4–4.3formodernspace

Totalwarehousestock 1,06millionm2

CurrentandplannedsupplyinCentralPolandregion

BusinessParkŁódź,DiamondBusinessParkŁódź,DiamondBusinessParkStryków,PanattoniBusinessCenterŁódź,PanattoniŁódźEast,PanattoniParkŁódźSouth,ParkridgeBusinessCenter,ProLogisParkStryków,TulipanParkŁódź,TulipanParkStryków,SEGROLogisticsParkStryków,PanattoniCastorama

WROCŁAW

Population 633,000

Unemployment 4.3%

Majorindustries automotive,IT,businessprocessoffshoring,pharmacy/medicalassortment,finances,medicalmachineryproduction,electrical,metallurgy,houseappliancesandfoodprocessing

Majorcompanies 3M,Alcatel,Bosch,BZWBK,Cadbury,CreditAgricole,Eurobank,EYSSC,CreditSuisse,Google,Hewlett–Packard,IBM,KRUK,LG,MacoPharma,Nokia,Polifarb,Siemens,Toyota,Ultimo,USPharmacia,Volvo,Wabco,Whirlpool

Office sector






AquariusBusinessHouse,ArkadyWrocławskie,AscoBusinessCentre,BemaPlaza,BetaCentre,CuprumNovum,DługoszaBusienssPark,FocusPlaza,GlobisWrocław,GreenTowers,GrunwaldzkiCenter,HeritageGates,HubskaOfficeCenter,LegnickaPark,MillenniumTower,NewPointOffices,Oniro,OławskaPrestige,PasażPkoyhof,Platon,PromenadyEpsilon,QuattroForum,RacławickaCenter,RenaissanceBusinessCentre,SilverForum,SilverTower,SkyTower,SzwedzkaCentrum,WratislaviaTower,WrocławskiParkBiznesu,WestHouse

Futuresupply BusinessGarden,Dominikański,Dubois41,GammaOffice,NorthOffice,Nobilis,WestGate

Generalvacancylevel

10.4%

Retail sector


EUR65–75forprimeshoppingcenterunits EUR40–60forprimestreetunits EUR8–12forretailparkunits


Currentsupply PasażGrunwaldzki,ArkadyWrocławskie,MagnoliaPark,FactoryOutlet,CHKorona,BielanyRetailPark(IKEA),AuchanRetailParkBielany,GaleriaDominikańska,SzewskaCenter,Kaufland,CHBorek,TGG,Tesco,E.Leclerc,IKEA,CHMarino,Renoma(aftermodernization,SkyTower,FerioGaj,RetailParkMłyn,FamilyPoint,RetailParkBielany

Futuresupply GaleriaIdylla

Warehouse sector


Totalwarehousestock 895,000m2ofmodernspace


Currentsupply ProLogisParkWrocław(I&II)–BielanyWrocławskie,ParkridgeBusinessCenter,TinerLogisticCenter–Pietrzykowice,PanattoniParkWrocław–BielanyWrocławskie,PrologisParkWrocławV,PanattoniBTSforLear,PanattoniforAmazon,GoodmanforAmazon

KATOWICE

Population 303,000

Unemployment 4.7%

Majorindustries Coalmining,metallurgical,steel,machinery,electrical,ceramic,automotive,printing,informationandIT

Majorcompanies Capgemini,CartotecnicaPolska,DelphiAutomotiveSystem,DuPont,ElectrabelPolska,Elektromontaż1Katowice,GeneralMotors,GKFarmakol,GKTauronPolskaEnergia,IBM,ING,IsuzuMotors,KatowickiHoldingWęglowy,PepsiCo,Philips,PolskiKoks,PowertrainPolska,PwCSSC,Roca,Unilever

Office sector





Altus,ApissCenterPoint,ArmiiKrajowej6,Atrium,CentrumBiuroweFrancuska,CentrumBiuroweKatowice,Chorzowska50,Euro-CentrumKatowice,GórnośląskiParkPrzemysłowy,JesionowaBusinessPoint,Kostki,MillenniumPlazaKatowice,NoweKatowickieCentrumBiznesu,RawaOffice

Futuresupply A4BusinessParkII,III,PiaskowaBusinessCenter,SilesiaBusinessParkI,SilesiaStarI,SteelOffice,Żelazna

Generalvacancylevel

13.8%


Retail sector


EUR50–65forprimeshoppingcenter EUR25–45highstreetlocations EUR9–11forretailparkunits

Totalretailstock 1,3millionm2ofmodernspace

Currentsupply SilesiaCityCenterIandII(extension),3Stawy,CHDąbrówka,Castorama,OBI,MediaMarkt,RetailParkRAWA(IKEA),DomHandlowyZenit,GaleriaAuchan,GaleriaKatowicka,RawaParkHandlowy,GaleriaSkarbek,GaleriaNowyRóździeń

Warehouse sector


Totalwarehousestock 1.4millionm2

CurrentandfuturesupplyintheUpperSilesiaregion

TulipanParkGliwice,PanattoniParkGliwice,ProLogisParkBędzinI&II,ProLogisParkSosnowiec,ProLogisPark–DąbrowaGórnicza,ProLogisParkChorzów,ProLogisParkUjazd,DiamondBusinessParkGliwice,CrossPointDistributionCenterŻory,MilleniumLogisticParkTychy,AllianceLogisticCenterSilesia,PanattoniParkCzeladź,PanattoniParkMysłowice,PanattoniParkBielsko-Biała


Legal and tax aspects of investing in real estate

2


ThisChapterconsidersthemostimportantlegalandtaxissuesarisingduringeachofthefollowingfivestagesofarealestateinvestment:

• Financing

• Acquisition

• Developmentandconstruction

• Operationandexploitation

• Sale

TheChapterisarrangedsothateachoftheaboveaspectsisdealtwithinaseparatesection(2.3.–2.8.),consideringlegalimplicationsfirst,followedbyanassessmentofrelatedimportanttaxconsequences.

Thesection2.1.onthelegalbackground(below)willintroducethereadertocertainconceptsandtermsthatmaynotbecommonplaceintransactionselsewhereinEurope.ThisshouldbereadasageneralintroductiontothelegalenvironmentinPoland.Thechapteralsocontainssection2.2.oninvestmentvehiclesandstructurespresentinginformationonthemostcommonstructuresusedinrealestateinvestmentsinPoland.Takentogether,theyformthebasisforunderstandingthemostrelevantlegalandtaximplicationsofinvestinginrealestate in Poland.

Legal,financialandtaxduediligencearealsofundamentaltoanyinvestmentcycleandgiventheimportanceofduediligencetoanytransaction,wediscusstherelevantproceduresandkeyconsiderationsindetailinsection2.9.


Ingeneral,Polishrealestatelawprovidesquiteclearandstableruleswhichallowpotentialinvestorstomakewell-foundeddecisionsaboutenteringintorealestatetransactions.Additionally,therearemeasuresandinstitutionswhichenableinvestorstosafelyconcludetransactionsadaptedtotheirneedsandexpectations.Inparticular,mostrealpropertydeeds(sale,othertransfers,establishingofamortgage)mustbeexecutedbeforeanotarypublic.Apubliccredibilitywarrantyofthelandandmortgageregisterisanadditionalinstrumentwhichprotectsthepurchaseragainstthirdpartyclaimsandguaranteesthevalidityofthetitleacquired(aslongasthepurchaseractedingoodfaith).

BelowwepresentsomekeyinformationonrealestatelawinPolandwhichshouldbethebaseforothercommentsinthischapter.

2.1.2. Legaltitlestorealestate

ThebasicsourceofrealpropertylawinPolandistheCivilCodeof23April1964(withmanyamendmentssince;hereinafterreferredtoastheCivilCode).Althoughitdoesnotregulatethisbranchoflawexhaustively,itconstitutesabasisforotherregulationsregardinglegaltitlestorealestateandtheirlimitationsormodifications.

ThemostcommonlegaltitlestorealestateinPolandaretheownershipright,theperpetualusufructright,andobligationrights,suchaslease,tenancyorleasing.Polishlawalsoprovidesseverallimitedpropertyrightssuchaseasementsandusufruct.

2.1.Legalbackground

2.1.1. Generalremarks


Ownership right

Ownership(prawowłasności)isthebroadestrighttorealestateinPoland,equivalenttoafreehold.Asarule,ownershipconveystherighttopossessanduserealestateforanunlimitedperiodoftime(withtheexceptionofownershipofanybuildingsconnectedwiththeperpetualusufructright;seeourcommentsbelow)andtransferorencumbertherealestate.Theownershiprightmaybelimitedbystatutorylaw,principlesofcommunitylifeandthesocioeconomicpurposeoftheright.Themostcommonlimitationsresultfromconstructionlawandzoningmasterplansadoptedbylocalauthorities(municipalities).

Right of perpetual usufruct

Perpetualusufruct(użytkowaniewieczyste)isarightofusetherealestatewhichmaybegrantedbytheStateinrelationtotheState-ownedlandorbyalocalauthorityinrelationtotheauthority-ownedland.Ineithercasetherespectiveentity(theStateorthelocalauthority)remainstheowneroftheland.

Theperpetualusufructrightissimilartotheownership,however,thereareseveralcrucialdifferences:

• Theperpetualusufructrightiscreatedforadefinedpurpose(developingaprojectorconductingaspecificactivity)setoutinthecontract.Iftheperpetualusufructuaryisinbreachoftheseprovisions,thismayleadtoanincreaseintheannualfeesoreventermination

ofthecontractbythecommoncourt.

• Theperpetualusufructrightiscreatedforaspecificterm,inprincipleforaperiodof99years.

However,whentheeconomicpurposeoftheperpetualusufructofpropertydoesnotrequirelettingthelandforalongerperiod,ashorterperiodofnolessthan40yearsisallowed.Theholderoftherightmayapplyforextendingthetermoftheperpetualusufructforafurtherperiodof40to99yearsfollowingthelapseoftheinitialperiod.Refusaltoprolongthetimelimitisadmissibleonlyonaccountofimportantsocialinterest.

Oncecreated,theperpetualusufructrightcanbeinherited,transferredtothirdpartiesorencumbered(i.e.mortgage,easements).Theholderoftheperpetualusufructrightenjoystherighttousetherealpropertyandtodrawbenefitsfromit,e.g.rentalincome.

Currently,theperpetualusufructrightmaybecreatedbycontract,whichgenerallyrequiresputtingthelandupforatender(thereareseveralexceptionsprovided).Thewinningbiddersignsanotarialdeedwiththeowneroftherealestateestablishingtherightofperpetualusufruct.Theright,however,doesnotcomeintoexistenceuntilitisregisteredinthelandandmortgageregister.Otherissuesinvolvingtheestablishmentandtransferoftheperpetualusufructareaccordinglygovernedbytheregulationsregardingthetransferofownershipofrealestate.

Thecontractunderwhichthelandistransferredforperpetualusufructmay


laydownpotentiallimitationsontheuseanddisposalofrealpropertyandindicatethemannerinwhichtherealestateistobe used.

Iftherealestatetransferredforperpetualusufructisapieceofdevelopedland,thebuildingsandotherconstructionserectedthereonaresoldtotheperpetualusufructuaryinadditiontotheestablishmentoftheperpetualusufructright.Ifthebuildingsareerectedaftertheperpetualusufructrightisestablished,theyalsobecometheperpetualusufructuary’sproperty.Separateownershipofthebuildingsduetotheperpetualusufructuaryisarightstrictlyconnectedwiththerightofperpetualusufructand,inconsequence,thebuildingssharethelegal“lot”oftheland.Inparticular,theownershipofbuildingsmaybetransferredonlywiththerightofperpetualusufruct.Oncetheperpetualusufructrightexpires,theholderoftherightisentitledtoareimbursementcorrespondingtothecurrentmarketvalueofthebuildingsandotherimprovementslegallyimplementedonthelandthatisthesubjectoftheperpetualusufructright.

Theperpetualusufructuaryisobligedtopaytotheowneraone-offinitialfeewhichamountsfrom15%to25%ofthetotalmarketvalueoftherealpropertyandthenanannualfeeofupto3%ofthetotalmarketvalueoftheland.Therateof3%isthebasicrateprovidedbythelaw;however,therecanbeotherrates(0.3%,1%,2%)appliedtotherealestateassignedforspecificpurposes,strictly

listedinthelegalprovisions.Thevalueofthelandasestablishedforthepurposeofcalculatingtheannualfeeissubjecttoindexation(notmorethanonceforthreeyears).Theperpetualusufructuaryhastherighttoquestionanewvaluationbeforethelocalappealcommitteeand,ifunsuccessful,beforeacommoncourt.

Subjecttocertainconditions,theperpetualusufructuaryorhislegalsuccessorsmaydemandthattheperpetualusufructrightbeconvertedintoownership.Thelegalprovisionsdonotspecifywhethertheterm“legalsuccessor”referstogeneralsuccessiononly,orwhetheritmaybeapplicabletoentitiesacquiringrealpropertythroughasaleagreement.Thecourtsmoreoftentaketheviewthattheentitiesacquiringrealpropertythroughasaleagreementareentitledtodemandtheconversionintoownership.Thebasicconditionofacquiringtheownershipofrealestateisthepossessionoftherightofperpetualusufructasof13October2005.Theconversiontakesplaceunderanadministrativedecisionofarelevantlocalauthorityandisvalidasatthedatewhenthedecisionbecomesfinal.Suchadecisionalsoconstitutesabasisformakinganentryinthelandandmortgageregister.

Theconversionoftheperpetualusufructrightintoownershiprightissubjecttoafeewhichisequaltothedifferencebetweenthevalueofownershipandthevalueoftheperpetualusufructrighttothe land.


Leases and Tenancies

Polishlawdistinguishesbetweentwotypesofleases:lease(najem)andtenancy(dzierżawa).Leasesareusedmainlyforcommercialandresidentialpremises.Tenanciesareusedespeciallyforindustrialandagriculturalproperty.Underaleaseagreement,thelessorundertakestohandovertherealpropertyforthelessee’suseforafixedornon-fixedterm,andthelesseeundertakestopaythelessoranagreedrent.Thetenancycontract,however,providesforthelesseeadditionalrighttocollectprofitsfromtherealestate.

Leasing

Byaleasingcontract,thefinancingparty,whoisanentrepreneur,undertakestoacquiretherealestatefromaspecifiedtransferoronthetermsandconditionssetforthinthatcontractandtogiveitovertotheuserforuseorforuseandcollectionofprofitsforaspecifiedperiod.Theuser,however,undertakestopaythefinancingparty,byinstallments,amonetaryremunerationequaltoatleasttheremunerationorthepriceatwhichthefinancingpartyacquiredtherealestate.

TherearetwotypesofleasingthatcanbeexecutedinPoland:

• operatingleasing,inwhichcasetheleaseholdisanassetofthelessorwhomakesdepreciationwrite-offsandthelesseehasanoptiontopurchasethepropertyattheendoftheleasingterm;

• financialleasing,inwhichcasetheleaseholdisanassetofthelesseewhomakesdepreciationwrite-offsandthe

transferoftheownershipofarealestateattheendoftheleasingtermmaybestipulateddirectlyintheleasingagreement.

Thelesseeshouldchoosethetypeofleasingaccordingtohisrequirementsandneedswithrespecttotaxsettlementsandtheperiodofusingtheleasehold.

Easements

Easements(służebności)overlandarelimitedpropertyrightswhichmaybegrantedoverapieceofrealestate(encumberedproperty)forthebenefitofanotherpieceofrealestate(masterproperty).Dependingonthecontentofaneasementdeed,theholderofthemasterpropertymaybeentitledtoalimiteduseoftheencumberedproperty(activeeasement),ortheholderoftheencumberedpropertymayberestrictedintheexerciseofhisownrightsforthebenefitofthemasterproperty(passiveeasement).

Polishlawdistinguishesbetweentwotypesofeasements:

• groundeasements,whichareestablishedforthebenefitoftheownerorperpetualusufructuaryofthelandandaretransferredtogetherwiththeproperty(whetherthatencumberedorthemasterproperty);

• personaleasements,whichareestablishedforthebenefitofanaturalpersonandarenon-transferrable(norcantherighttoexercisethembetransferred).

TheCivilCodealsolistsaseparatecategoryofeasement,i.e.utilityeasementwhich


maybeestablishedforthebenefitofentrepreneursbeingutilityproviders.Autilityprovidermayaskthelandownertoestablishaneasementoverhislandinordertoinstall(andthenoperateandmaintain)e.g.electricitycables,installationsservingtosupplyandtochannelliquids,gas,steamorotherfacilities.Iftherealestateownerrefuses,theutilityprovidermaydemandthataneasementbeestablishedinreturnforanappropriateremuneration.

Inpractice,realestatemaybeencumberedwithmorethanoneeasementorotherlimitedpropertyright.Insuchacase,asarule,arightthataroselatercannotbeexercisedtothedetrimentoftheearlierright;however,therearealsoregulationswhichspecifypriorityinadifferentmanner.

Inparticular,ifoneoftherightsisenteredinthelandandmortgageregister,itbenefitsfrompriorityagainsttherightwhichisnotenteredintheregister,regardlessofthedatesoftheirestablishment.

Itshouldbenoted,however,thateasementsarenotalwaysdisclosedinthelandandmortgageregister.

Inconsequence,thepotentialinvestorshouldverifywhethersuchrightsarenotbeingexecutedbycarryingoutanon-siteinspection,i.e.duringaduediligencereview.

Usufruct

Usufruct(użytkowanie)ofrealestateisalimitedpropertyrightwhichallowsitsholdertousetherealestateandcollectbenefitssimilartothosetowhichthe

ownershipholderisentitled.Thescopeoftheusufructmaybelimitedbyspecifiedprofitsbeingexcluded,ortoadesignatedpartoftherealestate.Usufructiscreatedbyacontract.Usufructisnon-transferable,strictlyconnectedwiththeusufructuary,sotherightexpiresontheusufructuary’sdeath(orliquidation,inthecaseoflegalentities).Moreover,ausufructexpiresifnotexercisedfortenyears.

Usufructissimilartotenancy,yetitslegalnatureisdifferent.Usufruct,asalimitedpropertyright,iseffectiveergaomnes(itiseffectiveinrespectofthirdparties)andtenancyiseffectiveonlybetweenthepartiestoanagreement.

2.1.3. Realpropertyregisters

TherearetwotypesoflandregistersinPoland:thelandandmortgageregister(księgawieczysta),whosemainpurposeistoregistertitlesandencumbrancesoverrealestateandthelandandbuildingsregister(ewidencjagruntówibudynków),themainpurposeofwhichistodescribethephysicalfeaturesandtheuseoftheland and buildings.

Land and Mortgage Register

Landandmortgageregistersarekeptbydistrictcourtsandprovideinformationonthelegalstatusofrealestate,e.g.thelocationofparcelsofland,theownershipstatusofland,encumbrancesontheland,mortgages.

Thefollowingrealestaterightsareregisteredinthelandandmortgage


register:ownership,perpetualusufructandlimitedpropertyrightssuchascooperativemember’srighttoanapartment,cooperativemember’srighttocommercialpremises,righttoasingle-familyhouseinaresidentialcooperative,mortgage,easementandusufruct.Asarule,registrationstakeplaceattherequestofthepartyconcerned.

Landandmortgageregistersarepubliclyavailableforreviewbyanybody(eventhosewithnolegalinterest)andmaybealsoreviewedon-line,viaITsystem.

Asfaraslandandmortgageregisterfiles(includingmaps,deeds,courtdecisions)areconcerned,onlypartieswithalegalinterestmayinspectthem.Legalinterestisinterpretedquitenarrowlyandcomesdowntothosepartieswhoserightsareregisteredinagivenregister.

Entryofarightinthelandandmortgageregisterispresumedtoreflecttheactuallegalstatusoftherealestate.Shouldtherebeanyinconsistencybetweenthelegalstatusofrealestate,thecontentoftheregisterprevailsinfavorofthepersonwhohasacquiredtherightofownershiporanotherpropertyrightbyperforminganactinlawwithapersondulyregisteredastheholderoftherightandentitledaccordingtothepubliccredibilitywarrantyofthelandandmortgageregister(rękojmia wiary publicznej ksiąg wieczystych). In consequence,ifapurchaseracquiresapropertyingoodfaithfromanon-ownerregisteredasowner,theacquisitionisvalidandthetrueownercannotrenderthetransferinvalid.Hisonlyrecourseisanindemnityclaimagainstthevendor.Inconsequence,anexcerptfromthelandand

mortgageregisteristhekeydocumentthatshouldbeobtainedandanalyzedbeforeadecisiontoacquirerealestateismade.

Thepubliccredibilitywarrantydoesnotconferprotectionongratuitousdispositionsorthosemadeinfavoroftheacquirerinbadfaith.Itisalsoexcludedbyanentryinthelandandmortgageregisterconcerninge.g.filinganapplicationorlodgingacomplaintagainstacourtdecision.

Land and Buildings Register

Thelandandbuildingsregisteriskeptbystarostasofthepoviats(orpresidentsoftownswiththerightsofapoviat)andisauniformcollectionforthewholecountryofsystematized,updateddataonland,buildingsandpremises,theirownersandothernaturalpersonsandcorporatebodiesholdingtheland,buildingsandpremises.

Informationonland,buildingsandpremisesisavailabletothepublicandcommonlyaccessible.However,feesarecollectedfordisseminateddatasetsanddistributedextractsfromtheregistersanddirectoriesaswellasforcopiesofcadastralmaps.Additionally,thepartyintendingtoinspecttheregistershouldprovehis/herlegalinterestifthedemandedextractincludespersonaldata.Thepubliccredibilitywarrantydoesnotapplytothelandandbuildingsregister,hence,theregisterdoesnotprovidethepersonacquiringtherightofownershiporanotherrealpropertyrightwiththeprotectionwhichisprovidedinthecaseoflandandmortgageregistersheldbycourts.


2.2. Investmentvehiclesandstructures

2.2.1 Generalremarks

FurthertothePolishCommercialCompaniesCodeof15September2000(hereinafterreferredtoastheCommercialCompaniesCode)thelegalentities,referredtotherein,canbedividedintotwogroups:partnershipsandcompanies.Therearetwomaindifferencesbetweenthem:(i)generally,partnersinapartnershiptakefullresponsibilityforthepartnership’sliabilities(subsidiaryresponsibility)and(ii)partnershipsarenotlegalpersons,however,theymayacquirerightsandincurobligations.

Investinginrealpropertyisgenerallycarriedthroughspeciallycreatedentities–socalledspecialpurposevehicles(SPV).Polishlegalregulationsdonotimposeanyspecificlegalformforsuchanentity.Consequently,anentityorganizedinanyformlegallyacceptedinPolandmayserveasanSPV.TheSPVmayoperatebothasapartnershipandasacompany.

AmongallthelegalformsoforganizingtheentityprovidedforintheCommercialCompaniesCode,wewouldliketopresentthreethatarethemostcommonlyusedbytheinvestors:alimitedliabilitycompany,alimitedpartnershipandapartnershiplimitedbyshares.

ThechoiceofthelegalformfortheSPVwilldeterminethestructureunderwhichsuchanentitywillbeoperating.TheforeigninvestormayeitherbeadirectshareholderintheSPV,remainaparentcompanyforaforeign/PolishcompanycontrollingtheSPV,orarrangeanyotherstructurethatwouldsuititsneedsfromthelegalandtaxperspective.


TherearetwowaysforaninvestortointroducetheSPVintoitscapitalstructure:theSPVmaybeboughtorestablishedbytheforeigninvestor.Therearenumerousservicefirmsofferingthesaleofestablishedcompaniesorpartnerships(so-called“shelfcompanies”),thatcanbeusedstraightaway.However,thisisalwaysmoreexpensivethansettingupanewentity.

Apartfromthelegalformsmentionedabove,aforeigninvestormayalsooperateinPolandandinvestinrealproperty:

• directlythroughitsbranch;

• byenteringintoajoint-venture.

Formorecomplexanddiversifiedinvestmentsaformulaofaclosed-endfund(FunduszInwestycyjnyZamknięty;FIZ)canbeused.

2.2.2.Limitedliabilitycompany

Alimitedliabilitycompany(spółka z ograniczoną odpowiedzialnością)iscommonlyusedastheSPVforrealestateinvestmentsordevelopmentprojects.

ThefeaturesofthelimitedliabilitycompanyaresetoutintheCommercialCompaniesCode,themostimportantofthembeing:

• itmaybecreatedbyoneormorepersonsforanypurposeallowedbylaw(itmaynotbeformedsolelybyanothersingle-shareholderlimitedliabilitycompany);

• liabilityoftheshareholdersislimitedtotheircontributiontothesharecapitalofthecompany;

• thesharecapitalofthecompanyshallamounttotheminimumofPLN5,000(ca.EUR1,200)andisdividedintosharesofequalornon-equalnominalvalue;

• thesharecapitalcanbecoveredbyacontributionin-kind;

• limitedliabilitycompanyisalegalpersonandassuch,itisapartytospecificrightsandobligations;

• itactsthroughitsbody,i.e.themanagementboard;themembersofthemanagementboard,ingeneral,arenotliableforthecompany’sliabilities.

TheCommercialCompaniesCodeprovidesforaninstitutionofa“companyinorganization”.Thismeans,thatalimitedliabilitycompanysetupbysigningthearticlesofassociationmayacquirerightsonitsownbehalf,includingtherightofownershipofrealestateandotherrights,incurobligations,sueandbesuedevenbeforeitsregistrationwiththeregistrycourt.

ItisalsopossibletoregisteralimitedliabilitycompanywiththeregistrycourtviatheInternet.TheprocedureissimplifiedincomparisontothestandardprocedureandrequirestheregistrationofthecompanythroughadedicatedwebsiteoftheMinistryofJustice(https://ems.ms.gov.pl/).However,duringtheonlineregistrationofthelimitedliabilitycompanyitisnotpossibletomakeanin-kindcontribution,hence,theentiresharecapitalmustthereforebepaidincash.


TheSPVsmaybesetupdirectlybytheforeigninvestor,beingtheonlyshareholder(bearinginmindthelimitationsindicatedabove).ItisobviouslypossibletointroduceseveralSPVsestablished(orpurchased)bythesameshareholderinordertodividetheinvestmentriskbetweenthem.However,depending on the intentions of the investorandbearinginmindpossibletaxeffectivenessofthescheme,asimpleonestepstructuremaybeenlargedandinvolve,forexample,settingupaholdingcompany,abroadorinPoland,whichholdsthesharesoftheSPVs.

One step structure with several SPVs, allowing

diversification

Foreign Investor

A structure with a holding company,

gathering several SPVs

Foreign Investor

SPVs

SPVs

Hold Co

2.2.3Partnerships

Themainfeaturesofpartnershipsarethefollowing:

• partnersactinthenameofthepartnership;

• partnersareresponsiblefortheliabilitiesofthepartnership;

• theassetsofthepartnershipincludeanypropertycontributedtothepartnership;

• therearenominimumcapitalrequirements(excludingthepartnershiplimitedbysharesincaseofwhichtheminimumsharecapitalamountstoPLN50,000,i.e.ca.EUR12,000);

• althoughitisnotclassifiedasalegalperson.apartnershipmayacquirerightsonitsownbehalf,includingtherightofownershipofrealestateandotherrights,incurobligations,sueandbe sued.

Inrecentyearsthenumberofpartnershipsusedforthepurposesofinvestmentstructuressignificantlygrew.

Limited partnership

Alimitedpartnership(spółkakomandytowa)isapartnershipofwhichatleastonepartnerisliabletothecreditorsfortheobligationsofthepartnershipwithoutlimitation(thegeneralpartner-komplementariusz)andtheliabilityofatleastonepartner(thelimitedpartner-komandytariusz)islimitedtothevaluedefinedinthepartnershipagreement.

Thisfeatureofthelimitedpartnershipresultsinthespecificstructurethatneedstobeimplemented.Rightsandobligationsinthepartnershipshouldbesplitbetweentwoentities(limitedpartnerandgeneralpartner).Itisacommonpracticethattheinvestortakestheroleofthelimitedpartnerinordertoavoidthefullliability,whereasanadditionallimitedliabilitycompanyisestablishedto


serveasageneralpartnerintheSPV.Asmentionedwithrespecttothestructuresinvolvinglimitedliabilitycompanies,alsoincaseoflimitedpartnershipsvariousstructuresmaybeinvolved,dependingonthespecificneedsoftheinvestor.Mostcommonlyhowever,thelimitedliabilitycompanywillpossessaminoritypositionintheSPVandshallbea100%subsidiaryoftheinvestor,neverthelessitmaytakespecificfunctionsintheSPV-e.g.managementduties.

Structure with limited partnership

Foreign Investor(limited partner

SPV

LLC(general partner)

Partnership limited by shares

Apartnershiplimitedbyshares(spółkakomandytowo-akcyjna)isapartnershipthepurposeofwhichistoconductabusinessenterpriseunderitsownbusinessname,whereatleastonepartner(generalpartnerkomplementariusz)shallbearunlimitedliabilitytowardsthecreditorsforobligationsofthepartnershipandatleastonepartnershallbeashareholder(akcjonariusz).

Partnershiplimitedbysharesistheonlypartnershipincaseofwhichthereareminimumsharecapitalrequirements,i.e.thesharecapitalhastoamounttoatleastPLN50,000(ca.EUR12,000).

Thespecificfeaturesofthisentityresultsintwokindsofinvolvementinthepartnership,thegeneralpartneractslikeapartnerinanyotherpartnership-i.e.representsthepartnershipandtakessubsidiaryresponsibilityforthepartnership’sobligations,whiletheshareholderactslikeashareholderinajoint-stockcompany,i.e.hisinvolvementispurelyofafinancialnature.

ThepartnershiplimitedbysharesissubjecttosomeadditionalrestrictionsprovidedforbytheCommercialCompaniesCode:

• incaseofin-kindcontributionstheauditor’sopinionisrequired,

• profit-sharingoccursingroups(separatelyshareholdersandgeneralpartners).

Tax advantages

Till31December2013bothlimitedpartnershipandpartnershiplimitedbyshareswereconsideredtransparentforthepurposesofcorporateincometaxandthereforecommonlyusedasSPVsinrealpropertyinvestments.

DuetoCITlawchangesfrom1January2014partnershiplimitedbysharesisnolongerconsideredtaxtransparentandbecameacorporateincometaxpayer.Untiltheendof2013,taxationoftheshareholderinapartnershiplimitedby


shareswasdeferreduntiltheprofitsweredistributedtohimbythepartnership.Consequently,iftherewasnoeconomicprofitavailablefordistribution-ornodistributionwasmade-notaxationshouldoccurattheleveloftheshareholderofapartnershiplimitedbyshares.ThedeferralwasnotdirectlyindicatedinthetaxlawbutwasbasedonthegeneraltaxrulingofthePolishMinistryofFinance.Duetotransitionrules,theuseofpartnershipslimitedbysharesthatcanstillenjoytheabovemaybestillpossible,incasepartnershipswhichfinancialyearextendsbeyond2015.

Inthecaseoflimitedpartnership,taxablerevenuesandcostsgeneratedbythepartnershipareallocatedtothepartners(bothlimitedandgeneral)andrecognizedforcorporateincometaxpurposesonanon-goingbasisattheirlevel.

Partnershipspayothertaxes,suchasVAT,realestatetax,andcivillawtransactiontax,andtheymaypaywithholdingtaxes(e.g.withholdingtaxoninterestandpersonalincometax).

Thetablebelowcomparesthebusinessandtaxationaspectsofthelimitedpartnershipsandlimitedliabilitycompanies:

Limited liability company Limited partnership

possesseslegalpersonality YES NO

canbeestablishedbyasingleshareholder/partner

YES (NO if to be established by

aPolishLLC,whichhasonlyoneshareholderitself)

NO

canacquirerealproperty YES YES

theshareholders/partnersarepersonallyliableforthecompany’sdebt

NO generalpartner–YES limitedpartner–NO

minimalsharecapital 5.000 PLN (ca.EUR1,200) NO

managementboard obligatory NO

supervisoryboard voluntary* NO


Limited liability company Limited partnership

Taxationofincome(fromexploitationorsaleofassets)

19% atthecompanylevel

19% atthelevelofthepartners

Taxationofthedistributionofincometoshareholders/partners

19% undercertainconditionstherecanbereliefforshareholders

whoarelegalpersons(basedinPolandorintheEU/EEA). Reducedratesforforeignshareholdersonthebasisofdoubletaxationtreaties(dependingonthetreaty)

NO

Civillawtransactiontaxonshareholder/partnerloans NO

0.5% on the value of the loan

payablebythepartnership

Applicabilityofthincapitalizationrules YES

NO althoughinterestpaidto

thepartnerbeingthelendercannotberecognizedasataxdeductiblecostofthispartner(ontheotherhand,interestreceivedconstitutestaxable

incomeofthispartner)

Abilitytooffsetprofitsandlossesfromvariousprojects(carriedoutinseparatecompanies/partnerships)

NO onlyinthecaseof

establishingataxcapitalgroup

YES profitsandlossesare

compensatedatthelevelofpartners

TaxationinPolandofthesaleofsharesinthecompany/partnership

19% possiblereliefforforeignshareholdersonthebasisofdoubletaxationtreaties(dependingonthetreaty)

19% itisnotclearwhetherthe

samepossible reliefexistsinthecaseof

partnerships


Themainadvantagesofusingalimitedpartnershipinaninvestmentstructureareasfollows:

• profitdistributionsarenottaxed:thereisonlyoneleveloftaxation;

• limitationofliabilityvis-à-viscreditorsforthelimitedpartner(whoisliableonlyuptotheamountagreedbythepartnersinthearticlesofassociation,calledthecommendamsum);

• theabilitytooffsetprofitsandlossesondifferentprojectsconductedatthelevelofthepartners.

Alimitedliabilitycompanycanbetransformedintoalimitedpartnership,althoughsuchaprocessmayincurtaxationinPoland.Adetailedanalysisisrequiredineachcase.

2.2.4.Jointventure

Polishlegalregulationsdonotprovideanydefinitionofajointventure,nevertheless,itisausefulsolutiontocombineentrepreneurs’effortsinachievingthecommongoal.

Thetermjointventuremaybeunderstoodasacooperationoftwoentitiesresultinginsettingupanewcompany(theinvestmentonsuchbasisiscarriedthroughthegivencompany,asdescribedbefore)oritmaybeonlyaveryclosecooperationbetweenthetwoentities,whichallocatecapitalforactivitiesimplementedjointlybysharingcostsandrevenuesunderajointventurecontract,withoutcreatingaseparatebusiness entity.

Theobjectivesforthecreationofjointventuresare:

• gainingaccesstonewmarkets,

• synergies,

• riskdiversification,

• achievingeconomiesofscale,

• providingaccesstocheapersourcesofsupply,

• jointdevelopmentandsharingoftechnology,

• overcomingbarriersandadministrativedutiescreatedbythecountryofoneofthepartners.

2.2.5 InvestmentFund-closed-endfund

ThePolishInvestmentFunds’activityiscomprehensivelyregulatedbytheActof27May2004onInvestmentFunds(hereinafterreferredtoastheActonInvestmentFunds).AccordingtothatAct,thesoleobjectoftheinvestmentfund’sactivityistoinvestthemoniesacquiredfromtheparticipantsinshares,securities,moneymarketinstrumentsandotherpropertyrights–includingrealproperty.

Investmentfundsdifferfromregularlegalentitiessuchascapitalcompanies,asaninvestmentfundmerelyformsanassetbaseconsistingofthepaymentsoftheparticipantsandtheassetsacquiredforthesaidpayments.

TheActontheInvestmentFundsdifferentiatesingeneralbetweenOpen-EndInvestmentFundandClosed-End


InvestmentFund(hereinafterreferredtoasFIZ).

FIZisalegalperson.TheprimaryprincipleoftheFIZisthefixednumberofparticipationtitles(investmentcertificates)issuedinexchangeforcontributionsmadebyitsparticipants(investmentcertificate-holder).FIZdoesnotissueparticipationtitlesoneverydemandofaninvestorasisthecasewiththeopen-endinvestmentfunds,butratherindiscretionaryperiodsoftime.Inordertosubscribeforinvestmentcertificates,theparticipanthastomakeacontributiontotheFIZ.Generally,theparticipantsmaycontributetotheFIZcash,sharesorrealestate.

TheFIZ’sbodiesaretheManagementCompany,theBoardofInvestors(controllingbody)andGeneralInvestor’sMeeting.

TheManagementCompany(Towarzystwo Funduszy Inwestycyjnych)isalegalentityseparatefromtheInvestmentFund.Accordingtothelegalprovisionsonlyajoint-stockcompanywithitsregisteredofficeinPolandholdingauthorizationtoconducttheactivitiesrelatedtocreatinginvestmentfundsandmanagingthemissuedbythePolishFinancialSupervisionAuthority(Komisja Nadzoru Finansowego),maybeaninvestmentfundmanagementcompany.ThismeansthattheManagementCompanycarriesoutitsactivitiesonthebasisofthepermitissuedbythePolishFinancialSupervisionAuthorityandunderitssupervision.

AManagementCompanymaybeformedbyaninvestor,however,itiscommonpracticethatalreadyexisting

ManagementCompaniesareengagedtotakethisrole.InsuchacaseaninvestormakesanagreementwithaManagementCompany.Consequently,theinvestoronlyholdsinvestmentcertificatesintheFIZandthroughthisstructureinvestsinparticularproperty.

TheManagementCompanyfulfilstwoprimaryfunctions:(i)atthebeginning-itactsasafounderoftheFIZ,(ii)whentheFIZisestablishedandregistered-itbecomesitsgoverningbody(representsFIZintransactionswiththirdparties).

InaccordancewiththeActonInvestmentFunds,theManagementCompanyshallbeliabletotheparticipantsintheFIZforallthedamagecausedbythefailuretoperformorimproperperformanceofitsdutiesasregardsthemanagementoftheFIZanditsrepresentation.

TheaboveshowsthatthestructureneededtoimplementFIZiscomplexandrequires:

a) engagingaManagementCompany,

b) establishinganFIZ,

c) establishingtheoperatingcompanies,whichmayacquiretherealproperty.

Nevertheless,establishinganFIZstructurehasimportantadvantages.Firstofall,itallowsforadditionalfinancingfortheinvestmentstoberaisedbysellinginvestmentcertificates.Thismaybeveryusefulinenteringinlarger,long-termrealpropertyinvestments.

Theuseofthisstructuremayallowthedeferral,orevenexemptionfromtaxation,oftheoperatingandcapitalgainsgeneratedfromtherealestate.


Similarly,aforeigninvestmentfundestablishedintheEUorEEAcountrymaybeused(thePolishCITlawinforcefrom1January2011providesforsuchapossibilityexplicitly).Inthatcasealsoflow-throughpartnershipsmaybeusedtocreatetaxeffectivestructuresforoperationsonthePolishrealestatemarket.However,lackofwellestablishedpracticemakesitadvisabletoverifytheapplicabilityofthetaxexemptionineachcase.

InviewofthechangesintroducedintheCITlawasof1January2014,accordingtowhichpartnershipslimitedbysharesbecametaxpayers(similartolimitedliabilitycompanies),alternativestructuresusingaPolishorforeigninvestmentfundcanbeused.Thesetupoftheinvestmentstructureshouldbeplannedinadvance,duetoatime-consumingimplementationprocess.

Example of a FIZ structure

Foreign Investor

FIZ

SPV

Management Company

investment certificates

2.2.6 Public-privatepartnership

General remarks

Public-privatepartnership(hereinafterreferredtoasPPP)isoneoftherisingformsofcooperationbetweenpublicauthoritiesandtheprivatesector.Itallowsforanincreaseintheefficiencyofpublicservicesthroughtheuseofprivatesectorexperienceandforthesharingofriskbetweenpublicandprivateentities.

PPPenablesamutualadvantageforthepublicandprivatesector–forpublicentitiesitguaranteesanadditionalsourceofcapitalandasaconsequenceprovidesthepublicsector-withfundstoallocateforotherpurposes.Ontheotherhand,thepublicsectormayprovidetoprivateinvestorsthelong-termcertaintyofcashflowsfrompublicsources.

InPolishlawthelegalframeworkforPPPisestablishedbytwoactsthatregulatethecooperationbetween

publicentitiesandprivatepartners:

• theActof19December2008onPublic-PrivatePartnership,hereinafterreferredtoastheActonPublic-PrivatePartnership,

• theActof9January2009onConcessionforWorksandServices,hereinafterreferredtoastheActonConcessions.

ThemainsimilaritiesbetweentheActonPublic-PrivatePartnershipandtheActonConcessionsareasfollows:


• cooperationbetweenapublicandprivatepartner,

• riskdivisionbetweenapublicandprivatepartner,

• privatepartnersreceivepaymentsfortheservicerendered,

• constituteaspecialformoftenderagreements.

Selection of the private partner

TheActonPublic-PrivatePartnershipbasicallydistinguishestwowaysofselectingtheprivatepartner.Thewaysofselectiondependonthetypeoftheprivatepartner’sremunerationandareasfollows:

• Iftheremunerationoftheprivatepartnerisrepresentedbytherighttocollectbenefitsfromthesubjectofthepublic-privatepartnership,ormainlysucharighttogetherwithpaymentofanamountofmoneytheselectionoftheprivatepartnershallbedoneapplyingtheActonConcessionssubjecttoprovisionsoftheActonPublic-PrivatePartnership.

• Inothercases,theselectionoftheprivatepartnershallbedoneapplyingtheprovisionsoftheActofJanuary29,2004onPublicProcurementLaw(hereinafterreferredtoasPublicProcurementLaw)subjecttoprovisionsoftheActonPublic-PrivatePartnership.

IncaseswheretheActonConcessionsandPublicProcurementLawdonotapply,theselectionoftheprivatepartnerismadeinawaythatensuresthemaintenanceoffairandfree

competition,aswellastheprinciplesofequaltreatment,transparencyandproportionality.Ifthepublicpartnerbringsinrealestateasitsowncontribution,theprovisionsoftheActofAugust21,1997onthePropertyManagement(hereinafterreferredtoastheActonPropertyManagement)mustbetakenintoaccount.

Implementation of PPP

PursuanttotheActonPublic-PrivatePartnershippublicandprivateentitiesconcludeanagreementunderwhichtheprivatepartnercommitsitselftoimplementtheprojectatanagreedremunerationandtocoverinwholeorinparttheexpendituresforprojectimplementation,orcoverthemthroughathirdparty,whilethepublicentitycommitsitselftocollaborateforthepurposeofachievementoftheprojectgoal,inparticularbymakingitsowncontribution.ThePPPcontractcanalsoprovidethatforthepurposeofitsperformance,thepublicentityandtheprivatepartnershallestablishacompany,alimitedpartnershiporapartnershiplimitedbyshares.

Financial restrictions

ThetotalamountuptowhichbodiesofgovernmentadministrationcancontractfinancialliabilitiesonthebasisofcontractsofPPPinagivenyearisspecifiedintheBudgetAct.In2011,2012aswellasin2013itwasPLNonethousandmillion.


However,asarule,thefinancingofaprojectfromtheStatebudgettotheamountexceedingPLN100millionrequiresaconsentissuedbytheministerresponsibleforpublicfinance(excludingthefundsallocatedforfinancingofoperationalprograms,thatarespecifiedintheActof6December2006onPrinciplesofDevelopmentPolicy.Whenissuingtheconsenttheministerresponsibleforpublicfinanceshallconsidertheinfluenceoftheplannedbudgetexpendituresonthesafetyofpublicfinance.

The concession contract – legal basics

TheActonConcessionsspecifiestherulesandproceduresforcontractingconcessionsforworksorservicesandthelegalprotectionmeasures.

Thedurationofaconcessioncontractshouldtakeintoaccounttherecoveryoftheconcessionaire’sexpenditureincurredwithreferencetotheperformanceoftheconcessionandshallbenolongerthan:

• incaseofconcessionforworks–30years;

• incaseofconcessionforservices–15years.

Wheretheexpectedtimelimitofrecoveryoftheconcessionaire’sexpenditureincurredwithreferencetoperformanceoftheconcessionislongerthantheperiodspecifiedabove,thecontractmaybesignedforalongerterm.

Theconcessionaireundertheconcessionsignedwiththeconcession-grantingauthorityisobligedtoperformthesubjectofconcessionforremuneration,whichconstitutesincaseof:

• theconcessionforworks–exclusivelytherighttousetheworkorsuchrightwiththepaymentbyconcession-grantingauthority;

• theconcessionforservices-exclusivelytherighttousetheserviceorsuchrightwiththepaymentbyconcession-grantingauthority.


2.3.Realestatefinancing

2.3.1.ModesoffinancingtheSPVs/investments

Themostimportantthinginstartinginvestments,istoprovidefinancingfortheSPVs,sotheycanoperateandacquirerealproperty.

Thereareseveralmethodsoffinancingthecompany,somefundscanbereceivedfromoutside,butsomemaycomefromthecapitalgroup–e.g.fromtheparentcompany.Inmanycasesbothsolutionsarepossible.

Loan and credit agreement

Byloanagreementalenderundertakestotransfertheownershipofacertainamountofmoneyorgoodstoaborrower,whileaborrowerundertakestoreturnthesameamountofmoneyorthesameamountofgoodsofthesamekindandthesamequality.Loanscanbegrantedbyanyentity/personandmayberelativelyfreelyregulatedbytheparties.

Acreditagreementisaspecifickindofexternalfinancing,whichisregulatedbytheBankingLawof29August1997andcanbegrantedonlybybanks.Byacreditagreementabankagreestoprovideaspecificamountofmoneyforaspecificpurposeandtime,andtheborroweragreestousethecreditforitsintendedpurpose,andpaybacktheamountofcreditalongwithduerewardintheformofbankinterest.

Onthefinancialmarketthereisawidechoiceofbankcreditsandtheirpricedependsonvariousfactorsas:duration,securitiesavailable,financialconditionoftheborrower.Additionally,banksmay


chargetheborrowerapreparationfeeforallworkconnectedwiththepreparationofthecredit.

Banksalsogenerallyrequiresecuritiesforthecredits.Amongothers,themostpopularare:

• mortgages;

• sharepledges;

• assetandbankaccountpledges;

• powersofattorneytobankaccounts;

• securityassignmentsofreceivablesoftheborrower;

• submissionstoexecution;

• subordinationagreements.

AmortgageisthecommonformofsecurityrequiredbyPolishbanks–especiallyrequiredinrealestatefinancingtransactions.

Mortgageshallbedefinedasaright,underwhichthelender(creditor)maysatisfyhisclaimsfromtheproperty,regardlesswhoisthecurrentowneroftheproperty,andwithpriorityoverotherpersonalcreditorsoftheborrower,whosecreditsarenotsecuredwithmortgage.

AmortgagebecomeseffectiveafterenteringintheLandandMortgageRegister.Theentrytakeseffectatthedateoffiling,soeventhoughtheregistrationmaytakeseveralmonths,marketpracticeissuchthatbankspayouttheamountofthecredituponreceiptofconfirmationoffilingoftheapplicationforregistration.

Amortgageisaverysecuresolutionforthebank,asinthecaseofthedebtornotbeingabletopayoffhisdebt,thereal

propertymaybesoldinapublicauctionandthus,thebankmayretrievethewholeamountofdebt.

Shareholder’s loan

Aloanfromshareholdershastwoimportantadvantagesoverthebankloan.First,itisingeneralacheapersolutionandwhatismore,itdoesnotbaretheriskofenforcementincaseofdifficultfinancialsituationoftheborrower.

Itisimportanttomentionthespecificrulesresultingfromart.14§3oftheCommercialCompaniesCode,whichprovidesthatshareholder’sclaimresultingfromaloanshallbeconsideredtobehiscontributiontothecompanyincaseofdeclarationofbankruptcywithintwoyearsfromthedateoftheloanagreement.However,theabovedoesnotconstituteanincreaseinthesharecapitalofthecompany,andthecontributionistreatedasmadeonthesupplementarycapital.Thisprovisionisintendedtoprotectcreditorsofthebankruptcompany.

Bonds

Bondscanbeissuedbyajoint-stockcompany,alimitedliabilitycompanyandapartnershiplimitedbyshares.Bondscanbedefinedassecurities,whichobligetheissuer(thecompany)togivecertainbenefitsincashorinkindtothebondholder(thebuyerofthebonds).Companiescanissueregisteredorbearerbonds.

Theadvantageofthisformoffinancingistheabilitytofairlyfreelydetermine


thebenefitsthatareassociatedwithbonds.Theconstructionofthesecuritydoesnothavetobelimitedtoasimplefinancialbenefitintheformofrepaymentofthebondsplusinterestrepresentinganincomeofthebondholder.Whileissuingbonds,thecompanyisfreetoformulatethegratificationtobeprovidedtobondholders,suchasthepossibilityofparticipatinginprofitsofthecompany,ortheconversionofbondsintoshares.

Thebondsmaybedistributedonanopenmarket,insearchforanoutsidefinancing,orserveasamodetotransferfundsfromanotherrelatedcompany.ItshouldbenotedthatthereareseveralcompaniesintherealestatesectorlistedonthePolishbonds’openmarket.

InthecaseofSPVswhichaimtoobtainfinancingfromtheshareholders,thegratification(amutualbenefit)totheparentcompanyasabondholderwillbeofsecondaryimportance.ApracticalsolutionisthatiftheSPVgeneratefutureearningsfromrealproperty,bondscouldentitlebondholderstoparticipateintheprofit.Duetothehighdegreeoffreedomintheframeworkofthisinstrument,itisveryrecommendedasanoptimalwaytobringthefundsdownwards.

Wewouldliketonote,however,thattheissuingofbondscreatesadditionalobligationsforthebondissuer,relatedtoprovidingdatatoassessthefinancialconditionofthatentity.Additionally,iftheissueroperatesformorethanayear,itisrequiredtoprovidefinancialstatementspreparedasatthebalance

sheetdate,noearlierthan15monthsbeforethedateofthepublicationofthetermsofissuingthebonds,alongwiththeauditor’sopinion.

Promissory notes

InordertoobtainfinancingSPVsmayissuepromissorynotes.

Apromissorynotemayincludeadeferredpaymentdate.Itshouldhaveaclearlydefinedduedate,intheformofacalendardate.Thereareexemptionsfromthisrule–e.g.an‘avista’promissorynote-whichprovidesthatthepaymentismadeondemandfromthepayeeorwithinacertainperiodafterthedemand.Additionally,an‘inblanco’promissorynoteallowsapayeetofillin(atitsowndiscretion)-theconditionsofsuchpromissorynote(e.g.dateofpayment)withinthescopeforeseenbyamutualagreement.

Theobligationfromthepromissorynotedoesnothavetobeaccompaniedbyanyotherlegalrelationshipthatitsecures.Itmeansthattheholderhasanunquestionableclaimfrompromissorynote,evenif,forexample,promissorynoteliabilitywasnotbasedonanyotherparticularobligations-suchasloans.

Similarlyasinthecaseoftheloanagreement,theissuerofapromissorynotebecomesadebtor.Withtheuseofapromissorynote,SPVscaneasilyobtainfundsfromtheparentcompanyinalessformal,quickerwayandeasilysettlethedebtinanysuitabletimeframes.


Increase of share capital

Raisingcapitalisacommonwayoffinancingcompanies.Itcanbecarriedbyincreasingthenominalvalueofthesharesexistingorcreatingnewones;bothwaysleadtoanincreaseofthesharecapital.

Thisprocessisassociatedwitheitherchangesinarticlesofassociation(aformalmodethatrequiresfilingthechangesinthearticlesofassociationwiththeNationalCourtRegister)oranincreasebasedonthecurrentprovisionsofthearticlesofassociation(informalmode).Theaimistochangethecapitalstructureofthecompanybydefiningthesharecapitalatahigherthancurrentlevel.Tocovertheincreaseofthesharecapital,thefundsmaybepaidincashorin-kindcontributionscanbemade.

Itshouldbenotedthatthesharecapitalincreaseneedssomeadditionalexpenses.TheseincludethefeeforchanginganentryintheNationalCourtRegister(ca.EUR60),afeeforthenotificationintheCourtandEconomicMonitor(ca.EUR25),notaryfeefortheminutesdocumentingthecapitalincreaseandforthepreparationofadeedcontainingastatementofacquisitionofsharesinthefullamount(notaryfeesdependonthevalueofincreaseandarelimitedbylegalprovisions).

Thecapitalincreaseisamoreformalprocessincomparisontotheadditionalcontributions(referredtobelow)andloans,buttheadvantageofthisformoffinancingistheabilitytocontributeinvariousforms,suchascashorin-kind.

AsignificantdrawbackofthismethodoffinancingSPVsisrelativelydifficult

processofwithdrawingtheinvestedcapital.Thisiscarriedthroughthereductionofsharecapital(Articles263-265oftheCommercialCompaniesCode),whichinvolvesagainadditionalcosts(notification,registration)andistime-consuming(e.g.includesthreemonthsforobjectiontothereductionthatcanbebroughtbycreditors).

Additional contributions

ThismethodoffinancingisprovidedbytheCommercialCompaniesCode,butitisapplicableonlytothelimitedliabilitycompany.Accordingtotheprovisions,thearticlesofassociationofthecompanymayrequirethepayments(additionalcontributions)fromtheshareholdersinaspecificamountpaidbytheshareholdersinproportiontotheirshares.Infact,itisworthnotingthatpartnershipagreementscanalsoobligethepartnerstoadditionalpayments–suchasolutionispossiblebasedonthefreedomofcontractprinciple.

Paymentsofadditionalcontributionsinalimitedliabilitycompanydonotaffectthevalueofsharesinthesharecapitalofthecompany,andthereforethesharecapitalofthecompanyremainsunchangedaftertheadditionalcontributions.Thepaymentsincreasethecompany’sownfunds,whicharethusquitefreelyallocatedforthespecificneed,andthisiscertainlybeneficialfortheSPV.Theamountandtimingofpaymentsisdecidedbytheshareholders’meeting.

Asmentionedabove,thegeneralobligationtoadditionalcontributionshastobe


stipulatedinthearticlesofassociation(ifsucharticlesdonotcontainsuchprovisions,itwouldbenecessarytoamendthem,asotherwiseadditionalcontributionsarenotpossible).However,itisnotenoughtocreateanactualobligationfortheshareholderstomakecontributions.Aresolutionoftheshareholder’smeetingtakenbyanabsolutemajorityofvotesisrequired.Afterthisstepiscomplete,theactualobligationarises.

PursuanttotheprovisionsoftheCommercialCompaniesCode,theadditionalcontributionsmayberefunded,providedthatfundsgatheredfromthosecontributionsarenolongerrequiredtocoverthelossesreportedinthefinancialstatements,andnotearlierthanonemonthafternoticeinwriting,announcingtheintendedrefund.Rulesontherefundmaybedifferentlyregulatedbythearticlesofassociation,whichmeansthatthisinstrumentisrelativelyflexible.Shareholdersmayinfactdecide,contrarytotheprovisionsoftheCommercialCompaniesCode,thatadditionalcontributionmayberefunded,evenifthecompany’sfinancialstatementsshowaloss,inlessthanamonthfromthedateofpublication,orevenwithouttheneedtoannouncetherefund.

Additionalcontributionsarealwaysmadeincashandcannotbefulfilledbyprovidingthecompanywithnon-cashbenefits.Paymentscanbeusedfordifferentpurposes,andtheapplicableregulationsdonotcontainrestrictionsinthisregard.

2.3.2.Taximplications

Equity financing

WhenaPolishcompanyisfinancedthroughequity,thefundsrequiredfortheinvestmentarereceivedinexchangeforthesharesinthecompany.Equityfinancingisgenerallysubjecttoa0.5%civillawtransactiontaxwithcertainexceptionsforrestructuringandreorganizationtransactions.Contributionstoareservecapital(sharepremium)shouldnotbesubjecttocivillawtransactiontax.

Generally,forPolishcorporateincometaxpurposes,acontributioninkind(exceptforthecontributioninkindofabusinessoranorganizedpartthereof)isataxableeventforthecompanymakingthecontribution,andissubjecttothestandardcorporateincometaxrate,currently19%.However,foreignentitieswillusuallybeexemptfromPolishtaxationundertherelevanttaxtreaty.

Sharesinthecompanygiveshareholderstherighttocontrolthecompanyandtherighttofinancialbenefitsfromthecompany.Theincomeofthecompanygeneratedthroughitsoperationsissubjecttocorporateincometax.Anyafter-taxprofitscanbedistributedtoshareholdersintheformofdividends.Theshareholdersarenotonlyentitledtodividendsbutalsotoashareofanyproceedsuponliquidationinproportiontotheirshareholdings.


Additionalpaymentsarecontributionsmadebytheshareholder(s)ofalimitedliabilitycompanywherenosharesareissuedinexchange.Usuallythesepaymentsaremadewhenthecompanyhasmadeafinanciallossanditslevelofequityislowerthanthenominalvalueofitsissuedsharecapital.Ifthecompany’sarticlesofassociationallowsuchadditionalpaymentstobemade,andlaterrepaidtotheshareholders,thenreceiptandrepaymentisnotsubjecttotaxation.Compensationformakingtheadditionalpaymentsmaybepaidtotheshareholdersintheformofinterestpayablebythecompany.Whenpaid,suchinterestshouldbetreatedasanon-taxdeductiblecost.

Taxation of dividends

DividendsdistributedbyaPolishcompanytoaforeignowneraregenerallysubjecttoa19%withholdingtaxinPoland.Thistaxmustbewithheldbythecompanydistributingthedividendonthedividendpaymentdate,andpaidtothetaxofficebeforetheseventhdayofthemonthfollowingthemonthinwhichthetaxwaswithheld.The19%ratecanbereduced(toalowerpercentage)iftherecipientisataxresidentinacountrywithwhichPolandhasconcludedataxtreaty.PolandhasconcludedmanytaxtreatiesandtherearejustasmanywaysinwhichthePolishwithholdingtaxcanbereduced.Usuallythetreatywithholdingtaxratesondividendsvarybetween5%and15%.

Appropriatetaxplanningintheinitialphaseoftheinvestmentshouldbecarriedouttodetermineinwhichcountrytherecipientofthedividendsshouldbelocatedinordertoreduceoravoidtheinternationaldoubletaxationofdividends(seetheAppendixattheendofthisbookforalistofwithholdingtaxratesunderPoland’svarioustaxtreaties).DoubletaxationoccurswhenthePolishwithholdingtaxcannotbereducedto0%byvirtueofatreatyandthedividendisalsosubjecttoincometaxinthecountrywheretherecipientisataxresident.Thetreatiesorunilateraltaxrulesinmostcountriesprovideacreditsystemtoavoidsuchdoubletaxation.

Inaddition,sincetheimplementationoftheEUParent–SubsidiaryDirective,anexemptionondividendspaidtocompaniesfromotherEEAcountriesandSwitzerlandapplies.ThisisprovidedthattheentityreceivingthedividendistaxedinanotherEEAcountry(orinSwitzerland)onitsworldwideincome(andisnotsubjecttotaxexemptiononitstotalincome)andhasheldorwillholdatleast10%(inthecaseofacompanyresidentfortaxpurposesinSwitzerland,atleast25%)ofthesharesinthePolishcompanypayingthedividendforatleasttwoyears.Thisconditioncanbealsometprospectively,i.e.aftertheactualdividendpayment.Iftheconditiontoholdtheamountofsharesforanuninterruptedperiodoftwoyearsisnotsatisfied,withholdingtax(asaruleat19%)togetherwiththepenaltyinterestforlatepaymentwillbedue.


Itisuptothecompanypayingthedividendtodeterminetheapplicablewithholdingtaxrate.ThePolishwithholdingtaxsystemisnot“apayandrefundsystem”.ThePolishcompanydistributingthedividendcanbeheldliableformistakes,e.g.ifitappliesanincorrecttaxrate.AcertificateissuedbyaforeignlocaltaxofficeconfirmingthetaxresidenceoftheforeignshareholderreceivingdividendpaymentsfromPolandmustbeobtainedbythePolishcompanyinordertoallowapplicationofthelowerwithholdingtaxrateorexemption.AnadditionalrequirementisthatthePolishentity paying dividends should also hold awrittenconfirmationfromtherecipientthatthelatterdoesnotbenefitfromtaxexemptiononitsworldwideincome.

DividendspaidbetweencompanieswhichareresidentinPolandfortaxpurposesareexemptfromwithholdingtaxprovidedthatthedividendrecipienthasheldorwillhold(onorafterthedaywhenthedividendisreceived)atleast10%ofsharesinthedividendpayingcompanyforatleasttwoyears.Iftheaboveconditionsarenotmet,non-creditablewithholdingtaxisleviedondividendsattherateof19%.

Redemption of shares and liquidation distributions

TheredemptionofsharesandthereturnofequitytoshareholdersarepermittedunderPolishlaw.Theformalprocedureistime–consumingandusuallytakesseveralmonths.

Standard,voluntaryredemptionofsharesissubjecttothesametaxtreatmentasdisposalofshares.ItmeansthatasarulesuchredemptionwillbesubjecttotaxinPoland,unlessrelevantdoubletaxtreatyprovidesfortaxexemption.

Otherthanvoluntaryredemptionofshares(compulsoryredemptionofshares)aswellasliquidationistaxedinthesamewayasdividendsandissubjecttotheapplicablewithholdingtax(takingintoconsiderationtheappropriatetaxtreaty)orwithholdingtaxexemptionbasedonthePolishCITlawprovisionsimplementingtheParent–SubsidiaryDirective.

Asregardsliquidationproceeds,accordingtothecurrentapproachofthePolishtaxauthorities,uponliquidation,theentitythatceasestoexististaxedasifitdisposedassetswhicharetransferredtotheshareholder.Thisapproachisnotsharedbythecourtsthough.

Thesimilarapproachtendtobeappliedtoinkindremunerationforredeemedsharesordividendsinkind.

However,asof1January2015thePolishCITprovisionsexplicitlystatethatincaseofinkindremunerationforsettlingtheliability(e.g.uponsharesredemptionorinkinddividendpayment)thevalueofliabilitysettledinsuchawayconstitutesataxablerevenueofthepayingentity.Thisappliesrespectivelyalsotolookthroughentities.


Debt Financing (Loans): civil law transaction tax

Loansaregenerallysubjecttocivillawtransactiontaxatthelevelof2%oftheloanprincipal.Thetaxmustbepaidwithin14daysofthedateoftheloanagreement,andthetaxliabilityrestswiththeborrower.

Nevertheless,thefollowingtypesofloansareexemptfromtaxation:

• loansgrantedbyshareholderstoalimitedliabilitycompanyorjointstockcompany;

• loansgrantedbyforeignentitieswhichareengagedincreditandfinancingactivities(suchasgrouptreasurycompanies);

• loansrecognizedasanactivitysubjecttoPolishorforeignVAT(e.g.bankloans);

• financinggrantedasapartofbusinessactivityisrecognizedasafinancialservicespecificallyexemptfromVAT;therefore,nocivillawtransactiontaxapplies.

Withholding tax on interest

Generally,interestpaidfromPolandtoaforeignlenderissubjecttoa20%withholdingtax.Thisrateappliesunlesstherelevanttaxtreatyprovidesotherwise.PleaseseeAppendixforalistofwithholdingtaxratesunderPoland’svarioustaxtreaties.Underthetaxtreaties,itisgenerallystipulatedthatifwithholdingtaxispayableitcanbecreditedagainstthecorporateincome

taxoftheforeignlender.Asinthecaseofdividends,inordertoapplyatreatyrate,acertificateconfirmingthetaxresidenceoftheforeignlendermustbeobtained.

AfterjoiningtheEuropeanUnion,PolandimplementedtheEUDirective2003/49/EConthecommonsystemoftaxationapplicabletointerestandroyaltypaymentsmadebetweenassociatedcompaniesofdifferentMemberStates.OneofthemainpurposesoftheDirectiveistoabolishwithholdingtaximposedbythecountryfromwhichpaymentsofinterestandroyaltiesoriginatewhensuchpaymentsaremadebetween“qualifyingEUentities”,i.e.paymentsmadebetweenparentandsubsidiary,subsidiaryandparentandbetweendirectsistercompanies(inallcasesaminimum25%stakeand2yearholdingperiodisrequired).Asaresultofthat,awithholdingtaxexemptiononinterestpaymentsmadebetweenparentandsubsidiary,subsidiaryandparent,andbetweendirectsistercompanies(inallcasesaminimum25%stakeand2yearholdingperiodisrequired)isavailablefromJuly2013.The2-yearholdingperiodconditioncanbealsometprospectively,i.e.aftertheactualinterestpayment.Iftheconditiontoholdsharesforanuninterruptedperiodof2yearsisnotsatisfied,outstandingwithholdingtax(asarule20%)togetherwiththepenaltyinterestforlatepaymentwillbedue.Penaltyinterestischargedfromthedayfollowingthatthedayonwhichtheaboveperiodexpires.


PolandwasgrantedaneightyeartransitionalperiodforthefullimplementationoftheDirectiveintoPolishdomesticlaw.Asaresult,until30June2013withholdingtaximposedoninterestandroyaltypaymentsmadetoqualifyingEUentitiesbyPolishentitywas5%.

Inordertobenefitfromthatfavorabletreatmentthepayershouldholdrecipient’scertificateoftaxresidence.Anadditionalrequirementisthatthepayershouldalsoholdtherecipient’sconfirmationthattherecipientdoesnotbenefitfromthetaxexemptiononitsworldwideincome.

Tax deductibility of interest paid on loans

Generally,interestonloansisdeductiblefortaxpurposeswhenactuallypaidorcompounded(addedtotheprincipalsothatitconstitutesabasisfornewinterestcalculation),i.e.accruedinterestmaynotbetreatedasataxdeductiblecostuntilitisactuallypaidorcompounded.

Ingeneral,itshouldbepossibletotreattheinterestonloansdrawntoacquiresharesinaPolishcompanyastaxdeductible.Carefultaxplanningis,however,alwaysrequiredinall“debtpushdown”structures.

Itisimportanttonotethatinterestaccruedduringthedevelopmentofrealestateonthepartoftheloanusedto

financethatdevelopmentisnotdirectlydeductible.Thecostofsuchinterestshould be added to the initial value of thenewlydevelopedrealestate(i.e.thenewbuilding)inordertoincreasethescopeofitsfuturedepreciationfortaxpurposes.However,thisruleappliesonlytorealestatewhichisthecompany’sownfixedasset.Itdoesnotapplytoprojectsconstructedforresale(e.g.residentialprojects).Insuchcases,interestistreatedastaxdeductibleunderthegeneralrules.

Level of interest

ThePolishtaxauthoritiesareusuallyinterestedintheconditionsofloanagreementsconcludedbetweenrelatedparties.Theseconditionsshouldbethesameas,orcomparableto,thesortoffinancingconditionswhichnon–relatedpartieswouldagreeupon,inaccordancewith“thearm’slengthprinciple”.Toohigh

aninterestratecouldleadtoanadjustmentofthePolishborrower’staxableincome.Inaddition,otherconditionsintheloanagreementwhichareunjustifiableorunfavorabletotheborrowercouldresultinfurthertaxadjustments.Accordingtoregulationsgoverningthedocumentationoftransactionsbetweenrelatedparties,taxpayersarerequiredtopreparespecifictransferpricingdocumentationorriskpayinga50%rateonanyadditionaltaxableincomeassessed.


Restrictions on the tax deductibility of interest paid on loans

ThePolishthincapitalizationruleshavebeenamendedasof1January2015.

Accordingtothetransitionalprovisionsnewrulesapplytointerestpaidonloanswithrespecttowhichfundsweremadeavailabletotheborrowerafter1January2015.Therefore,asregardsinterestpaidonloanswithrespecttowhichfundsweremadeavailabletotheborrowerbeforethatdate–oldrulesapply.

Old rules

ThePolisholdthincapitalizationrulesrestrictthetaxdeductibilityofinterestontwotypesofloans(credits)grantedbycertainentities:

• loans(credits)grantedtothetaxpayingcompanybyitsshareholderholdingnotlessthan25%ofthevotingrightsinthecompanyorloans(credits)fromshareholdersholdingjointlynotlessthan25%ofthevotingrightsinthecompany(“mothercompany”loans);

• loans(credits)grantedtothetaxpayingcompanybyanothercompany,ifthesameshareholderholdsnotlessthan25%ofthevotingrightsineachofthesecompanies(“sistercompany”loans);

wherethedebttoequityratio(theratioofthevalueofthedebtpayabletocertainentitiestothevalueofthesharecapital(seebelowfordetails)exceeds3:1atthedateoftheinterestpayment.Intereston

theloans(credits)exceedingtheratioisnottaxdeductible(theterm“loans(credits)”alsocoversbondsanddeposits).

Forthepurposesofthecalculationofthedebttoequityratio,thedebtincludes:

• inthecaseof“mothercompany”loans:

• ►debtpayabletodirectshareholder(s)holdingatleast25%ofthevotingrightsintheinterestpayingcompany;and

• debt payable to entities holding at least 25%ofthevotingrightsintheabovementioneddirectshareholders.

• inthecaseof“sistercompany”loans:

• debtpayabletodirectshareholder(s)holdingatleast25%ofthevotingrightsintheinterestpayingcompany;and

• debt payable to entities holding atleast25%ofthevotingrightsintheabovementioneddirectshareholders;and

• debtpayabletotheentitygrantingtheloan(credit).

Inbothcases“equity”includesthesharecapitalstatedinthecompany’sdeedofassociationandequaltothenominalvalueofthesharesissued,excluding:

• ►capitalnotpaidinfull;

• capitalconvertedfromshareholderloans(credits)and/orrelatedinterest;

• capitalformedbyacontributioninkind,whichisanintangibleassetnotsubjecttodepreciation(e.g.goodwill).

Examplesofhowtheoldthincapitalizationruleswork:


Example 1

Investment Company

Polish Real Estate Company

CorporateInvestor

160

40

Assumption:

PolishRealEstateCompany’s(PREC)

Nominalsharecapitalis: 50

Debtlimitis: 150

Totalloans: 200

Partofloansexceedingthreshold 50

Example 2

CorporateInvestor

40

100 60

Investment Company A

Investment Company B


Assumption:

PREC’snominalsharecapitalis 50

Debtlimitis 150

Total loans 200


Example 3

Polish Company


CorporateInvestor50

50

100

Investment Company

Assumption:

PREC’snominalsharecapitalis 50

Debtlimitis 150

Total loans 200


= minimal 25% voting right relationship

= loans subject to thin-cap

= loans qualifying for calculation of debt limit


New rules

Thenewrulesrestrictdeductibilityofinterestonabroaderrangeofloansthantherulesinforceuntiltheendof2014.Asof1January2015,generallyinterestonallintra-grouploans(alsothosefromindirectlyrelatedentities)maybesubjecttodeductibilityrestriction.

Underthenewthincapitalizationrules,ifthevalueofdebtowedtospecifiedrelatedpartiesexceedsthenetequityoftheborrower(1:1debttoequityratio),part(calculatedbasedonaproportion)ofinterestpaidonaloanfromarelatedpartyisnotdeductiblefortaxpurposes.Forthepurposesoftheserules,equityisdeterminedonthelastdayofthemonthprecedingthemonthofinterestpaymentwithouttakingintoaccountrevaluationreserveandsubordinatedloans.Thevalueofequityisfurtherdecreasedbythevalueofthesharecapitalthatwasnotactuallytransferredtothiscapitalorwascoveredwithshareholder’sloans’receivablesandintangiblesthatarenotsubjecttoamortization.

Thedefinitionofaloancoversanyformofdebtfinancing,includingtheissuanceofbonds,creditsandbankandnonbankdeposits.Thedefinitiondoesnotcoverderivatives.

Thethin-capitalizationrulesapplytointerestonloansgrantedbyPolishandforeignqualifiedentities.Theycoverthefollowingloans:

• loansgrantedbyanentitythatholdsdirectlyorindirectlyatleast25%ofthevotingrightsintheborrower,

• loansgrantedjointlybyentitiesthatjointlydirectlyorindirectlyholdatleast25%ofthevotingrightsintheborrower,

• loansgrantedbyonecompanytoanothercompanyifthesameentityholdsdirectlyorindirectlyatleast25%ofthevotingrightsinboththelenderandtheborrower.

Forgeneralpartnersinalimitedjoint-stockpartnership,theconditionsconcerningtheminimumshare(votingrights)arefulfilled,regardlessofthegeneralpartner’sshare.

Asof1January2015thetaxpayershavealsoarighttooptforanewalternativethin-capitalizationcalculationmethod.Ifchosenbythetaxpayer,theabovementionedmethodappliestointerestpaidtobothrelatedandunrelatedparties.TherecognitionofsuchinterestfortaxislimitedtotheamountoftheNationalBankofPoland’sreferencerateplus1.25percentagepointandthetaxvalueofassetswithinthemeaningofAccountingAct(excludingintangibleassets).

Thevalueofinterestrecognizedbytheentitycannotbehigherthanthevaluecorrespondingto50%oftheprofitfromoperatingactivities(thisconditiondoesnotconcern,generallyspeaking,banksandfinancialinstitutions).

Interestnotdeductedinagiventaxyearcanbedeductedinthefollowingconsecutive5taxyears.Ifataxpayerdecidestousethismethoditshouldbeusedforatleast3taxyears.


Tobeentitledtoapplytheaboverules,taxpayersaregenerallyobligedtofilerelevantnotificationtothetaxauthoritiesnotlaterthantilltheendoffirstmonthoftheirnewtaxyear.

Foreign currency financing

AstheforeigncurrencyliabilitiesarereportedforaccountingpurposesinPLN,foreignexchangedifferences(gainsorlosses)accrueintheaccountingbooksofthePolishcompany.Foreignexchangedifferencesaccruealsoonloanliabilities

inPLNdenominatedinforeigncurrencies.Thesegainsorlossesarerecognizedfortaxpurposesonlywhenrealized,i.e.whentherelatedliabilityispaidorsetoff.However,auditedcompaniescanreportforeignexchangegainsorlossesinaccordancewithaccountingstandardsuponnotifyingthetaxauthorities,providedthatsuchreportinginaccordancewithaccountingstandardswillcontinueforaperiodofatleastthreetaxyears.


2.4.Acquisitionofrealestate–assetdealandsharedeal

2.4.1.Generalremarks

Asmanyotherjurisdictions,Polishlawprovidesdifferentmethodsofacquiringrealestatebyaninvestor,amongwhichanassetdealandasharedealarethetwomostcommonlyused.

Bothmethodsbearvariouslegalandtaxconsequenceswhichhavetobeconsideredinanygivencaseandthereforethereisnogenerallyacceptedrulewhenasharedealoranassetdealshallbeapplicable.Theinterestsofthesellerandthebuyer,theparticularsofthecaseandthepowerofeachpartytonegotiatehavetobeconsideredwhilechoosingoneofthesetwoforms.

Inpractice,ifasharetransactionisproperlystructured,thiscanbethemosttaxefficientdisposalmethodtouse.Inawell–organizedcorporatestructure,taxesoncapitalgainscanbeentirelyavoidedorinsomecasesdeferred.

Fromthebuyer’sperspective,itisusuallymoretaxefficienttobuythepropertydirectlythantobuysharesinacompanyholdingtheproperty.Thebuyercanthendepreciateasmuchastherealmarketvalueofthebuildingfortaxpurposes.Ontheotherhand,ifthesharesareboughtatahigherpricethanthebookvalueofthecompany’sassets,goodwillpaidinreturnforthesharescanberecognizedforaccountingpurposes.Unfortunately,suchgoodwillcannotbeamortizedfortaxpurposes.Furthermore,acompanyowningrealestatewithalowbookvaluehasadeferredtaxexposurewithrespecttoanyfuturecapital


gainsmadeonthedisposalofthatrealestate.Thus,thebuyerofshareswillmostlikelytrytonegotiateadiscountonthetransactionpricetoeliminatethisnegativetaxaspect.

Thepurposeofthischapteristooutlinethemainfeaturesofthesetwotypesofrealestatetransactionfrom

boththelegalandtaxperspectives,andtoexaminetheconsequencesofeachstructure.

2.4.2.Legalaspects

Definition of a share deal and asset deal

Despitethefactthatthesharedealandassetdealareequallypopular,theirobjectandmannerofconductingaredifferent.Thekeydifferencesbetweenthesetwomethodsofacquisitionconcerntheextensionandnatureofpurchaseditemsandarepresentedbelow.

• Asharedealisdefinedasatransactioninvolvingacquisitionofsharesinacompanyasaresultofwhichthebuyerpurchasesthewholeorapartofthesharesinthesharecapitalofthecompany(i.e.thetargetcompany).Thus,insuchtransaction,thepurchaserbecomestheownerofthesharesanddoesnotobtainanydirectrightstotheassets(i.e.forinstancerealestate)whichremainthepropertyofthetargetcompany.Sinceinthistransactionaninvestorpurchasessharesinthetargetcompany,italsoacquirestheriskrelated

totheliabilitiesofthiscompany(e.g.undisclosedliabilities,taxliabilities).Thus,anextensiveduediligenceofthetargetcompanyprecedingthepurchaseofsharesisrequiredandrecommendable.

• Anassetdealiswherethepurchaseracquiresallorsomeoftheassetsofthecompany.Unlikeasharedeal,inan asset deal it is possible to divide out certainelements,suchasrealestateandacquireonlythoseparts.Therefore,inanassetdeal,aninvestorpurchasesthepropertyitselfandattheendownstheassetsofthetargetcompanyonly.Sinceincaseofthistransactionitisnotnecessarytoexaminethetitletothecompany’ssharesorthecompany’scorporatestructure,theduediligenceprecedinganassetdealisgenerallyshorterandlessextensiveincomparisontotheduediligenceprecedingasharedeal.However,theassetsbeingacquired(suchasrealestate)mayrequireamoredetailedanalysis.

Oneofthemostsignificantdifferencesbetweenthesetwotypesoftransactionsistheguaranteeofthevalidityofthepurchasedtitle.PursuanttothePolishlaw,intheassetdealtheinvestor’sacquisitionofthelandfromatitle-holderwhoisregisteredintheLandandMortgageRegisterguaranteesthevalidityofthepurchasedtitle.Thisappliesonlywhenthepurchaseractedingoodfaith(i.e.onedoesnotactingoodfaithifknew,orshouldhaveknown,thatthelegalstatusofthepropertyisdifferentthantheoneresultingfrom


theregister).Suchaguaranteedoesnotapplytothepurchaseunderasharedeal,inwhichthevalidityofthecompany’stitletothepropertyissupportedbytheseller’srepresentationsandwarrantiesthatareincludedinthesharepurchaseagreement.

Representations and warranties

Inordertosecurethepurchaser’sinterestextensiverepresentations,warrantiesandrelatedindemnitiesshouldbeincludedinthesharepurchaseagreement.Thisisusuallyoneofthemostimportantpartsoftheagreementsubjecttoextensivenegotiations.ThescopeofwarrantiesandrepresentationsaswellasdetailedlegalconsequencesoftheirbreachhavetoberegulatedinthesaleagreementindetailsasPolishlawdoesnotprovideforaspecificlegalregulationofthisissue.

Pleasenotethatrepresentations,warrantiesandaccompanyingindemnitiesincludedintheassetsaleagreementareusuallylessextensivethaninasharepurchaseagreement.

• Inanassetdeal,theseller’srepresentationsandwarrantiesconcern,inparticular,thevalidityoftheseller’stitletotherealestate,theinformationregardingencumbrances(ifany),thestatementconfirmingthatthedevelopmenthasbeencarriedoutinaccordancewiththebindingprovisionsoflawandtechnicalplansandthatrelevantpermitsarevalid.

• Theseller’srepresentationsandwarrantiesinasharedealusuallyincludetherepresentationsand

warrantiestypicalforanassetdealregardingrealestate,butalsoextensiverepresentationsandwarrantiesrelatingtoallaspectsofthecompany’sactivity:inparticulartax,employment,accounting,corporateandcontractualmatters.

Itisrecommendedthatthesaleagreementprovidesforspecificinstrumentssupportingtheenforceabilityoftheindemnitiessecuringtherepresentationsandwarranties.Inmarketpractice,partofthepurchasepriceisretainedinanescrowaccountorabankguaranteeisobtainedfromtheseller.

Types of agreements

Thereisanumberofdocumentsrelatedtobothtransactions.Usually,inordertoclearlystatetheintentions,goalstoachieveduringnegotiationsandthekeyprinciplesofthetransaction,thepartiessignaletterofintentpriortosigningtherealestatepurchaseagreement.Suchletterisagoodsolutionforpartieswhointendtoconductmulti-stagenegotiationsandtothosewhowouldliketoagreeonminordetailsofthetransaction.Insuchacase,partiesmaydeterminethetimeframeofthenegotiationsandthemomentoftheircompletion,aswellasallissuesthathavetobediscussed.

PursuanttothePolishlaw,thelegaltitletothepurchasedpropertyorsharesofacompanyholdingtherealestateistransferredonthebasisofanagreementexecutedintherelevantform.


Incasewhencircumstancessurroundingthetransactionarestraightforward,suchagreementmaybeexecutedimmediately,withoutundertakinganyadditionalactions.However,insomecasespurchaseofarealestateorsharesmaybeeffectedbyexecutingtwoseparateagreements,i.e.apreliminaryagreementfollowedbyafinalagreement.Thetransactionstructuredintwoseparatestagesisespeciallyrelevantwhenthereisaneedtoobtainconsentsforthetransactionortofulfillcertainconditions.ThePartiesusuallyconcludesuchanagreementoncealetterofintenthasbeendrawnupandbeforethefinalpurchaseagreementhasbeenexecuted.Inordertobevalid,thepreliminaryagreementmustincludetheessentialcontentofthefinalagreement(i.e.thesubjectofthesaleandthepurchaseprice).Inpractice,thepreliminaryagreementregulatesallissuesrelatedtotherealpropertyorshares.

Pleasenotethat,ingeneral,pursuanttothePolishlaw,eachtransferofpropertyisregistered,asthemortgageregistersysteminPolandaimstohaveallpropertiesregistered.However,thefunctionofsuchobligationismerelyinformativeanddoesnotdeterminethetransferoftheownershiprightstothepurchasedproperty.Nevertheless,certainpropertyrights,suchastheperpetualusufructrightcanonlybetransferredifthereisanentryintheLandandMortgageRegistermade.Thus,theagreementisnotsufficienttotransfertheperpetualusufructrightandthedateoftheaboveentrydeterminesthedateofthetransfer.

Thetransferoftherealestatemustbeunconditionalwhichmeansthatbeforeittakesplace,allconditionsforeseenbyapreliminaryagreementneedtobefulfilledortheobligationtosatisfytheseconditionsneedstobedisclaimed.Inthatcase,theexecutionofanunconditionalagreementcompletesthetransaction.

Transfer of the property-related rights

Inmanytransactions,itisnecessarytoobtainvarioustypesofconsentsorpermitsregardingthetransferoftherightsrelatedtotheproperty,thelackofwhichmayaffectthelegaleffectoftheentiretransaction.

Inthesharedealthepurchaserdoesnotobtainanydirectrightstotheassetsastheseremainthepropertyofthetargetcompany.Consequently,theproperty-relatedrightsandobligations(suchasleases,propertymanagementagreements,warrantyclaimsunderconstructioncontractsandcontractsofinsurance,permits)remainwiththecorporateentityholdingtherealestateandnoformalassignmentisrequired.

Intheassetdeal,theproperty-relatedrightsandobligationsarenotautomaticallytransferredasaresultofthesaleagreement.Incaseofcontractsasfortheformalassignmentitis,ingeneral,necessarytoobtaintheconsentoftheotherpartyofeachcontract.Incaseoflicenses,decisionsetc.itshouldbeanalyzedcasebycasewhatactionshavetobeundertakeninordertotransferthemtothepurchaser.This


meansthattheabilitytoassigntheproperty-relatedrightsorassumingtheobligationsisexaminedindividually,inlightofspecificregulationsorcontractualprovisions,whichmaypreventorrestricttransferability.

Therefore,asharedealisatypeoftransactionusuallyconsideredbyinvestorswhenthetargetcompanyconductsregulatedactivityasallpermitsrequiredforitsoperationstayinthecompany.

Formalities

• Purchase Agreement content

PursuanttothePolishlaw,theassetpurchaseagreementandthesharepurchaseagreementshoulddescribeatleastsuchelementsastheobjectofthesaleandtheprice.Inpractice,theagreementsarecomplexandprovideforthefollowingmaininformation:

a) thedetaileddescriptionofthepropertyorthesharesthataresubjectofthetransaction(thesaleobject);

b) thepriceandmechanismofpayment(includingdownpaymentifany,aswellasthepriceadjustmentmechanism);

c) securityinstruments(tobedeterminedbytheparties,e.g.amortgageovertheproperty,aregisteredpledgeovertheshares,thebankguarantee);

d) representations,warrantiesandindemnities;

e) othermatterssuchasincaseofanassetdealthetransferofrightsandobligationsrelatedtotherealestate,themethodofresolvingadisputeetc.

• Other requirements

Therequirementsregardingform,languageandgoverninglawoftheagreementdependonwhetherwedealwithanassetorasharedealtransaction.

Theformofanotarialdeedisrequiredfortheexecutionofarealestatepurchaseagreement,whilesuchrequirementisnotnecessaryfortheexecutionofthesharepurchaseagreement.Thesharepurchaseagreementrequiresthenotarialcertificationofthesignaturesoftheparties.

Consideringtheabove,sincetherealestatepurchaseagreementmustbeexecutedinaformofanotarialdeed,itmustbealsoconcludedinPolish.Bycontrast,inasharedealapurchaseagreementdoesnotrequiretheformofanotarialdeedbutjustnotarialcertificationofsignaturesand,therefore,itcanbeexecutedinaforeignlanguage.However,thePolishcommercialregistrycourtthatwillregisterthetransferofsharesmayrequestasworntranslationofsuchagreement.

TherealestatepurchaseagreementcanbegovernedbyPolishlawonly.Suchrequirementdoesnotapplytothesharepurchaseagreementwhichcanbegovernedbyaforeign


law(providedthatconclusionoftheagreementisconnectedwiththelawofatleasttwodifferentcountries).

• Costs

Propertypurchaseagreementrequiresthenotarialdeedform,whichissubjecttoanotarialfee,depending on the value of the transaction,butnotexceedingPLN10,000foreachagreement.ThefeeforthecertificationofsignaturesismuchloweranddoesnotexceedtheamountofPLN300forcertificationofeachsignature.

Merger control

Duediligencereviewprecedinganyassetorsharedealshouldanswerthequestionwhetherthelegislationgoverningmergercontrolwillbeapplicable,inparticular,whetheranotificationofthetransactiontotheOfficeofCompetitionandConsumerProtectionisrequired.Shouldsuchnotificationberequired,theclosingofthetransactionmustbesuspendeduntilthepermitoftheOfficeofCompetitionandConsumerProtectionis issued.

AnotificationontheplannedtransactiontotheOfficeofCompetitionandConsumerProtectionisrequiredifanyofthefollowingconditionsismet:

• thecombinedworldwideturnoverofundertakingsparticipatingintheconcentrationinthefinancialyearprecedingtheyearofthenotificationexceedstheequivalentofEUR1billion,or

• thecombinedturnoverofundertakingsparticipatingintheconcentrationintheterritoryofPolandinthefinancialyearprecedingtheyearofthenotificationexceedstheequivalentofEUR50million.

However,thePolishantitrustlawprovidesforcertainexceptionsfromtheobligationofnotificationeveniftheaboveconditionsaremet,inparticular,whentheturnoveroftheundertakingoverwhichthecontrolistobetakendidnotexceedintheterritoryofPolandinanyofthetwofinancialyearsprecedingthenotification,theequivalentofEUR10million;theconcentrationarisesasaneffectofinsolvencyproceedings,excludingthecaseswherethecontrolistobetakenoverbyacompetitororaparticipantofthecapitalgrouptowhichthecompetitorsoftheto-be-takenundertakingbelong;theconcentrationappliestoundertakingsparticipatinginthesamecapitalgroup.

The pre-emption rights

Itmayhappenthatthepublicauthoritieshaveastatutorypreemptiverighttorealestatewhichisabouttobesold.Therightofpre-emptionisarighttoacquirethepropertybeforeitcanbepurchasedbyanyotherpersonorentity.Wheretherealestateissubjecttoarightofpre-emption,itmayonlybesoldtoathirdpartyundertheconditionthatthebeneficiaryofthatrightdoesnotexerciseit.Ifsuchapropertyissoldwithoutobservingthisright,thesaleisconsideredtobenullandvoid.


Thenotaryexecutingtheconditionalagreementwillsendacopyofittothelocalauthority,whichmaythenexerciseitspreemptiverightwithinonemonthofreceivingtheconditionalagreement.Ifthepublicauthoritydoesnotexerciseitspreemptiverightwithinthatperiod,thepartiescanconcludethefinalagreement,whicheffectstheunconditionaltransferofthetitletotherealestate.

Acquisition of real estate by foreigners

ForeignersfromtheEuropeanEconomicAreaorSwitzerlandmayquitefreelyacquirerealestateinPoland.TheyarerequiredtoobtainaspecialpermitoftheMinisterofInternalAffairsonlyiftheywishtoacquireagriculturalandforestlandduringtheperiodof12yearsfromPoland’saccessiontotheEuropeanUnion(i.e.upto1May2016).Inconsequence,obtainingapermitisnotnecessaryinthecaseofacquiringotherrealestateinPolandandacquiringortakingupsharesincompaniesthatareownersorperpetualusufructuariesofrealestatelocatedinPolandeveniftherealestateisagriculturalorforestryland.

Asfarasotherforeignersareconcerned,ingeneraltheacquisitionoftherightofownershiptorealestateortherightofperpetualusufructonthebasisofanylegaleventbysuchentitiesrequiresapermitoftheMinisterofInternalAffairs.Apermitisissueduponthewrittenrequestprovidedthat:

• aforeigner’sacquisitionofrealestatedoesnotposeathreattotheState’s

defense,nationalsecurity,publicorderandisnotcontrarytothesocialpolicyandpublichealthconsiderations;

• theforeignerprovesthattherearecircumstancesconfirminghisbondswithPoland(i.e.forexamplethebuyerhasPolishoriginsorisconductingbusinessoragriculturalactivitiesintheterritoryofPolandunderthePolishlaw).

TheMinister’sdecisionconcerningrealestateacquisitionshouldbeissuedwithinonemonth(twomonthsinparticularlydifficultcases).Thepermitisvalidfortwoyearsfromthedayofissuance.

Theacquisitionofrealestatewithoutapermitisinvalid.AforeignerintendingtoacquirerealestateinPolandmayapplyforapromiseofthepermit.Thepromiseofthepermitisvalidforoneyear.Duringthisperiodapermitcannotberefusedunlesstheactualcircumstancespertinenttothedecisionhavechanged.

Acquisition of real estate from public entities

InPoland,realestateisoftenacquiredfromtheStateorlocalauthorities.Suchtypeofacquisitionisconsideredtobesafeandanattractivealternativetoacquisitionofrealestatefromprivateowners.Nevertheless,inpractice,acquisitionofrealestatefrompublicentitiesissubjecttoadditionalspecificrequirementssuchasanobligationtodisposethelandviapublictenders.

AninvestorinterestedinacquiringrealestatefromtheStateorlocalauthorities


shouldasktheauthoritiesforinformationonthecontemplatedpropertytobeacquired.Unfortunately,itisnotpossibletopurchasesuchrealestateonthespot,asthereisaspecialprocedureofsellingrealestateheldinpublicentities’possession.Withonlyafewexceptionsprovidedbythelaw(e.g.realestatebeingsoldtoitsperpetualusufructuary),realestateheldbytheStateorlocalauthoritiesmaybedisposedbywayofpublictender,afteralengthyprocedureiscompleted.


Asmentionedabove,realestatecanbesoldeitherthroughadirectsaleoftheproperty(anassetdeal)orindirectlythroughasaleofthesharesinthecompanyowningtheproperty(asharedeal).ThesetwotypesoftransactionsareaffordeddifferenttreatmentbythePolishtaxregulations.

Asset deal

TherevenuesgeneratedonthesaleofrealestatearesubjecttothestandardtaxationrulesofPolishcorporateincometax.Taxablerevenuesarereducedbythenetbookvalueoftheproperty.Effectively,onlythe“capitalgain”istaxedattherateof19%.Therevenuefromthesaleofrealestatemustbevaluedatthepricesetinthesalecontract.However,ifthepricedifferssubstantiallyandwithoutgoodreasonfromthemarketvalueoftherealestate,therevenuemaybeassessedbythetaxauthoritiesaccording

tothemarketvalue.Thistransactionpriceadjustmentmaybeappliedtotransactionsbetweenrelatedandunrelatedentities.Adjustmentstriggernotonlyahighertaxburdenbutalsopenaltyinterest.

ThePolishtaxsystemdoesnotincludeareplacementprovision.Therefore,thecorporatesellercannotdefertaxationofacapitalgain.

Costsincurredbythebuyerfortheacquisitionofrealestate:purchaseprice,transactioncostsincludingadvisory,civillawtransactiontax–ifapplicable,financialcostsaccruedtillthepurchase,etc.,formtheinitialvalueoftherealestateandarerecognizedastaxdeductiblecoststhroughdepreciationwrite-offsoruponsale.Asthevalueofthelandisnotsubjecttodepreciation,itisthenimportanttodeterminethevalueofthelandandthevalueofanybuildingseparately.

Starting1January2013taxdeductiblecostshavetobeadjustediftherelatedliabilityisnotsettledwithinthespecifieddeadlines.Effectivelythecostrecognitionisdeferreduntilthesettlementdate.Thisrulealsolimitstaxdeductibilityofdepreciationwriteoffs.

VAT on the acquisition of real estate

Thesupplyofbuildings,infrastructure,orpartsofbuildingsorinfrastructureisgenerallyVATexempt,exceptfor:

• thesupplyofabuilding,infrastructureorpartofabuildingorinfrastructurein


thecourseofitsfirstoccupationorpriortoit;and

• thesupplyofabuilding,infrastructureorpartofabuildingorinfrastructuremadewithintwoyearsofthefirstoccupation;

inwhichcasesthesupplyofbuildings,infrastructureorpartsofbuildingsorinfrastructurearegenerallysubjecttoVAT.

“Firstoccupation”meanshandingoverabuilding,infrastructureorpartofabuildingorinfrastructurewithinthecontextoftheperformanceofVAT-ableactivities(subjecttoVATorVATexempt)tothefirstacquireroruser,afterthe:

• initialcompletion;or

• improvement(iftheexpensesincurredfortheimprovementconstitutedatleast30%oftheinitialvalue)

ofthatbuilding,infrastructureorpartofabuildingorinfrastructure.

TaxpayersmaychoosenottoapplytheexemptionandchargeVATif:

• bothbuyerandsellerareVATregistered;and

• beforethedayofsupplytheysubmittheappropriatejointstatementtothetaxofficeofthepurchaser.

Thesupplyofbuildings,infrastructureorpartsofbuildingsorinfrastructurewhichshouldbesubjecttoVAT(i.e.supplyinthecourseoffirstoccupationorwithintwoyearsofthefirstoccupation)mustbeVATexempt(nooptiontotaxallowed)if:

• thesellerwasnotentitledtodeductinputVAT;and

• thesellerdidnotincurimprovementexpensesonwhichhehadrighttodeductVAT,orsuchexpensesdidnotexceed30%oftheinitialvalueofthebuilding,infrastructureorpartofabuildingorinfrastructure(unlesstheimprovedrealestatewasusedfortaxableactivitiesfornolessthan5years).

ThediagrambelowoutlinesVATrulesonthetaxationofthesupplyofbuildings,infrastructureorpartsofbuildingsorinfrastructure.

TAXATION

YES

YES

NO

NO

NO

Did the supplier have the right to deduct input VAT in relation to the building, infrastructure or part of a buildingor infrastructure?

Did the supplier incur improvement expenses higher than 30% of the initial value of the building, infrastructure or part of a building or infrastructure?

EXEMPTION

Did the supplier have the right to deduct the input VAT in relation to the improvement expenses?

EXEMPTION

EXEMPTION

Had the improved building, infrastructure or part of a building or infrastructure been used to execute taxable activities for at least 5 years?

TAXATION

Did a period shorter than two years elapse between the point of first occupationand the supply of the building, infrastructure or part of a building or infrastructure?

Is the supply of the building, infrastructure or part of a building or infrastructure being carried out in the course of the first occupation or prior to it?

EXEMPTIONWITH AN OPTION OF TAXATION

NO

YES

NO

NO

YES

YESYES

Generally,theVATtreatmentofownershiptitletolandoraperpetualusufruct(RPU)overlandfollowstheVAT


treatmentofthebuildingsdevelopedonthe land.

AnexceptiontotheaboveruleiswhenanRPUisacquiredforthefirsttimefromtheStateorlocalauthority,inwhichcase,theRPUisalwayssubjectto23%VAT,eventhough the buildings developed on the land maybeexemptfromVAT.

Thesupplyofownershiptitle/RPUtoundevelopedlandqualifiedaslandfordevelopmentpurposesissubjectto23%VAT(supplyofagriculturallandisasaruleexemptfromVAT).

IfsubjecttoVAT,thesupplyofrealestateissubjectto23%VAT.However,thesupplyofresidentialbuildingsandseparateapartmentsissubjecttoareduced8%VAT,exceptforpartofresidentialbuildingswhoseusablefloorspaceexceeds300m2 andapartmentswhoseusablefloorspaceexceeds150m2.Insuchacaseonlythepartofresidentialbuildingand/orapartmentwhichfitswithintheabovelimitsbenefitsfromthe8%VATrate,whereasthepartexceedingthethresholdsissubjecttoastandard23%VATrate.Dependingonthelegalcaseunderlyingthetransaction,saleofaparkingspacesoldjointlywiththeapartmentbutconstitutingaseparatelegalproperty,canbesubjecttoastandard23%VAT.

Starting1January2014,asarule,VATtaxpointarisesinthemonthofdeliveryofgoodsorrenderingtheservicestothepurchaser.Theinvoiceshouldbeissuedbythesellernolaterthanuntilthe15thdayofthemonthfollowingthemonthinwhichthegoodsweredeliveredortheserviceswererendered.

IfthesupplyofrealestateisVATexempt,itissubjecttocivillawtransactiontaxpayablebythebuyer.Theapplicablerateis2%ofthemarketvalueoftherealestate.

IfthebusinessofthePolishcompanyorpartofitsbusinessissoldasagoingconcern,thetransactionfallsoutsidethescopeofVAT.Theassetsofthebusinessorpartthereofwillbesubjecttocivillawtransactiontaxpayablebythebuyerattherateappropriateforaparticularitem(2%forland,buildingsandothertangibleproperty,1%forintangibles,includinganygoodwillthatwouldcrystallizeonsuchtransfer).Civillawtransactiontaxconstitutesanadditionalcostofthetransactionandisnon-recoverable.

Recoverability of input VAT

InputVATisrecoverableifthecompanyperformsorintendstoperformactivitiesinthefuturewhicharesubjecttoVAT(e.g.leaseofthecommercialrealestate).InputVATwillnotberecoverableifthecompanyperformsorintendstoperformactivitiesinthefuturewhichareVATexempt.Ifthisisthecase,theinputVATwillincreasetheinitialtaxbasisoftherealestate.

Forexample,certainfinancialactivitiesperformedbybanks,financialinstitutionsandinsurancecompaniesareexemptfromVAT:theseinstitutionshaveno(orlimited)outputVATandthereforetheyarenotentitledtorefundsoranyotherkindofrecoveryofinputVATincurredinthecourseoftheirVATexemptfinancialactivities(incertaincasestheremaybealimitedrecoveryavailable).


Ifbusinessactivitiesarepartlyexempt,therecoveryofanyinputVATwhichcannotbematcheddirectlyeithertoVAT-ablesalesorVATexemptsalesshouldbeeffectedinlinewiththeproportionofthenetvalueofthetaxedsuppliestothetotalvalueofallsupplies(asocalledproratarecovery).Duringacalendaryear,theproportioniscalculatedbasedonthevolumeofsuppliesmadeinthepreviousyear.Attheyearend,theamountofdeductionsisadjustedtotheactualpercentagecalculatedforthewholeyear.Inthecaseoftangibleorintangibleassetssubjecttodepreciationfortaxcalculationpurposes,thepercentageofinputVATwhichmaybedeductedissubjecttoadjustmentsovertheperiodof5oreven10years(inthecaseofrealestate).

CalculationofthepercentageofinputVATtobedeductedisnecessaryonlyifitisnotpossibletomatchinputVATwithtaxedactivitiesorexemptactivitiesdirectly.

Starting1January2013therecoveredinputVAThastobeadjustediftheliabilityresultingfromtheinvoicedocumentingtheexpenseincurredisnotsettledwithinthespecifieddeadlines(asarule150days).Additionalsanctionsmayapplyifnoadjustmentismade(i.e.additionaltaxliabilityupto30%oftaxresultingfromthenotsettledinvoices,whichhasnotbeenaccordinglyadjusted).

Date of input VAT recovery

TherighttorecoverinputVATarisesintheperiodwhen–withrespecttotheacquiredgoodsorservices–thetax

pointarose(i.e.inthemonthinwhichtheserviceswererenderedto,orthegoodswereacquiredbythepurchaser).Itcannotbe,however,recoveredearlierthanintheperiodinwhichthetaxpayerreceivestherespectiveinvoice(prepaymentinvoicesdonotfallunderthisrule:theymustbepaidinorderforinputVATtobereclaimable).

Direct refund of input VAT

AdirectrefundofanysurplusinputVATincurredshouldbemadewithin60daysofthesubmissionoftheapplicationfortherefund(theVATreturn)onconditionthatthetaxpayerperformedVAT-ablesupplyintheperiodforwhichtherefundisclaimed.

Pleasenotethatthisdeadlinecanbeshortenedto25daysatataxpayer’srequestiftheinputVATtoberefundedresultedfrominvoicesthathavebeenpaid in full.

ItispossibletogetarefundofinputVATevenifVAT-ablesuppliesarenotmadeintheperiodforwhichtherefundisclaimed.However,insuchcasetheperiodfortherefundisextendedto180days,unlessaformofsecurity,e.g.abankguaranteeisprovided(inwhichcasetherefundmustbemadewithin60days).

Share deal

AcapitalgainonthesaleofsharesissubjecttoPolishcorporateincometaxatthestandardrateof19%.

Ifthesellingpartyisaforeignshareholder,theapplicabletaxtreaty


influencesthetaximplicationsofsuchatransaction.UndermosttaxtreatiesconcludedbyPolandtherighttoimposetaxesonthesaleofsharesincorporateentitiesisallocatedtothecountrywheretheshareholderisataxresident.InsuchcasesPolishincometaxrulesarenotapplicableandthefiscalrulesofthecountryinwhichtheshareholderisataxresidentgovernthetransaction.Insomecountriescapitalgainsonsharesareexemptfromtaxation.Therationalebehindthisexemptionisthatthetaxationofcapitalgainsonsharesconstitutesdoubletaxation:theprofitwithinthecompanyistaxedusingthenormalincometaxrateand,therefore,theprofitonthesharetransactionshouldnotbetaxedagain.IninternationaltaxationterminologythisexemptionisknownastheParticipationExemption.SomecountrieslimitthisParticipationExemptiontocapitalgainsonsharetransactionsinvolvingdomesticsharesonly.OthercountriesenabletheParticipationExemptiontobeapplicabletotransactionsinvolvingthesharesofforeigncompaniesaswell.

SignificantpartofPolishtaxtreaties(e.g.withSpain,France,Denmark,Sweden,Germanyand–followingrecentchangesofPolishtaxtreaties-alsoLuxembourgthatusedtobeapreferredjurisdictionforholdingstructures)providethatasaleofsharesinacompanyholdingmainlyrealestateassetsshouldberegardedasasaleofrealestate.Consequently,incomeearnedonthesaleofsharesinthePolishcompanywillbetaxedinPoland.

ThesaleofsharesinthePolishcompanyissubjecttoa1%civillawtransactiontax

(onthemarketvalueofshares)payablebythebuyer.Thisisirrespectiveofwherethetransactiontakesplaceorwherethepartiestothetransactionareresidentfortaxpurposes.AsharetransactionisnotsubjecttoPolishVAT.However,whereasharetransactionistreatedasbeingmadeinthecourseofbusinessactivity(ratherthanasaone–offtransaction),itmaybeclassifiedasaVATexemptfinancialservice.However,itwillstillbesubjecttocivillawtransactiontax.

Costswhichmustbeincurredinordertoacquireshares(e.g.purchasepriceandnotarypublicfees)mayberecognizedastaxdeductiblecostsuponthesaleofshares.

Othercostsindirectlyconnectedwithacquisitionofsharessuchasfinancingcostsmayberecognizedastaxdeductiblecostswhenincurred(incertaincasesrecognitionovertimemayoccur).

Cross-border structure

Typically,foreigninvestmentsarestructuredinsuchawaythattheoverallleveloftaxationofthefinancing,exploitation,andpotentialcapitalgainiskeptaslowaspossible,seekingtoavoiddoubletaxation.Internationaltaxplanningshoulddeterminethefinalstructureoftheinvestment.Commonly,astructureinvolvingmorethantwojurisdictionsisusedtooptimizetheoveralltaxposition.ThetaxtreatmentofalltherelevantlegaltransactionsinvolvedinaPolishrealestateprojectdiffersaccordingtotheotherjurisdiction(s)involved.Thetaxtreatiesconcludedby


Polandshouldpreventdoubletaxation.Investigatingthetaxtreatiesandtheapplicablerulesinthedifferentrelevantjurisdictionswillhelptodeterminewhatstructure,giventhespecificcircumstances,shouldbearranged.Therefore,itisfairtosaythatthereisnotypicalcross–borderinvestmentstructure,andthateachinvestmentprojectisunique.

Nevertheless,thefollowingpointsshouldbeconsideredwhendesigningthemostefficientstructure:

• interestpayableinrespectofanydebtfinancingoftheinvestmentshouldbefullytaxdeductible;

• interestincomeshouldbereportedastaxableincomeinajurisdictionwitharelativelymodesttaxrate;

• theexploitationandoperationalcostsoftherealestateshouldbetaxdeductibletothelargestextentpossible;

• profitsfromtheexploitationofrealestateshouldbetaxedatthelowestratepossible;

• after–taxprofitsshouldbeeasilydistributed;

• Polishwithholdingtaxshouldbereducedasmuchaspossible;

• revenuesfromthefuturesaleofrealestateorthesharesofacompanyshouldbetaxedatthelowestratepossibleorshouldbeexemptfromtaxation;

• allstrategiesforthepostponementofthetaxpaymentdateshouldbeexplored.

Addressingthesepointswillhelptodesignandimplementatailor–madestructure.

Additionally,bearinginmindthegeneralantiavoidanceregulationthatisconsideredtobeintroducedtothePolishtaxregulationsandintroducedasof1January2015CFC(“ControlledForeignCompany”)rules,thecrossborderinvestmentsshouldbeeachtimecarefullyexaminedandproperlystructuredalsofromthebusinessperspectivetoensuretheireffectivenessfromthetaxpointofview.

CFC Rules

ThenewCITregulationsregardingCFCdefinesCFCas:

1. aforeigncompanyseatedinataxheaven(asofficiallyblacklistedbythePolishMinistryofFinance)or

2. aforeigncompanyhavingitsseatorplaceofmanagementinthecountryotherthanmentionedinpoint1),withwhich:

a) Polandhasnotconcludedaninternationalagreement,inparticulardoubletaxtreaty,or

b) EUhasnotconcludedaninternationalagreement

• beingabasisforrequestingtaxinformationfromtaxauthoritiesofthatcountry,or


3. aforeigncompanywhichjointlyfulfillsthefollowingconditions:

a) thePolishtaxpayerhasadirectorindirectshareholding(foranuninterruptedperiodofatleast30days)ofatleast25%sharesor25%votingrightsora25%stakeinprofitsoftheCFC;

b) atleast50%ofannualrevenuesoftheCFCconsistofapassiveincome,i.e.:

• dividendsandotherincomefromsharingprofitsoflegalpersons

• disposalofshares,receivables

• interestorbenefitsfromalltypesofloans,securitiesorguarantees

• copyrightsorintellectualpropertyrights–includingdisposalofthoserights

• disposalorexerciseofrightsfromderivatives;

c) atleastoneofthesourcesofpassiveincome(listedinpointb)isnotsubjecttotax,istaxexemptorissubjecttotaxatalowerratebyatleast25%thanthePolishstatutoryCITrate(now19%)intheCFCscountryofresidence(unlessthetaxexemptionresultsfromoftheParentSubsidiaryDirective).

CFCprovisionsshouldnotapplyinthecasewhere:

• theCFC,whichissubjecttotaxationonitstotalincomeinoneoftheEU/EEAMemberStates,carriesoutactualbusinessoperationsinthisstate,or

• theCFCrevenuesinataxyeararebelowEUR250000;or

• theCFCcarriesoutactualbusinessoperationsoutsideoftheEUorEEAMemberStatesinwhichitissubjecttotaxonitstotalincomeanditsnetincomedoesnotexceed10%ofrevenuesearnedfromtheactualbusinessoperationsinthisstate–subjecttotheconditionthatthereisalegalbasisresultingfromtheagreementbetweenPolandorEUandarespectivestate,basedonwhichthePolishtaxauthoritiesmayrequestinformationfromthetaxauthoritiesofthatparticularstate.

ThePolishcompaniesareobligedtoholdregistersoftheCFCcompanies

Step-up of initial tax basis of assets

Polishtaxregulationsinsomecasesmayprovidetheopportunitytoincreasetheinitialtaxbasisofassets,whichprovidesataxshield(byincreasingtheabilitytomaketaxdepreciationwrite-offsandtominimizetaxablecapitalgainsuponsale).Carefultaxanalysisisalwaysrequiredbeforecarryingoutsuchtransaction.


2.5.Developmentandconstruction

2.5.1 Legalaspects

2.5.1.1 Landdevelopmentissues

Landdevelopmentissuesareimportantforrealestateinvestors,astheydeterminethepossiblemethodofinvestinginagivenarea.Regulationsonlanddevelopmentmayinfluencetheshapeoftheplannedbuilding,butsometimestheyalsopreventtheinvestorfromtheinvestment.

Legal background

LanddevelopmentissuesrepresentoneofthemaindifficultiesintherealestateinvestmentprocessinPoland.AsaresultoftheintroductionoftheZoningActof27March2003(hereinafterreferredtoastheZoningAct),allzoningmasterplansadoptedbefore1January1995expiredasof1January2004.Forthisreason,aswellasduetothecomplexprocedureforadoptingazoningmasterplan,currentlyonlyapartoftheterritoryofPolandiscoveredwithzoningmasterplans,mostlywithintheboundariesofbiggercities.

TheZoningActsetsouttheprinciplesforthelanddevelopmentprocess.Inparticular,itgrantsauthorizationtotherelevantlocalauthoritiestodevelopandmanagespatialpolicy.TheZoningActalsosetsforththeprocedureunderwhichzoningactsaretobeadoptedbytheseauthorities.Thetwomainzoningactsdetermininglanddevelopmentwithinagivenmunicipality(commune)arethezoningstudyandthezoningmasterplan.However,frominvestors’perspective,thezoningmasterplan


isofhigherimportance,asitdeterminestheirrightsandobligations,whilethezoningstudybindsthelocalauthoritiesonly.Inthecasewherenozoningmasterplanhasbeenadoptedforagivenarea,theinvestormayapplyforadecisiononlanddevelopmentandmanagementconditions(hereinafterreferredtoasthezoningdecision).Whereabuildingpermitisrequiredforaninvestment,eitherazoningmasterplanorazoningdecisionarerequiredtostartthedevelopmentoftherealproperty,since,asarule,nobuildingpermitmaybeissuedwithoutthem.

Therefore,beforebuyingtherealproperty,itiscrucialforinvestorstoverify:

• whethertherealpropertyinquestioniscoveredbyazoningmasterplan(orwhethersuchaplanwillbeadoptedsoon);

• intheeventthereisnozoningmasterplan,whetherazoningdecisionhasbeenissuedfortherealpropertyinquestion;and

• whethertheprovisionsofthezoningmasterplanorzoningdecisionallowfortheimplementationoftheirinvestmentplans.

Zoning study

Azoningstudyisaninternaldocumentissuedbyeachmunicipality(commune),whichcoversthewholeterritoryoftherelevantcommune.Azoningstudyprovidesthebackground/guidelinesfordraftingazoningmasterplan.Asaninternaldocument,azoningstudydoes

notbindinvestorsbutonlythelocalauthoritieswhichdesignandadoptzoningmasterplans.Zoningmasterplansmaynotbecontrarytotheassumptionsofazoningstudy.Therefore,zoningstudiesmaybeagoodsourceofinformationfortheinvestoronthefuturedirectionsofagivenarea’sdevelopment.

Zoning master plan

Thezoningmasterplanisadoptedbythecommunecouncilandisbindingforthirdparties(investors)asanactoflocallaw.Eachzoningmasterplandeterminesthemannerofdevelopmentoftheterritorycoveredbythatplan.Inparticular,itdeterminesthedesignationofplots(landuse–agricultural,forest,buildingpurposes,etc.),developmentconditionsandtypesoffacilitieswhichcanbelocatedontheplots.Theprocedureforadoptingazoningmasterplanisrathercomplexandtimeconsumingasthedraftzoningmasterplanissubjectto“publicconsultation”withthepartiesconcernedaswellasopinionsissuedbytherelevantadministrativebodies.

Theprovisionsofthezoningmasterplanarecrucialforinvestors,astheplanneddevelopmentoftheplotscoveredbysuchaplanmustcomplywithitsprovisions,inparticular,regardingthedistanceofabuildingfromtheplot’sborderortheheightofabuilding.Sometimestheprovisionsofazoningmasterplanmayrenderthedevelopmentofthegivenplotimpossible.Moreover,althoughstilldisputableinthelegaldoctrine,theprevailingviewisthatlargeretailunits


withasurfaceexceeding2,000m2canonlybeconstructedifazoningmasterplanprovidingforretaildevelopmenthasbeenadoptedforagivenarea.

Therefore,tobeabletoimplementtheirinvestmentplans,sometimesinvestorsstartaprocedureofamendingthezoningmasterplan,whichmayprovetoberathertimeconsuming.

Zoning decision

Inthecasewherenozoningmasterplanhasbeenadoptedforthegivenarea,aninvestormayapplyforazoningdecision,whichsetsoutalltherequiredconditionsforthedevelopmentofthatarea.Beforethebuildingprocessisstartedonthegivenplotunderabuildingpermit,theplotmustbecoveredeitherbyazoningmasterplanorbyazoningdecision(therefore,itcanbesaidthatazoningdecisionsubstitutesazoningmasterplanforaninvestor).

Azoningdecisionisissuedbythegoverningauthorityofthecommune.Theprocedureforissuingzoningdecisionsincludesperformanceofazoninganalysisbythelocalauthority’sarchitecturedepartmentanditmay,therefore,takeevenuptoseveralmonths.

Ifazoningmasterplanisbeingadoptedforarealproperty,zoningdecisionsrelatedtothisareaexpireiftheprovisionsofthezoningmasterplandifferfromthoseofthezoningdecision.However,thisshallnothappenifafinalbuildingpermithasalreadybeenissuedfortherealpropertyinquestion.Therefore,in

thecasewherethereisnozoningmasterplanforagivenrealproperty,priortoinvestmentplanningtheinvestorshouldmonitorthestageofworksrelatedtothezoningmasterplanandshouldlearnifitispossibletoacquireafinalbuildingpermitbeforethezoningmasterplanisadopted.

Anapplicationforazoningdecisionmaybefiledwiththerelevantauthorityevenwhentheapplicantdoesnotholdanytitletothelandinquestion.Azoningdecisionmaybetransferredtothirdparties.

Thismeansthatinvestorsmayuseadecisionissuedforthesellerofarealproperty,astheydonothavetoapplyforthedecisiononceagainafteracquiringtherealproperty(theinvestoronlyappliesforthetransferofsuchadecisiontohimself).Investorsmayalsoapplythemselvesforsuchadecisionbeforedecidingontheinvestment.

Building permit

Abuildingpermitisanadministrativedecisionissuedbyalocalauthority(starostaormayorinbiggercities)whichallowsaninvestortostartthedevelopmentprocessonthesite.

Thedocumentsattachedbytheinvestortotheapplicationforabuildingpermitshouldinclude,inparticular,adeclarationofhavinglegaltitletousetherealpropertyforconstructionpurposes.Moreover,theapplicationmustalsoencloseapprovalsofthelocalauthoritiesresponsibleforlocalinfrastructure,inparticularutilities,roads,environmental


protectionandsewagetreatment.Thebuildingpermitwillonlybegrantediftheconstructiondesignisconsistentwiththeassumptionsofthezoningmasterplanorzoningdecisionaswellaswiththeregulationsgoverningtechnicalconditionsforthedevelopment.

Asageneralrule,abuildingpermitexpireseitherifconstructionworkshavenotbeenstartedwithinthreeyearsofthedateonwhichthepermitbecamefinalorifconstructionworkshavebeendiscontinuedformorethanthreeyears.

Notallconstructionworksrequireabuildingpermit.ConstructionofcertainstructureswhicharelistedintheBuildingLawof7July1994(hereinafterreferredtoastheBuildingLaw)maybecommenceduponanotificationsenttotherelevantauthoritiesifnoobjectionshavebeenraisedbythemwithin30daysofthenotificationdate.

Usage of the building

Dependingontheindividualcase,theuseofabuildingorstructureafteritscompletionrequireseithernotifyingtheconstructionsupervisoryauthoritiesthatconstructionworkshavebeencompletedoracquiringapermitforuse.

Inthecasewhereonlyanotificationisrequired,underthegeneralruletheinvestormayoccupyandusethebuildingorstructureifnoobjectionhasbeenraisedbytheauthoritieswithin21daysofthedateofnotification.

Incaseswhereapermitforuseisrequired,thebuildingmaybeoccupied

onlyafterthedecisiongrantingthepermitforusebecomesfinal.Thegrantingofapermitforuseisprecededbyatechnicalinspectionofthebuildingorstructuretoconfirmthatallconstructionworkshavebeenperformedincompliancewiththetermsandconditionsofthebuildingpermitaswellastechnicalrequirements.

Occupyingabuildinginbreachoftheabove-mentionedregulationsmayresultinafine.

Environmental issues

Thebuildingprocesshasmanyenvironmentalaspectsthatmustbetakenintoaccount.ThePolishlawprovidesthatanenvironmentaldecisionmustbeobtainedpriortoobtainingazoningdecisionandabuildingpermitforthegivenproject.PursuanttothePolishlaw,fromtheenvironmentallawpointofview,theinvestmentsaredividedintotwogroups:

• projectsthatalwayshavesignificantimpactontheenvironment;

• projectsthatmayhavesignificantimpactontheenvironment.

Environmentaldecisionmustbeprecededbytheenvironmentalimpactassessmentproceeding(whichincludespreparationofenvironmentalimpactassessmentreport)incaseofprojectsthatalwayshavesignificantimpactontheenvironment(i.a.parkinglots,buildingsofaparticularsizeetc.).However,theenvironmentalimpactassessmentproceedingmaybealsoorderedbytheauthorityissuing


theenvironmentaldecisioninrelationtoprojectsthatmayhavesignificantimpactontheenvironment.

Despiteofthefactthatenvironmentalimpactassessmentiscarriedoutatthestageofissuingtheenvironmentaldecision,itmayalsoberepeated(incertaincircumstances)atthestageofissuingabuildingpermit.

Environmentalimpactassessmentisalegalinstrumentthatallowstodeterminetheeffectoftheplannedinvestmentontheenvironment(i.e.water,landandairqualityaswellasimpactonfloraandfauna).Environmentalimpactassessmentproceeding,beyondtheidentificationofspecificimpactsthattheproposedprojectmayhaveontheenvironment,concentratesonthewaystopreventandminimizetheeffectsoftheplannedproject.

PursuanttothePolishlaw,authoritiesmustinformthegeneralpublicabouttheenvironmentalimpactassessmentproceedingandallowthegeneralpublictosubmitcommentsandrecommendationstotheproceeding.

Moreover,Polishlawincertaincircumstancesallowsabroadaccesstotheenvironmentalimpactassessmentproceedingtonon-governmentalenvironmentalprotectionorganizations.

Environmentaldecisionmaybetransferred(aswellasthebuildingpermitissuedonthebasisofazoningdecision).

Energy efficiency

Inimplementingtheirpro-environmentalpolicy,EUmemberstateshavedecidedtoadoptlegislationthemainpurposeofwhichistolimitemissionofgreenhousegasesbyincreasingenergyusageefficiency.Asaresult,anumberofregulationsregardingenergyefficiencyhavebeenintroducedintothePolishlaw,interaliabyestablishingenergyperformancecertificationsystemsforbuildingsandpremises.

Ingeneral,certificatesshoulddeterminetheamountofenergythatmustbeusedinordertosatisfytherelevantneedsofagivenbuilding/premises.TheprovisionsoftheBuildingLawdeterminethecasesinwhichenergyperformancecertificatesshouldbeissued.Inpractice,energyperformancecertificatesareobtainedfornewlyconstructedbuildings,inparticularpublicutilitybuildingswithusablefloorspaceexceeding1,000m2.

Theenergyperformancecertificatedoesnotonlyinformtheownerofthebuilding/premisesabouttheenergyusageinvolvedandtherelatedcostsbutmayalsopositivelyinfluencethevalueofthebuildingasbeing“environmentallyfriendly”.

Animportantthinghereisthatifsuchacertificateincludesfalsedata,itistreatedasaphysicaldefectofthebuildingundertheBuildingLaw.


2.5.1.2 Constructionissues

Legal framework for construction works contracts

TheCivilCodeincludesprovisionswhichestablishthelegalframeworkforconstructionworkscontracts.Mostofthoseprovisionsaregeneralinnatureandenablecontractingpartiestostructuretheconstructionworkscontractsinawaythataddressestheirparticularbusinessneeds.Suchaflexiblelegalframeworkallowsthepartiesveryoftentouseinternationalstandardsforconstructionworkscontracts,includingthepopularFIDICforms.However,notalltheprovisionsofinternationalstandardsforconstructionworkscontractscomplywiththerequirementsoftheCivilCodeandtheBuildingLaw.

Inparticular,amoredetailedanalysisshouldbeperformedwithrespecttocontractualclausesregardingstatutorywarrantyperiods,contractswithandliabilitytowardssubcontractorsaswellascontractor’spaymentguarantees.Belowwepresentthekeylegalregulationsinthisareas.

Statutory warranty periods

UnderthePolishlaw,thestatutorywarrantyperiodforacquiredrealestates,includingbuildingsisfiveyearsfromtheproperty‘shand-overdate.Theabovementionedstatutorywarrantyperiodoffiveyearsappliesalsointheconstructionworkscontracts.

Approval of a contract with a subcontractor

Beforeasubcontractisconcludedbythegeneralcontractorwithasubcontractor,suchasubcontractshouldbeapprovedbytheinvestorinwriting.Uponbeingprovidedwiththedraftsubcontract,theinvestorreviewsitanddecideswhetherthesubcontractshouldbedismissedorapproved.Theinvestorshouldrespondinthematterofdismissingorapprovingthesubcontractwithin14daysofitsreceipt.Ifnoresponseisgivenbytheinvestor,thesubcontractisdeemedtohavebeenapproved.Inthecasewhereaninvestorhasdismissedasubcontract,suchasubcontractsignedbetweenthegeneralcontractorandthesubcontractorisunenforceableagainsttheinvestor.

Liability towards subcontractors

Inthecasewheretheinvestorhasapprovedthesubcontractbetweenthegeneralcontractorandthesubcontractor,theinvestorisjointlyandseverallyliablewiththegeneralcontractorforthepaymentoftheremunerationtothesubcontractor.Thepartiesmustnotchangethisruleinacontract.Therefore,contractsoftenincludeaclauseunderwhichtheinvestorisnotobligedtopaytheremunerationtothegeneralcontractorunlessthegeneralcontractorpresentsaconfirmationofpaymenttothesubcontractor.Therearealsosome

othermethodsofsecuringtheinvestor’sriskofadoublepayment(tothegeneralcontractorandtothesubcontractor),


whichmustalwaysbeadjustedtothebusinessrequirementsofgiveninvestment.

Contractor’s payment guarantee

Oneoftheinconveniencesforinvestorssigningconstructionworkscontractsistheobligationtograntapaymentguaranteetothegeneralcontractor.Underthisobligationageneralcontractorisentitledtoastatutoryclaimagainsttheinvestorforapaymentguaranteeuptothemaximumamountofthecontractvalue.Theinvestormaysatisfythegeneralcontractor’sclaimbyissuingapaymentguaranteeintheformofabankguarantee,aninsuranceguarantee,aletterofcreditorabank’ssuretyship.Thestatutoryclaimforapaymentguaranteemayberaisedatanytimeandcanbeextendedtoincludethevalueofanyadditionalworksagreedinwritingduringthetermoftheconstructionworkscontract.

Construction design contracts

Oneofthekeyelementsofthebuildingprocessisdrawingupaconstructiondesign.Aconstructiondesignisaformalrequirementforobtainingabuildingpermitformostofbuildinginvestments.UnderthePolishlawaconstructiondesignmustbedrawnupandsignedbyacertifiedarchitect,whotakesresponsibilityforthetechnicalaspectsoftheconstruction.Thearchitectshouldprepareadesignunderacontractforarchitecturalserviceswhich,depending

onitsscope,mayeithertransferthecopyrighttotheconstructiondesigntotheinvestororprovidetheinvestorwiththerighttousetheconstructiondesignforthepurposesoftherelevantinvestment.Itisworthmentioningthatacontractforarchitecturalservicesmayincludevariousrestrictionswithregardtothecopyrightortheuseofthedesign.Suchrestrictionsmaybecrucialfortheinvestmentdevelopmentprocess,inparticularwhentheyregardthepossibilityofenteringmodificationstotheconstructiondesignortransferringthecopyrighttootherentities.

Public procurement contracts

General overview

ThankstoanumberofEUfundingprogramseveryyearPolishauthoritieshavebillionsofeurosattheirdisposaltobespentondevelopment.Aconsiderablepartofthisfundingwillbedesignatedforinfrastructuralprojects,inparticularroadandrailwayinfrastructure,whichisstillnotverywelldevelopedinPoland.Forthisreason,manyoftheinfrastructuralinvestmentsdevelopedonthePolishmarketwillbecarriedoutunderpubliccontracts.

Poland,asoneoftheEUMemberStates,wasobligedtoimplementregulationsgoverningpublicprocurementproceedings.TheprovisionsofEUdirectivesonpublicprocurementwereimplementedtothePublicProcurementLaw,whichconstitutesthelegalframeworkforthismatterinPoland.The


PublicProcurementLawissupplementedbyadditionallegalactswhichrelateinparticulartopublic-privatepartnershipandlicensesforconstructionworksandservices.

Themaingoalofpublicprocurementregulationsistoestablishclearandcompetitiverulesandproceduresforawardingpubliccontractstothesuppliersofworksandservicesaswellastoprovidemeasuresforsupervisionoverthepublicauthoritiesawardingpubliccontracts.ThekeyobjectiveofthePublicProcurementActistoensurethatpubliccontractsareawardedwhileapplyingequaltreatmenttoallentitiestakingpartintenderproceedingsaswellastoensureimpartialityandobjectivityofthefinaldecision.

Procedure

UnderthePolishpublicprocurementregulationstherearenumerousdifferentproceduresforawardingpubliccontracts.Theonesthataremostcommonlyappliedareopentenderingandlimitedtendering.Bothproceduresmustbefollowedbyapublicnotice.Noticeoncontractperformstheaimofprovidingproperimplementationoftheruleofequaltreatmentintheverybeginningoftheprocedure.Theobligationofpublishinganoticealsoprovidesnon-confidentialityandtransparencyoftheappliedpubliccontractsystems.

Ingeneral,opentenderingisasimpleprocedure,meaningthatentitiesfamiliarizethemselveswiththeinformationinthenoticeandinSETC

and,iftheyareinterestedinsubmittingtendersinsuchprocedure,theysubmitatenderwhichshallthenbeevaluatedbyranking.

Underlimitedtenderingprocedure,entitiesinterestedinbeingawardedapubliccontractsubmitrequestsforparticipatinginthetenderandtheawardingpartydecideswhichbiddersmaysubmittheirproposals.Otherpublicprocurementproceduressuchascompetitivedialogue,negotiatedprocedurewithpublication,negotiatedprocedurewithoutpublication,singlesourceprocurement,requestforquotationsorelectronicauctioncanonlybeappliedunderspecificcircumstancesstipulatedinthebindinglaw.

Asimilarcourseofactionshouldbeappliedtotheabovemaintypesofthepublicprocurementprocedure.Eachofthemiscomprisedofpre-qualification,submissionofproposalsandselectionofthewinningtendererphases.Inthepre-qualificationphasetheawardingpartysetsouttherequirements/criteriatobemetbythetenderers.Basedonthespecificrequirements/criteria,tenderersdrafttheirproposalsandsubmitthemtotheawardingparty.Intheproposaleachtendererdemonstratesitscompliancewithtenderrequirementsbyreferringtoitscompetencies,suchasexperience,knowledgeandfinancialcapacitytoperformthecontractedwork.Afterreviewingallsubmittedproposalstheawardingpartyselectsthebesttendererwithwhomthepubliccontractistobesigned.


However,thisisnotnecessarilytheendofthepublicprocurementprocessasthereisapossibilityofappealingagainstthedecisionoftheawardingparty.Inpractice,theappealprocedureisquitecommonlyusedbythetendererswholostapubliccontract,whichoftenresultsindelaysinthecompletionoftheinvestmentprojectconcerned.


Tax treatment of the construction costs

Costsrelatedtoconstructionprocessandaccruedpriortoputtingtheassetsintouseformtheinitialvalueoftherealestateandarerecognisedastaxdeductiblecostthroughdepreciationwrite-offsoruponsale.

Costsrelatedtofutureoperation/exploitationoftheassetsshouldberecognizedfortaxpurposesbasedongeneralrules.

VAT and the construction process

Duringtheconstructionprocess,themostimportanttaxisVAT.ThestandardrateofVATinPolandis23%.AreducedVATrateof8%appliestotheconstructionofresidentialhouses/apartmentsexceptforpartofresidentialbuildingswheretheusablefloorspaceexceeds300m2 andapartmentswheretheusablefloorspaceexceeds150m2.Insuchcasesonlyconstructionofthepartoftheresidentialbuildingand/orapartment,whichiswithin

theabovelimits,benefitsfrom8%VATrate,whereasconstructionofthepartexceedingthethresholdsissubjecttostandard23%VATrate.

PurchasestheinvestorneedstomakeduringconstructionwilltypicallyincludePolishVAT.ThisinputVATcouldbedeductedfromtheoutputVATthattheinvestorhastopaytothetaxauthoritiesasaresultofhisbusinessactivities.Astheconstructionprocessusuallytakesaconsiderableperiodoftimeandrequirestheavailabilityofsubstantialfinancialresources,itisessentialthattheinputVATpaidisrecoveredduringthisprocess.RulesofVATrecoveryandrefundsarepresentedinsection2.4.3.However,duringtheconstructionprocessthetypicalsituationisthatthecompanyhastopayhighinputVAT(resultingfrompurchaseinvoices),butnooutputVATisincurred.Therefore,specificrulesneedtobeobservedtoensuretherecoverabilityofinputVATpaidduringtheconstructionprocess.

Services of foreign contractors

Theplaceofthesupplyofservices(i.e.theplaceinwhichservicesaredeemedtoberenderedandshouldbetaxedaccordingly)dependsonthenatureofaparticularservice.Underthegeneralrule,servicesrenderedtoaVATtaxpayer(oralegalpersonnotbeingaVATtaxpayer)occurwheretheservicerecipientislocated.However,servicesconnectedwithrealestatearegenerallytaxedwheretherealestateislocated,i.e.inPoland.Servicesconnectedwithrealestateincludeconstructionworks,servicesof


architectsandfirmsprovidingon-sitesupervisionandtheservicesofrealestateagentsandpropertyvaluers.

IftheplaceofsupplyofaparticularserviceisPoland,itispossibleforaforeignconstructioncompanytoregisterinPolandasaVAT–payer.ThisimpliesthattheforeigncompanywillitselfbeliableforPolishVAT.TherecipientoftheservicescanrecovertheVATpaidtotheserviceproviderasinputVATunderthegeneralrules.

IfservicesaredeemedtoberenderedinPolandandtheforeignservicesupplierdoesnotregisterandaccountforPolishVATonhisinvoice,thePolishrecipient(inthiscasetherealestatecompany)mustself–assesstheVATdueonthebasisofthereversechargemechanism.ThiscanthenbedeclaredbytherecipientasinputVATandbedeductedfromitsoutputVAT.SuchadeductionmaybemadeinthesamemonthinwhichtheoutputVATonimportationofserviceswasrecognized(whichmeansthatthecompanysuffersnoadversecashfloweffect).

Taxes due on imported goods

ImportedgoodsarealwayssubjecttoimportVATwhentheycrosstheEUborder(orintheEUdestinationcountrywhenthegoodsaretransportedunderaspecialcustomsprocedure).ThisVATiscalculatedbasedonthecustomsvalueofthegoodsincreasedbythecustomsdue. It is possible to offset this input VAT againstoutputVATinaccordancewiththegeneralVATrules.Typically,inPolandtheVATrateis23%.

ImportVATcanbesettledwithouttheneedforanupfrontcashpaymentthroughtheVATreturnratherthanbeingpaiddirectlytothecustomsofficeandthereafterreclaimed(thismechanismissometimesreferredtoas“postponedaccountingforVAT”).Thisruleappliesonlytoimportersusingthesimplifiedcustomsprocedure.

TheregulationsconcerningimportsdonotapplyifgoodsaretransportedfromanotherEUMemberState.Suchatransactionisclassifiedasanintra–CommunityacquisitionandissubjecttoVAT.Thecompanyisobligedtoself–assessVATontheacquiredgoodsattherateappropriateforthem(usually23%).Atthesametimeself–assessedtaxmaybetreatedasinputVATanddeductedfromoutputVATinthesamemonthinwhichitwasincurred,providedthattheacquirerisinpossessionofapurchaseinvoiceorwillobtainitwithin3months.

Noexcisetaxisdueontypicalconstructionequipmentandmaterials.

Taxation of a foreign construction company

InsomecasesitisnotnecessaryforaforeignconstructioncompanytodobusinessthroughaPolishcompany.TheconstructionworkcanbeperformedinPolanddirectlybytheforeignentity.InthiscasethequestionarisesastowhethertheforeigncompanyissubjecttoPolishincometaxontherevenuesgeneratedfromtheconstructionwork.Polandisindeedallowedtotaxthisincomeatarateof19%iftheactivities


oftheforeigncompanyconstituteapermanentestablishmentinPoland.

WhetherornotthegivenforeignconstructioncompanyhasapermanentestablishmentisdeterminedbytherelevanttaxtreatywhichPolandhasconcludedwiththecountryinwhichtheforeigncompanyisbased.Ingeneral,aconstructionsitebecomesapermanentestablishmentoncethedurationoftheconstructionworksexceedsacertainperiodoftime.Usuallythisperiodis12months.Iftheworkisfinishedwithin12months,thennopermanentestablishmenthasbeencreated.Iftheconstructionperiodtakeslonger,thena

permanentestablishmentisrecognizedandtheincomederivedfromtheworkissubjecttoPolishincometax.ItshouldberememberedthatinsuchcasesthepermanentestablishmentisdeemedtoexistfromthestartoftheconstructionactivitiesinPoland.Standardratesandtaxrulesareapplicabletodeterminethetaxdue.

PleasenotethatiftheactivitiesofaforeigncompanyinPolandextendsignificantlybeyondasinglecontract,thecompanymayberequiredtosetupabranch.SettingupabranchwillmostlikelyleadtothecreationofapermanentestablishmentinPoland.


2.6.Operationandexploitation

2.6.1.Legalaspects

2.6.1.1.Introduction

AccordingtotheCivilCode,partiesofthecontractmaybenefitfromtheprincipleoffreedomofcontracts,whichgivesthemanopportunitytomodifythestatutorytypesandprovisionsofthecivilcontract.However,therearesomemandatoryprovisionsandlimitations,whichhavetobeconsideredbytheparties.Amongalltypesofpropertyexploitationagreements,thebelowarethemostcommonforthePolishrealestatesector:

• Lease (najem)–regulatedinarticles659to692oftheCivilCode,

• Tenancy(dzierżawa)-regulatedinarticles693to709oftheCivilCode,

• Leasingofrealestate(leasingnieruchomości)-regulatedinarticles709(1)to709(18)oftheCivilCode,

• Propertymanagement(zarządzanie nieruchomościami)-regulatedintheActonPropertyManagement.

2.6.1.2.Leaseagreement(najem)

Undertheleaseagreementthelessorgrantstothelesseetherighttooccupypremises(office,residentialetc.)inexchangeforthepaymentofrent.Ingeneral,everythingthatcanbesubjecttotheownershipright,maybealsosubjecttothisagreement,neverthelessincaseofrealestate,themorestrictprovisionsmayapply.


Duration

Thedurationofaleaseagreementmaybedefiniteorindefinite.Theleaseagreementmaybeconcludedinanyform,however,incaseofaleaseofarealpropertyforaperiodlongerthanoneyear,theagreementshallbeconcludedinwriting.Incaseofalackofawrittenform,theleaseagreementshallbedeemedtohavebeenconcludedforanindefiniteperiodoftime.

Thedurationofaleaseagreementmaybefreelyfixedbytheparties,however,therearecertainrestrictions.Theleaseagreementconcludedforaperiodlongerthantenyears,is,afterthisperiod,deemedtohavebeenconcludedforanindefiniteperiodoftime.Theruleaboveisdifferentfortheleaseagreementsconcludedbetweenentrepreneurs.Inthiscasetheleaseagreementconcludedforaperiodlongerthanthirtyyearsisdeemedtohavebeenconcludedforanindefiniteperiodoftimeafterthethirtyyears’periodhaspassed.

Rent

Payingrentistheprincipalobligationofthe lessee. The lessee is obliged to pay rentwithintheagreedtime.Iftheduedateisnotfixedintheagreement,therentshouldbepaidinadvance:iftheleaseisnotlongerthanonemonth-forthewholeleaseperiod,andiftheleaseislongerthanonemonthorifthecontractisconcludedforanindefiniteperiodoftime-monthly,nolaterthanonthetenthdayofthemonth.Inpractice,the

leaseagreementsregulateindetailsthepaymentoftherent.

Maintenance and expenditures settlement

Thelessorshouldhandoverthepropertytothelesseeinaconditionfitfortheagreeduse.Itshouldbemaintainedbythelessorinthisconditionthroughouttheleaseterm.Minorrepairsconnectedwiththenormaluseofthepropertyshouldbefixedbythelessee,unlesstheleaseagreementprovidesforotherwise.Ifthesubjectofleaseisdestroyedduetocircumstancesforwhichthelessorisnotresponsible,heisnotobligedtorestoreit.If,duringtheleaseperiod,thepropertyrequiresrepairswhichencumberthelessor,thelesseemaysetthelessoranappropriatetimeforrepair.Afterthisperiodthelesseemaycarryouttherepairsneededatthelessor’scost.

Ifthelesseeimprovesthesubjectoflease,thelessormay–aftertheexpiryoftheleaseterm,atitsdiscretion,eitherdemandthatthepreviousconditionberestoredorpaythelesseeasumcorrespondingtotheimprovementvalueatthetimeofreturn.Inpractice,theseissuesareusuallycoveredbytheprovisionsoftheleaseagreements.

Subletting and disposal of the leased property

Thegeneralruleisthatthelesseemayhandoverthepropertyorpartofittoathirdpartyforfreeofchargeuseor


subletit,iftheleaseagreementdoesnotforbidit.However,whenthesubjectofleaseconstitutespremisesorretailareas,handoverthepropertyorpartofittoathirdpartyforfreeofchargeuseorsubletitrequiresthelessor’sconsent.Iftheleasedpropertyishandedovertoathirdparty,boththelesseeandthethirdpartyareliabletowardsthelessorforusingthepropertyinaccordancewiththeprovisionsoftheleaseagreement.Therelationshiparisingfromacontractforfreeofchargeuseorsublettingconcludedbythelesseeisterminated,atthelatest,whenthemainleaseagreementisterminated.Inpractice,theleaseagreementsforbidsublettingthepropertytoathirdpartyorrequirethepriorwrittenconsentofthelessor.

Theleasedpropertycanbedisposedofduringtheleaseperiod.Inthiscasetheacquirerbecomesapartytotheleaseagreementasalessorinplaceoftheseller.Theapprovalofthelesseeisnotrequired.Thenewownermayterminatetheleaseagreementretainingstatutorynoticeperiods.However,thenewownerdoesnothavearighttoterminatetheleaseagreementifitisconcludedforadefiniteperiodoftime,inwrittenformwithanauthenticateddate(datapewna)andthesubjectofleasehasbeendeliveredtothelessee.If,asaresultoftheleaseagreementbeingterminatedbytheacquireroftheleasedproperty,thelesseeisforcedtoreturntheleasedpropertyearlierthanhewouldhavebeenobligedtoundertheleaseagreement,hemaydemandcompensationfromtheseller.

Security

Lessorsoftenusethespecialclausesintheleaseagreementstosecuretheirpotentialclaimstolesseessuchasmoneydeposit,promissorynote,suretyandbankguarantee.

• Moneydeposit–itisasumofmoneysubmittedbythelesseeinordertosecurethelessor’spotentialclaimsincaseofnon-fulfillmentoftheleaseagreementordamagescausedbythelessee.Asfarastheleaseofcommercialpremisesisconcerned,thereisalmostunlimiteddiscretionindeterminingthecontentoftheclause.Inthecaseofleaseofresidentialpremises,whicharethesubjecttoregulationoftheActontheprotectionoflessee’srightsof21June2001(hereinafterreferredtoastheLessee’sProtectionAct),thefreedomofpartiesformingthecontentofthisadditionalcontractualclaimislimited.Amoneydepositcannotexceedtwelvetimesthemonthlyrentforthepremisesandtherentshouldbecalculatedattherateapplicableatthedate of the lease.

• Promissorynote–promissorynoteissuedbythelesseeisaneffectivewaytoprotectthelessor’spotentialclaims.Incaseofdefaultinpaymentofrentorincaseofotherclaimsagainstthelessee,thelessorcanmakeuseofthepromissorynoteandrequestthelesseetoredeemit.Incasethelesseedoesnotfulfillitsobligationsfromthepromissorynote,thelessorcanstartthecourtprocedureagainstthelessee.


• Surety–inthecontractofsurety,theguarantorundertakestoperformcertainobligationofthelesseetowardsthelessorifthelesseedoesnotperformthem,mostlythisreferstothepaymentofdueamounts.Theliabilityoftheguarantorisequivalent,notsubsidiary.Thismeansthatthelessormayrequestapaymentfromboththelesseeandtheguarantor.

• Bankguarantee–itisaunilateralobligationoftheguarantor’sbank,accordingtowhichthebankwillprovidefundstothebeneficiaryoftheguarantee-thelessor,ifthelesseedoesnotfulfillitsobligation.Thepartiesoftheleaseagreementtypicallydetermineaperiodthathastoelapsefromthepaymentduedateandafterwhichthelessorhastherighttoexecuteabankguarantee.

Termination

Aleaseagreementconcludedforanindefiniteperiodoftimemaybeterminatedbyanypartywithapriornoticeoftermination(itslengthisinpracticedefinedintheleaseagreement).Thestatutoryperiodofnoticeofterminationfortheleaseagreementconcludedforanindefiniteperiodoftimeisasfollows:

• iftherentisdueforaperiodlongerthanamonth–thecontractcanbeterminatedbygivingathree-monthnotice,effectiveattheendofthecalendarquarter;

• iftherentisdueeverymonth–thecontractcanbeterminatedwithaone-

monthnotice,effectiveattheendofthecalendarmonth(three-monthnoticeincaseofleaseofpremisesorretailareas,effectiveattheendofthecalendarmonth);

• iftherentisdueforaperiodshorterthanamonth–thecontractcanbeterminatedwithathree-daynotice;

• iftherentisdueforoneday–thecontractcanbeterminatedonedayinadvance.

Theleaseagreementconcludedforadefiniteperiodoftimemaybeterminatedonlyincasesspecifiedinthecontract.

However,theCivilCodestipulatesthatthepartiescanterminatetheleaseagreementimmediatelyifcertainconditionsdefinedbytheabovecodeoccur.Thisappliestocontractsconcludedforbothdefiniteandindefiniteperiodoftime:

• if,atthetimeofhandingitovertothelessee,thesubjectofleasehasdefectsthatmakeitimpossibletouseitinthewaydefinedintheleaseagreement,orifthedefectsoccurlaterandthelessordoesnot,despitereceivinganotice,removetheminanappropriatetime,orifthedefectscannotberemoved–thelesseemayterminatetheleaseagreementwithoutnotice;

• ifthelesseedefaultsinpayingrentforlongerthantwofullpaymentperiods–thelessormayterminatetheleaseagreementwithoutnotice(incaseofleaseofpremisesorretailareas,beforetermination,thelessorisobligedtowarnthelesseeinwritingbygivinghimanadditionalone-monthperiodtopaytheoverduerent);


• ifthelesseeusesthesubjectofleasecontrarytothetermsoftheagreementorthepurposeofthisand,despiteawarning,doesnotceasetouseitinthisway,orifalesseeneglectsittosuchanextentthatthesubjectofleaseisatriskofbeinglostordamaged–thelessormayterminatetheleasecontractwithoutnotice.

Lease of premises for residential purposes

Residentialleaseagreements,duetotheirpurposearesubjecttospecialprotectionwhicharisesfromtheprovisionsoftheLessee’sProtectionAct.Thisprotectionappliesmainlytothelimitedpossibilityofterminationofthelease.Thereisalsoaspecificregulationregardingtherentincrease.

2.6.1.3. Tenancyagreement(dzierżawa)

Byatenancyagreement,thelessorcommitstohandoverasubjectoftenancytothelessee’suseandcollectionofprofitsforafixedoranon-fixedterm.Inexchange,thelesseecommitstopaytheagreedrent.Thetenancyagreementgivesnotonlytherighttousethepropertybutalsotocollectbenefitsfromit,whichiswhythetenancyagreementusuallyconcernsland.

Thedurationofatenancyagreementmaybedefiniteorindefinite.However,thetenancyagreementforaperiodlongerthanoneyearshouldbeconcludedinwriting,otherwiseitisconsideredtobe

concludedforanindefiniteterm.Alsoatenancyagreementexecutedforalongerperiodthanthirtyyearsisdeemedtobeconcludedforanon-fixedterm,afterthisperiodpasses.

UndertheCivilCode,iftherentpaymentperiodisnotspecifiedinthecontract,rentispayableinarrearsonthedatecustomarilyaccepted,andintheabsenceofsuchcustom,semiannuallyinarrears.Ifthelesseedefaultsinpaymentofrentforatleasttwofullpaymentperiodsand,inthecaseofrentpaidannually,hedefaultsinpaymentforoverthreemonths,thelessormayterminatethetenancywithoutnotice.However,thelessorshouldwarnthelesseebygivingthelesseeanadditionalthree-monthperiodtopaytheoverduerent.

Thelesseeisresponsibleforthecostsofallrepairstotheextentnecessarytokeepthesubjectoftenancyinthesamecondition.However,thepartiesareabletomodifythisruleinthetenancyagreement.Therearealsosomedifferencesbetweenaleaseagreementandatenancyagreementinthefieldofsublettingaproperty.Thelesseecannotsubletthepropertywithoutthelessor’sconsent.Iftheaboveobligationisviolated,thelessormayterminatethetenancyagreementwithoutnotice.

2.6.1.4.Leasingagreement(leasing nieruchomości)

Byaleasingagreement,thefinancingpartyundertakes,withinthescopeofoperationsofitsenterprise,toacquireapropertyfromaspecifiedtransferor


andtohanditovertotheusertouseforadefinedperiod.Inexchange,theusercommitstopaytheinstallmentsagreedinthecontract.Thelessorretainsownershipoftheproperty,however,whenthecontractexpires,thelesseehasarighttotakeovertheownershipoftheproperty.Inpractice,therearetwomaintypesoftheleasingagreement:

• operatingleasing–inthistypeofleasingthesubjectofleaseagreementremainstheassetofthelessorwhomakestherelevantdepreciationwrite-offs.Aftertheendoftheleasingtermthelesseemaypurchasethesubjectoftheagreementforremuneration.Anoperatingleaseiscommonlyusedtoacquireequipmentonarelativelyshort-termbasis;

• financialleasing–inthistypeofleasingthelessorremainsthelegalowneroftheasset,however,itisthelesseewhomakesthedepreciationwrite-offs.Thetransferofanownershipofasubjectofaleasingagreementafteritsterminationmaybestipulateddirectlyinthatagreement.

Thedurationofthefinancialleasingcontractisusuallylongerthantheoperatingleasingandsimilartotheeconomicutilityofthesubjectofleasing.

Thereisalsoanotherformoftheleasingagreementwhichisoftenusedintherealestatemarketcalledsaleandlease-back.Theessenceinthiscaseisthesaleofpropertybytheownertoaleasingcompany.Afterwards,theleasingagreementissignedbetweenthesamepartiesallowingthepreviousownertouse

thepropertyasthelessee.Thisoperationallowsthereleaseoffundsandgivestheopportunitytoinvesttheminotheractivities.Moredetailedlegalandtaxcommentsarepresentedinsection2.8.

2.6.1.5.Propertymanagementagreement(zarządzenie nieruchomościami)

Propertymanagementisaprofessionalactivitycarriedoutbypropertymanagers.ItisregulatedintheActonPropertyManagement,underwhichmanagementofaparticularpropertyisbasedonthepropertymanagementagreementbetweentheowneroftherealestateandthepropertymanager.Theagreementforpropertymanagementshouldbeconcludedinwriting,otherwisenull and void.

Thepropertymanagerisrequiredtohaveacompulsoryinsuranceofcivilliabilityfordamagecausedinthecourseofactivities.

2.6.2. Taximplications

Income subject to tax

Taxableincomecomprisestheentireincomegeneratedfrombusinessactivities(tradeorservices).TaxableincomeiscalculatedonthebasisoffinancialstatementspreparedinaccordancewithPolishaccountingstandardsaftersignificantadjustmentsrelatingtothetaxbase.Taxableincomeisasarulerecognizedfortaxpurposesonanaccrualbasis.Theapplicabletaxrateis19%.


Calculation of taxable income

Taxablerevenuesminustaxdeductiblecostsconstitutethetaxassessmentbase.Thecostsaredeductibleiftheywereincurredforthepurposeofrevenueearningormaintaining/securingthesourceofrevenue.Fortheexploitationofrealestate,themostimportantcosts,suchasinterestpayments,thecostsofexploitationandmaintenanceanddepreciationwrite–offs,areconsideredtaxdeductible.Polishtaxrulesspecificallyexcludecertainexpensesfromtaxdeductiblecosts.Forexample,doubtfulreceivablescanonlybedeductedunderverystrictconditions.Alsobusinessentertainmentexpenses(e.g.thecostsofrepresentation)arenon–deductible.

Loss carry forward rules

Polishlegislationprovidesforcarryingforwardtaxlossesoverfiveconsecutivetaxyearsfollowingtheyearwhenthelosswasincurred.Theamountwhichcanbeutilizedinanyofthesefiveyearscannotexceed50%ofthetotalloss,however.

Example:

Year 0 1 2 3 4 5 6

(Loss)/profit

(100) 60 10 10 20 5 20

Carryforward

- 50 10 10 20 5 -

Effectivetaxbase

- 10 0 0 0 0 20

Total loss effectively carried forward: 95, unutilized loss: 5.

Taxlossescannotbecarriedforwardfollowingcertainlegaltransactionsinvolvingthecompany(e.g.mergerswherethelossespertaintoentitieswhichnolongerexistafterthemerger).Thereisnotaxlosscarryback.

Depreciation rate for real estate

Thestandarddepreciationrateformostnewbuildingsfortaxpurposesis2.5%peryear.Hence,thecostsofrealestateinvestmentaregenerallydeductedoveraperiodof40years.Newlyacquiredbuildings,usedpreviouslybyaformerowner,canbedepreciatedfortaxpurposesduringtheperiodequaltothedifferencebetween40yearsandthenumberofyearsthathavepassedsincethebuildingwasputintouseforthefirsttime(thatperiodcannotbeshorterthan10years).Landisnotsubjecttotaxdepreciation.

Ifresidentialbuildingsconstitutefixedassetsusedforbusinesspurposes(e.g.iftheyareleased)theyaredepreciatedatarateof1.5%peryear.

Undercertaincircumstancesitmaybeworthcarryingoutacostsplitanalysisofinvestmentexpenditurespriortoputtingabuildingintouse.Thisisbecausesomemachinerymay–underspecificregulations–beexcludedfromthevalueofthebuildingandbetreatedasseparatefixedassetsdepreciatedathigherrates(4.5%–20%peryear).Thiscouldleadtosignificanttaxsavingsasthecostsincurredcouldbedeductedoverashorterperiodoftime.Acostsplitanalysisshouldbealsopossibleincaseofthepurchaseofanalreadydevelopedbuilding.


Calculation of the depreciation base

Thedepreciationbaseconsistsofallcostsincurredinmakingtheinvestment:constructioncosts,buildingmaterials,designs,interestandforeignexchangedifferencesaccruedduringtheconstructionperiod,commissionandpotentiallynon–recoverableinputVATrelatedtothebuildingincurredbeforeitwasputintouse.Asthevalueofthelandisnotsubjecttodepreciation,itisthenimportanttodeterminethevalueofthelandandthevalueofthebuildingseparately.

VAT implications of renting out real estate

Rentalincomeissubjectto23%VAT.ThisVATisaddedtotherentdueandispayablebythelesseetothelessor.IfthelesseeisaregularVATpayer,hecandeducttheVATpaidintherentinvoicefromhisoutputVATliabilityresultingfromtaxableactivities.

IfthelesseeperformsVATexemptbusinessactivities,theinputVATontherentisirrecoverable.Forexample,theactivitiesofbanks,financialinstitutionsandinsurancecompaniesareexemptfromVAT.

Ifthelesseeperformsexemptactivities,aswellastaxableactivities,thentheinputVATontherentcanbededucted

proportionatelyontheproratabasiscomputedforagivenyear.

Rentalofresidentialunitsforhousing(butnottherentalofresidentialunitsforthepurposesotherthanhousing)isVATexempt.

Real estate tax

Realestatetaxischargedtotheowner(orinsomecasestheholder)ofthelandorbuildingsandinfrastructurewhichareusedforbusinessactivities.Thelocalauthoritiessettherealestatetaxratesandcollectthetaxes.However,localauthoritiesareboundbythefollowingmaximumPLNyearlytaxrates:

• forland,PLN0.90perm2ofland;

• forbuildings,PLN23.13,perm2 of the usablesurfaceofabuilding;

• forinfrastructure(e.g.roads,pipelines),2%ofthevalueoftheinfrastructurecalculatedaccordingtospecificregulations(initialvaluedeterminedforthepurposesoftaxdepreciation).

Localauthoritiesmaydifferentiatebetweentaxratesfordifferenttypesofactivitiesorlocationsandgrantexemptionsforcertaintypesofrealestate.


2.7.Exitingtheinvestment

Theinvestor’schoiceofexitstrategywillbepredominantlytaxdriven,anditisimportantattheoutsetoftheinvestmentprocesstohaveaclearideaofthepossibleexitmechanics.Theduediligencefindingsmadeduringtheacquisitionphasearelikelytobearrelevancetothequestionofwhichexitstrategytochoose,andshouldbegivenproperconsideration,sothattheinvestor’spositiononexitwillbeasstrongaspossible.

Generally,theexitmaybestructuredasanassetorsharedeal.Thelegalandtaxconsequencesofbotharepresentedinsection2.4.


2.8.Saleandleaseback

Legal aspects

Asaleandleasebacktransactionconsistsoftwostages.Thefirststageassumessellingthetargetrealpropertybythesellertothepurchaser.Inthenextstagethesellerconcludestheagreementontheleaseoftherealpropertyfromthepurchaser.Asaresultofthesale,theowner(orperpetualusufructuary)oftherealestatechanges.However,duetoleasingtherealpropertyback,therealestateremainsundertheoperationalcontroloftheoriginalparty(theseller).

Fromthelegalperspectiveitisimportanttosecurethesellers’interestalreadyinthefirststageofthetransaction,i.e.toestablishtheobligationofthepurchasertoleasetherealpropertybackintheagreementonthesaleoftherealproperty.Itisalsoimportantforbothpartiestoagreedetailsofthelease(duration,price,etc.)assoonaspossible,especiallyifthesellerandthepurchaserdonotbelongtothesamecapitalgroup.

Themainadvantageofsuchasaleandleasebackoperationisthereleaseoftheseller’scapitalasaconsequenceofthesaleoftherealproperty.Thiscapitalmaybethereafterusede.g.forinvestmentpurposes.However,thedecisiononchoosingsuchasolutionshallbemadeondetailedcalculationofallthecostsrelated,includingtheleasecosts.


Tax implications

Ifasaleandlease-backtransactionisstructuredasanoperationallease,thebuyer/lessorisinmostcasestheowner,andwillbeabletodepreciatethevalueoftheinvestmentatthestandarddepreciationrateof2.5%.Accelerateddepreciationforusedbuildingscanbeconsideredinsomecases.Othercostsrelatedtothemaintenanceandexploitationofthebuildingaretax-deductibleforthelessor.

If,underasaleandlease-backcontract,therealestateassetwhichisthesubjectofthecontractissoldatahigherpricethanitsnetbookvalue,ataxablecapitalgainwillresult.UnderPolishlegislation,itisnotpossibletodeferthetaxationofsuchacapitalgaininordertouseitforreinvestment.

Asaleandlease-backarrangementhasanadvantagefortheseller/lesseethattheleasepaymentsarefullytaxdeductibleascostsincurredforthepurposeofearningrevenue.Bycontrast,fortheborrowerpartytoanormaldirectfinancingarrangement,onlytheinterestpaymentsmadeontheloanaretax-deductible.Therepaymentofcapitalisnotatax-triggeringevent.Underadirectfinancingarrangementsecuredbyamortgage,thedebtorwouldstillbetheowneroftherealestate.Assuch,thedebtorwouldbeunabletodepreciatethevalueoftheland.Underaleasecontract,theleasepaymentsarepartlyacompensationfortheuseoftheland.Therefore,paymentsfortheuseofthelandaretax-deductibleforthebenefitofthelessee.


2.9.Duediligenceaspartoftheacquisitionprocess

Themainpurposeoftheduediligenceprocessistoprovideinvestorswithacomplexoverviewofthesituationoftherealestatebeingthesubjectoftheacquisitionfromthelegal,financialandtaxperspective.Takingintoaccountthespecificstatusandfeaturesofagivenrealestate,abroaderduediligencereview,conductedbytechnicalandenvironmentalexperts,mayberecommended.

2.9.1.Legalduediligence

Theduediligenceprocessisallaboutmitigatinginvestmentrisks.Inpractice,thelegalduediligencereviewconsistsingatheringinformationandshouldprovidethepotentialinvestorwithacomprehensiveviewofthelegalissuesregardingtherealpropertyheconsidersacquiring.

Bytheendoftheduediligenceprocess,theinvestorshouldhaveafairideaofwhethertherealestateisworthinvestingtimeandmoney.Inthisregard,aduediligenceshouldbeascomprehensiveaspossible.

Thescopeofthelegalduediligencewilldependonthestructureofthedeal.Inasharedeal,thescopeoftheduediligencewillgenerallybewiderthanthatrequiredforanassetdeal,asitneedstocoveralltheaspectsrelatedtotheactivityofthecompany.Incaseofanassetdealmostlythelegalstatusoftherealestateshouldbetakenintoconsiderationandexaminedcarefully.

Withinthelegalduediligence,thereviewbasesmainlyondataandinformationprovidedbythesellerandonenquiriesanddiscussionswiththesellerand/orthemanagementofthetarget.Additionally,publicly


availablesources(suchasdataincourtregisters)areexplored.Inpractice,theduediligenceregardingtherealestateusuallycoversreviewofthefollowingmatters:

• legaldocumentsrelatedtotheseller’stitletotherealestateinuse(e.g.realestateacquisitionagreements,extractsfromthelandandmortgageregister,extractsfromthelandandbuildingsregister,etc.);

• documentsrelatedtotheencumbrancesovertheseller`srealestate;

• leaseagreementsfortherealestateconcludedbytheseller;

• developmentandconstructiondocumentation;

• planningandzoningissues;

• utilitiessupplydocumentation;

• environmentalissues(permits,licensesetc.).

Reviewofotheraspectsisusuallyagreedwiththesellerandstrictlydependsonthetypeoftransaction(shareorassetdeal).

Theaimofthelegalduediligencereviewoftherealestateistoidentifyareasofinvestmentrisksbutalsootherspecificlegalaspectsregardingperformingofbusinessactivityontherealestateanditssale.Belowwepresentcertainissuesthatneedtobeanalyzedduringtheduediligenceprocessandwhichmayinfluencethestructureofthetransaction,orevenadecisiononenteringintothetransaction.

Zoning Master Plan

Thezoningmasterplansareissuedbythelocalauthorities(municipalities)for

agivenarea.Generally,zoningmasterplansarelocalactsanddefineconditionsforlanduseanddestinationandthescopeofbusinessthatcanbeconductedwithinagivenarea.Municipalitiesissuezoningmasterplanswithaviewtolocaldevelopmentandpublicinterest.Developmentofaninvestmentontherealestateispossibleprovidedthatbuildings,plantsandotherindustrialfacilitiescomplywiththerelevantzoningmasterplanforagivenarea.Therefore,itisessentialtoestablishduringtheduediligenceprocesswhetherthereisalocalzoningmasterplancoveringtheareawherethetargetedrealestateislocatedandifso,whataretheconditionsofthiszoningmasterplaninordertoconfirmwhetheritwillbepossibletoperformtheplannedinvestment.Pleaserefertothesection2.5.1.formoredetailedinformationregardingthezoningmasterplan.

Withinthereviewofthezoningmasterplan,inparticular,theissuesoftheconservationandhistoricpreservationzonesandagriculturallandshouldbeverified.

Conservations and historic preservation zone

Thezoningmasterplanmayprovidethattheareawheretherealestatesubjecttothepotentialinvestor’sinterestislocatedfallswithinaconservationandhistoricpreservationzonewheresomespecificrulesapplyinordertoprotectthehistoricalmonumentslocatedinthezone.Dependingonthetypeoftherealestateanditshistoricalstatustheremaybe


additionalrequirementsandlimitationsestablishedbytheprovisionsoflaw.

Agricultural land

Thezoningmasterplanmayprovidethattherealestateisassignedforagriculturalactivity.Asarule,thedevelopmentofrealestatedesignatedforagriculturaluserequiresaspecialprocedureinvolvingthemodificationofthezoningmasterplan.Suchaproceduremaybetime-consumingandisconnectedwiththeriskofthirdpartieschallengingtheproposedchangestotheplan.Additionally,realestateclassifiedasagriculturallandintheLandandBuildingRegister,butnotcoveredbythemasterplan,shouldbealsoexcludedfromagriculturalproductionbyobtaininganadministrativedecisionfromtherelevantauthority.

Itshouldbenotedthataftertheexclusionoftheareafromagriculturalactivityanannualfeehastobepaidfortenyears(seecommentsbelow).

Certainregulationsarealsoinforceasregardstheacquisitionofagriculturalrealestateandtheyprovideformanyspecificlegalrestrictionsandlimitations.Inparticular,priortotheacquisitionoftheagriculturallandbyforeigners(includingcitizensandcorporateentitiesfromtheEuropeanEconomicArea),apermitfromtheMinistryofInternalAffairsmustbeobtained.Theserulesdonotchangeincaseitisthesharesinthecompanyowningtheagriculturallandthataresubjectofthetransaction.Additionallimitationthathastobetakenintoconsiderationisthepre-emptive

righttowardsarablelandofanareaofatleast50,000m2whichisgrantedtotheAgriculturalPropertyAgency.

Inconsequence,aninvestorconsideringacquisitionofagriculturalrealestateshouldbepreparedforadditionalactionstobetakenandcoststobeincurredinordertoexecutehisplansregardingtheacquisitionanddevelopmentoftheland.

Restitutions claims

UnderthenationalizationlawspassedinPolandaftertheSecondWorldWar,manyrealpropertiesandfunctioningenterprises(includingtheirrealestateassets)were“nationalized”(or“communalized”).However,currently,therearenospecificreprivatisationlawsinforceinPolandtodealwiththerestitutionmattersandclaims.Asaresult,thelegalstatusofnationalizedpropertiesisquiteoftensubjecttouncertainty.Underspecificconditions,formerownersortheirsuccessorsmayapplytocivilcourtsandinitiateproceedingsaimedattherestitutionofsuchrealestate.Asthecurrentownerbenefitsfromthelandandmortgageregister’spubliccredibilitywarranty,theoutcomeofsuchclaimwillprimarilydependontheapparentgoodfaithofthecurrentandpreviousowneratthetimetheyacquiredtheproperty.Nevertheless,thisissueneedstobesubjecttoanalysisduringtheduediligence.

InWarsaw,onthebasisofthespecial“Warsawdecree“onlandownershipof1945,theCityofWarsawgainedownershiprightstothemajorpartof


realestateinthecity.However,subjecttospecificconditions,formerownersoftherealestateweregrantedtherighttoapplyforobtainingusufructrightstorealestateorcompensation.Currently,suchapplicationswhichwerenotresolvedorwereresolvedincontraventionofthelawmaybethebaseforsuccessfulclaimsforreestablishingtherightsofthepreviousownersortheirsuccessors.Inconsequence,itisessentialduringtheduediligencetoinvestigatewhetheranysuchproceedingsarependingwithrespecttothetargetpropertylocatedinWarsaw.

Fees – holding the real estate

Zoning fee

Zoningfee(“OpłataAdiacencka”)isachargewhichmayoccurwithregardtotheincreaseofthevalueoftherealpropertyresultingfrom:

• divisionoftheproperty;

• mergingandsubsequentlydividingtheproperty;

• theconstructionofinfrastructurewiththeuseofpublicfunds(placingwaterpipes,sewagepipes,heatingsystems,electricitygasandtelecommunicationsfacilities).

Theamountofthefeedependsontheamountoftheincreaseintheproperty’svalue and is usually established based onanopinionofanindependentexpertdetermininghowmuchthevalueofpropertyhasincreasedby.

Theamountoffeeshallnotbehigherthan50%(withrespecttothedivision

followingamergerandtheconstructionofinfrastructurewiththeuseofpublicfunds)andnothigherthan30%(withrespecttoadivision)oftheincreaseinvalueoftheproperty.

Additionally,adoptionofthezoningmasterplanmayalsoleadtoanincreaseinrealestatemarketvalue,e.g.whenaforestrylandoranagriculturallandisreclassifiedinthezoningmasterplanintopublicroads,itsvalueusuallyincreases.Insuchcasesthezoningfee(“RentaPlanistyczna”)maybeestablishedasapercentage(nothigherthan30%)oftheincreaseinvalueofthelandcalculatedasatthedateofthetransferofthegivenrealestate.

Thepercentageforcalculationofthezoningfeeshouldbeprovidedforinthemasterplan.Thezoningfeeispayablebythevendorinthecaseofatransferofthepropertywithin5yearsfromthedaywhenthezoningplancameintoforce.

Exclusion from agricultural production fee

Entrepreneursareofteninterestedinchangingthepurposeofuseoftheagriculturalandforestlandinordertodevelopthelandandrealizeaninvestment.Exclusionfromagriculturalproductionissubjecttoaninitialfeeandsubsequentannualpayments.Thevalueofsuchpaymentsdependsonthe:

• areaofthelandsubjecttoexclusion;

• qualityoftheland(classofsoil);

• marketvalueofthelandsubjecttoexclusion.


It should be noted that if the land excludedfromagriculturalproductionissold, the obligation to pay the annual fees passestothepurchaser.

Environmental issues

Introduction

Polishenvironmentallawaffectstheconductofeconomicactivityformostbusinessentities.Oneofthemostimportantrequirementsimposedbytheenvironmentallawistherequirementtoobtainpermitsrelatedtotherulesofhavinganimpactupontheenvironment.Itisusuallyexaminedduringtheduediligencewhethertheseller(orthetargetcompany)fulfillstheenvironmentallawrequirements.

Permit requirements

Environmentalpermitscanbebasicallydividedintotwogroups.Thefirstoneincludespermissionobtainedinthecourseoftheinvestmentprocessandthesecondgroupincludespermissionrelatedtotheuseoftheproperty.

IncertaincircumstancesPolishenvironmentallawimposesanobligationtoobtainanintegratedpermit,whichincludesanumberofpermitsgoverningtheuseoftheenvironment.Theobligationtoobtainintegratedpermitrelatesto,interalia,thefollowingbranchesofindustry:metallurgyandsteelindustry,themineralindustryandthechemicalindustry.

Besides,itisimportanttotakeintoaccountthepermissiblelevelofnoise.Permissionisrequiredonlyifthenoise

levelexceedsthenoiselimits,whichshouldbeevaluatedtakingintoaccounttheprovisionsofthelocalplan.

Liability for contaminated land

PursuanttothePolishenvironmentallaw,aholderoftheland(i.e.anownerofthepropertyorotherentityindicatedinthelandregistryasaholder)isresponsibleforthelandcontamination,notwithstandingwhenthecontaminationoccurred.Thus,theholderofthelandwillbeliablefortheclean-upevenifthecontaminationhasbeencausedbyhispredecessors.

Partiestotheagreementcannotcontractuallyexcludetheliabilityofthepurchaserforclean-upofcontaminatedlandsowhenapotentialinvestorintendstobuyaproperty(especiallyonethatwasusedforindustrialpurposes)adetailedstudyonpollutionofthelandisrequired.

Tosecurepurchaser’sinterest,thesellerofcontaminatedlandmayagreetoindemnifythepurchaseragainsttheliabilityfortheclean-up.However,inpracticeitmaybedifficulttoachieve.

Environmental impact assessment

Accordingtothesection2.5.1wheretheenvironmentaldecisionandenvironmentalimpactassessmentwheredescribed,insomecases–especiallyforlargeinvestmentsanenvironmentalimpactassessmentproceedingmayberequired.


2.9.2.Financialduediligence

Notmanyinvestorsperformduediligencewhencompletingarealestatetransaction.Oftentheinvestor’sowninternalproceduresrequireduediligencetodeterminewhetherornotthetransactionisinthebestinterestoftheinvestor.

Althoughfortransactionsofasmallerscalethismaynotbeagoodwaytoevaluateadeal,mostinvestorsunderstandthevalueofexpertoutsourcedfinancialduediligenceservices.Thisringsespeciallytruewhentakingintoaccountlargertime-sensitivetransactions(auctionprocessesforexample).

Althoughsomeinvestorschoosetoforegoduediligencewhenacquiringnewassets,theyshouldunderstandthatfinancialduediligencecanindicatehowtheacquiredassetswillaffectmetricssuchasrevenueandnetoperatingincome.Inaddition,duediligenceisabletodiscoverunforeseenproblemssuchasdiscrepanciesbetweentheamountpaidforrentasdescribedinleaseagreementsvs.theactualamountbeingpaidpertheaccountingbooks.

Abuyerusuallymakesuseoffinancialduediligencetoassistinidentifyingmajorissuesconcerningatransaction:

• thevalueoftheproperty’sNOItakingintoaccounttheexistingleaseportfolio

• anyprovisionsintheleasethataffecttheNOIadversely(forexample,discountsonrentforanygivenperiodoftimeorforimprovementsmadebylessee)?

• bookkeepinginusebeingadequateforthebusiness,andhowdoesitlooks

nexttotheinvestor’sbookkeepingprocedures

• lesseeeverbeinglatewiththerent,orittakinglongertocollectrent;

• chargesmadebythelesseebeingenoughtocoverthecostsofmaintainingthebuilding;andanyservicechargesnotsettledforanyreason

Analyzing financial issues

Theitemslistedbelowshouldbeconsideredwhenseekingtoresolvethepreviouslymentionedissuesconcerningfinancialduediligence:

• thefinancialfiguresbeingviable:canthefiguresbetracedbacktoitsoriginreliably;

• criticalbookkeepingproceduresbeingappliedconsistentlyandappropriately;

• theinfluenceofthebookkeepingproceduresonthefinancialfigures;

• assuringthatthecreationandlevelofmanagementinformationisaccurateandadequateforthebusinessbeingconsidered;

• evaluatingthecontractualobligationsthebusinesshasandtheirinfluenceonprofitabilityandcashflow;

• evaluatingcriticalproblemsinfluencingearningsposition;

• recognitionoftheneedforcostrechargesincurredandfocusonareasforimprovement;

• recognizingthe“normal”workingcapitalandcashflowtidesofthebusinessandprobablefundingneedsdowntheline;


• makingsureconstructionscostsareproperlyreflectedinthebookkeepingrecords;

• recognizingthenetassetbaseforacquisition;addressingpossiblebalancesheetvaluationdiscrepancies;makingsureeverythinghasbeenadequatelyaddressedinevaluatingtheunderlyingearnings;

• comparingtherentrollagainsttherentalagreementsandbookkeepingrecords;

• comparingtheservicechargesincurredagainstthebookkeepingrecords;and

• goingoverrentalagreementstoidentifybalancesheetliabilities.

2.9.3.Taxduediligence

Taxduediligence,ingeneral,focusesonassessingmaterialtaxriskspertainingtoassetsorsharesbyreviewingthetaxpositionofthetargetcompany.Byidentifyingtaxrisksduringduediligenceconductedbeforethetransaction,theinvestormayseekprotectionorindemnificationfromtheseller.

Fromataxperspective,itisalsoimportanttoensurethattheappropriatetaxstructureisused,whichusuallyinvolvesapre–transactionstudyandthepreparationofthetransactionstructureinaccordancewiththePolishandinternationaltaxregulations.Inaddition,itcanalsoincludeanassessmentofthetaximplicationsofafutureexitscenario.

Acquisition of assets

Inthecaseofanassetdealdeemedtobetheacquisitionofbusinessasagoingconcernoraviablepartofthatbusiness,theacquirermaybeheldliablefortheoutstandingtaxliabilitiesoftheseller.Thisliabilityisexcludediftheacquirercouldnothavebecomeawareoftheseller’staxarrearsdespiteactingwithduediligenceinattemptingtoidentifysuchtaxarrears.Performingataxduediligencereviewisthusawaytolimitorexcludesuchliability.

Thisliabilityisinpracticeofa’subordinated’nature,asevenifaformaldecisiondeclaringthattheacquirerisliablefortheseller’staxarrearsisissued,theclaimagainsttheacquirermaycrystallizeonlyiftheenforcementprocedureagainstthesellerisineffective(andtaxclaimsagainstthesellerarenotsatisfied).

Accordingtothetaxregulationstheacquirer(withtheseller’sconsent)orthesellermaysubmittothetaxauthoritiesaformalrequestforacertificatewhichlistsallthetaxliabilitieswhicharetransferabletotheacquirer.Theacquireristhenliableonlyuptothevalueofthetaxliabilitiespresentedinthecertificate.

Inthecaseofasaleofsingleassets(notconstitutingtheviablepartofabusiness),itisstillpossible(becausetherelevanttaxregulationsareunclear)thattheacquirermaybecomeliablefortheoutstandingtaxarrearsoftheseller,butonlyforperiodsbefore2009.However,asarule,taxliabilitiesregardingtheperiodbefore2009shouldalreadybesubjecttostatuteoflimitation.


Acquisition of shares

Inthecaseofasharedeal,allthepotentialoutstandingliabilitiesremainwiththeacquiredcompany.Asaconsequence,theacquirerfacesthepossibilityofincurringaneconomiclossonthetransactionifundisclosedtaxliabilitiesbecomeapparentafterwards.Taxduediligenceisthereforeconductedtoallowtheacquirertoassessandminimizethisrisk.

Generally,theperiodoflimitationfortaxliabilitiesis5taxyearsfollowingtheyearinwhichthetaxispayable.Inpracticethismeansthatfromtheperspectiveof2015thereisstillataxriskinrelationspecificallytoatarget’scorporateincometaxpaymentsfor2009–2015,andtoothertaxliabilities,ingeneral,for2010–2015.

Tax issues analyzed

Thescopeofataxduediligencereviewdependsonthestructureoftheplannedtransaction.

Inthecaseofanassetdeal,thescopeofduediligencedependsonthesubjectofthetransactionandtheextenttowhichtheacquirermaybeliablefortheseller’staxliabilities.

Inthecaseofasharedeal,astheacquirerfacesthefullimpactofanytaxliabilitiesassumed,fullduediligenceisusuallyconducted.

Thetaxduediligenceincaseofasharedealusuallycoversthefollowingareas:

• reviewoftaxreturnsforperiodspreviouslyfiledandreviewoftax

calculationsforperiodsthatarenotyetfiledwiththetaxauthorities;

• reviewoftheresultsofpasttaxauditstodetecttaxrisksforperiodsthatarestillopenfortaxauditsbythetaxauthorities;

• reviewofanyobtainedtaxrulings;

• reviewofanylossescarriedforward,taxcreditsandspecialtaxprivilegestoidentifyrelatedtaxrisksforunauditedperiodsandtoassesswhethersuchtaxbenefitswillbeavailableposttransaction;

• reviewofwithholdingtaxproceduresandexemptionsavailable;

• reviewofsignificanthistoricalreorganizationsandone-offtransactionsandtheirimpactonthetaxaccounts;

• reviewofintercompanytransactionsandpresenttransferpricingpolicyinthecompany;

aswellasanexaminationofareastypicalforarealestatecompany,suchas:

• theexistingdebtfinancingstructure(e.g.debtpushdownschemes),thincapitalizationandotherpendingrestrictionsonthetaxdeductibilityofinterestpaymentsonthedebt;

• anylargedifferencesbetweenbookandtaxbasisofassets,analysisofthedeferredtaxcalculations,inparticularidentificationofanydeferredtaxliability,e.g.fromaccruedforeignexchangegains;

• rulesforcapitalexpenditurerecognitionandtheimpactofforeignexchangedifferencesontheinitialvalueoffixed


assetsfortaxdepreciationpurposes;

• policiesforthetaxdepreciationofassets,includingareviewofcostsegregationschemes;

• cashincentivesofferedtolesseessuchasarentfreeperiodorstep-uprentandtheirimpactonthetaxaccounts;

• treatmentoftheinvestmentcostsincurredbylessees(leaseholdimprovements)whentheleaseexpires;

• taxrecognitionofmanagementchargespayablebyspecialpurposevehiclestoservicingcompanieswithinthegroup;

• anystep-upinthevalueoftherealestateperformed;

• reviewofinputVATrefundsintheinvestmentphase;and

• policiesforrealestatetax.

Areviewofthesaleandpurchaseagreement(SPA)fortheacquisitionofarealestatetargetusuallycoversthefollowingtaxpoints:

• reviewofthetaxdefinitionsintheSPA,andofthetaxrepresentationsandwarranties;

• reviewofthetaxindemnityclausesintheSPA;and

• analysisoftheSPAfromtheperspectiveofotherprotectionavailableagainsttaxexposures.

2.9.4.Theuseofduediligenceresultswhennegotiating

Afterthewholeprocessofduediligence,theinvestorgetsageneralfinancialandtax

riskoverview,whichmakesuptheoriginoftheinformationfornegotiationswiththesellerandassistsinadjustingthefinancialmodelforvaluation.

ThiscanbeusedtogetadecreaseinpriceinordertoalleviatepossibletaxliabilitiesandcanbeusedwhenwritingwarrantiesanddamagesintheSPA.

Theresultsmaydirectlyaffectthecompositionofthetransaction,forexample,transformingasharedealtoanassetdeal;theymayalsobeusedforpost-acquisitiontaxplanning.

Alongwiththetaxandfinancialduediligenceresults,thelegalduediligencereviewshouldassistthebuyerindeterminingwhetherornottocompletethetransaction,andifso,inwhatform.Duediligenceinvestigationsletthebuyer’slegalteamconstructtheconditionsofthedealsothatthebuyerisaffordedwithanadequateamountofcomfortandprotection.Thelegalteamwillthenbeinapositiontoaddressspecificproblemsbyaskingforfurtherexplanationsand/orpromisesorwarrantiesfromtheseller.ThelegalteamcanalsoevaluatewhetherornotsuchpromisesorwarrantiesneedtobecoveredbyanindemnityclauseorotherlegallanguageallowedunderthePolishlaw.

Whentakentogether,thefinancial,taxandlegalduediligenceresultsareaverystrongtoolwhichcanveryeasilyhaveaninfluenceonthefinalresultofnegotiations,and,inparticular,howmuchthebuyerwillultimatelypay.



Accounting aspects of investing in the Real Estate market

3



3.1.Polishaccountingregulations

3.1.1.IntroductiontotheaccountingframeworkinPoland

PolishaccountingisregulatedbytheAccountingActof29September1994withsubsequentamendments(theAct).TheMinisterofFinancehasalsoissuedseveralregulationscoveringspecificaccountingareassuchasfinancialinstruments,consolidation,accountingforbanks,insurancecompanies,investmentfundsandpensionfunds.Since2002theAccountingActhasbeenundergoingsignificantchangestobringthePolishaccountingprinciplesclosertotheInternationalFinancialReportingStandards(IFRS).However,duetothemanychangesinIFRS,somedifferencescontinuetoexistbetweentheActandIFRSasnotedbelow.

In2002theAccountingStandardsCommitteewasestablishedinPoland.SincethattimeithasissuedthefollowingNational

AccountingStandards(‘KSR’)toimplementtheAct:.

• KSR1“Cashflowstatement”

• KSR2“Incometaxes”

• KSR3“Constructioncontracts”

• KSR4“Impairmentofassets”

• KSR5“Leasing”

• KRS6“Provisions,accruals,contingentliabilities“

• KSR7“Changesinaccountingpolicies,estimates,correctionoferrors,postbalancesheetevents–accountingandpresentation”

• KSR8“Developeractivity”

• KSR9“Managementreport”


TheCommitteealsoissuedseveralstandpoints(notastandard)ontopicsrelatedtobookkeeping,accountingforemissionrights,inventoryvaluationandgreencertificates.InanymattersnotregulatedbytheActorDecreesissuedbyMinistryofFinanceanentitymayapplytheNationalAccountingStandards.Intheabsenceofrelevantlocalregulations,the

entitymayapplyInternationalFinancialReportingStandards.

TheamendmentstotheAct,whichcameintoforceon1January2005,permitsomePolishentitiestoapplyIFRSasadoptedbytheEUastheirprimarybasisofaccounting.Theapplicationcriteriaaresummarizedinthefollowingtable:

Standalone financial

statements

Consolidated financial

statements 1.Entitieslistedonaregulatedmarketin

PolandorotherEuropeanEconomicArea(EEA)country.

Choice Required

2. Banks(otherthanthoseincludedin1,3and4). Notpermitted Required

3.EntitiesthatappliedforpermissiontolistonaregulatedmarketinPolandorotherEEAcountry*.

Choice Choice

4.EntitiesthatarepartofagroupwheretheparentpreparesconsolidatedfinancialstatementsinaccordancewithIFRSasadopted by EU.

Choice Choice

5.Branchesofaforeignentrepreneurs Choice Notapplicable

6.Otherentities. Notpermitted Notpermitted

* The Companies which filed prospectus to the Financial Supervision Committee in Poland or other EEA country.

Asof18March2008,furtheramendmentstotheAccountingActwerepublished.Themajorityoftheamendmentsbecameeffectiveasof1January2009andhavebeenapplicabletofinancialstatementsfortheannualperiodsbeginningonorafter1January2009.Itrequiredthefollowingadditionaldisclosuresinthenotestothefinancialstatements:agreementsnotrecognized

inthebalancesheet,significantrelatedpartytransactionsnotonanarms’lengthbasisandremunerationoftheauditorortheauditfirm.Amendmentstobeappliedinthefinancialstatementsforthefinancialyearbeginningin2009includedamongstothers:

• recognitionofchangesinthefairvalueofinvestmentpropertiesandintangibleassetsclassifiedasinvestments;


• possibilitytoceaseapplicationofIFRSastheprimarybasisofaccounting;

• changeofthecapitalgroupdefinition;

• changestoapplicationofthepoolingofinterestmethodforbusinesscombinations.

3.1.2.ApplicationofthePrinciplesoftheAccountingAct

TheprovisionsoftheActshallapply,subjecttotheprovisionsofParagraph3oftheAct,tothefollowingentitieswhoseregisteredofficesorplaceofexecutivemanagementarelocatedontheterritoryoftheRepublicofPoland:

• commercialcompanies(partnershipsandcompanies,includingthoseintheprocessofsettingup)andcivilpartnerships,aswellasotherlegalpersons,exceptfortheStateTreasuryandtheNationalBankofPoland;

• naturalpersons,civillawpartnershipsestablishedbynaturalpersons,generalpartnershipsestablishedbynaturalpersonsandprofessionalpartnerships,iftheirnetrevenuefromthesalesofgoodsforresale,finishedgoodsandfinancialtransactionsforthepriorfinancialyearamountedtoatleastthePolishzlotyequivalentofEUR1,200,000;

• organizationalentitiesoperatingonthebasisoftheBankingLaw,regulationsontradinginsecurities,investmentfundregulations,insurance

regulations,cooperativesavingsbanksorregulationsontheorganizationandoperationofpensionfunds,regardlessoftheirlevelofrevenue;

• communes,provinces,voivodshipsandtheirassociations,aswellas:

• state,communal,districtandprovincialbudgetentities;

• communal,districtandprovincialbudgetinstitutions;

• statespecialpurposefunds.

• organizationalunitswithoutthelegalpersonality,exceptforpartnerships;

• foreignlegalpersons,foreignunitswithoutthelegalpersonalityandforeignnaturalpersonsconductingactivitiesintheRepublicofPolandpersonally,throughanauthorizedperson,withtheaidofemployees-inrespectofbusinessactivitiesconductedintheRepublicofPoland;

• entitiesnotmentionedabove,iftheyreceivesubsidiesorsubventionsfromtheStatebudget,budgetsoflocalauthoritiesorspecialpurposefundsforcarryingoutrelevantassignments-fromthebeginningofthefinancialyearinwhichthosesubsidiesorsubventionsweregranted.

• naturalpersons,civilpartnershipsestablishedbynaturalpersons,registeredpartnershipofnaturalpersonsandprofessionalpartnershipsmayapplytheaccountingprinciplesspecifiedintheActfromthebeginningofthesubsequentfinancialyear,iftheirnetrevenuefromthesalesofgoods,andproductsandfinancialtransactions


fortheprecedingfinancialyeararelessthanthePolishzlotyequivalentofEUR1,200,000.Inthatcase,suchpersonsorpartnersarerequiredtonotify,beforethebeginningofthefinancialyear,thetaxofficerelevanttoincometaxmatters.

Entitiesshouldhavedocumentationwhichdescribes,inPolish,itsadoptedaccountingpolicies,inparticularthoserelatedto:

• thedeterminationofthefinancialyearandreportingperiodscoveredbyit;

• themethodsofmeasuringassets,liabilitiesandequity,anddeterminingthefinancialresult;

• themannerofkeepingthebooksofaccounts,includingatleastacorporatechartofaccountswithadoptedprinciplesofeventsclassification,principlesofkeepingsubsidiaryledgeraccountsandtheirlinkageswithgeneralledgeraccounts;

• alistofthebooksofaccountsand,inthecaseofcomputerizedbooksofaccounts,alistofdatafilescomposingthebooksofaccountsonelectronicdatamedia,withthespecificationoftheirstructure,mutuallinkages;

• adescriptionofthedataprocessingsystemand,inthecaseofcomputerizedbooksofaccounts,adescriptionofthecomputersystem,includingalistofprograms,proceduresorfunctions;

• asystemprotectingdataanditsfiles.

AccountingrecordsshouldbekeptandfinancialstatementsdrawnupinthePolishlanguageandexpressedinthePolishcurrency.

3.1.3.Valuationofselectedbalancesheetitemsapplicableforreal-estatesectorentities

Investment property

Thedefinitionofinvestmentpropertyincludesproperties,whicharenotusedbytheentityforitsownpurposes,butwhichareheldforthepurposeofgeneratingprofitsthroughcapitalappreciationand/orproceedsfromrental.Investmentpropertyisvaluedatapurchasepricedecreasedbydepreciationandimpairmentwrite-offs(costmodel)oratitsfairvalue(fairvaluemodel).Eachentityhasapolicychoiceforthevaluationmodelused.

Fair value model

Ifthefairvaluemodelisselected,thechangesinthefairvalueofinvestmentpropertyarerecognizedintheincomestatementasotheroperatingcostsorotheroperatingincome(beforetheamendmentstotheActwhichcameintoforceon1January2009changesintheinvestmentpropertyfairvaluewererecognizedthroughequity).

Cost model

Ifthecostmodelisapplied,investmentpropertyisrecognizedandsubsequentlymeasuredatacquisitionorconstructioncost,lessaccumulateddepreciationandaccumulatedimpairmentwrite-offs.Landisvaluedatitsacquisition


costreducedbyimpairmentwrite-offs.Investmentproperties,exceptforland,aredepreciatedonastraight-lineorothersystematicbasisovertheinvestments’estimatedusefullives.

Borrowingcostswhichrelatetotheconstruction,adaptation,assemblyorimprovementofaninvestmentpropertyarecapitalizedaspartofthecostoftheasset,wherethoseborrowingshavebeendrawdownforthatspecificpurposethroughtothedateofthecompletionoftheconstructionorimprovement.

Financial instruments

Financialinstrumentsareinitiallyrecognizedattheiracquisitioncost(price),beingthefairvalueoftheconsiderationgiven.Thecostsofthetransactionareincludedintheirinitialvalue.

Afterinitialrecognition,financialassets(includingderivativesandembeddedderivatives)areclassifiedintooneofthefollowingfourcategoriesandreportedasfollows:

• heldtomaturity–measuredatamortizedcost,calculatedusingtheeffectiveinterestrate;

• loansandreceivables–measuredatamortizedcost,calculatedusingtheeffectiveinterestrate,shorttermreceivablesforwhichnointerestratehasbeensetaremeasuredattheamountdue;

• heldfortrading–measuredatfairvaluewithunrealizedgains/lossesrecordedintheprofitandlossaccount;

• availableforsale–measuredatfairvalue,withanunrealizedgains/lossesrecognizedintheprofitandlossaccountorintherevaluationreservecomponentofequityuntiltheinvestmentissoldorimpairedatwhichtimethecumulativegain/lossisincludedintheprofitandlossaccount–thepolicychoiceshouldbemadebythemanagementoftheentity.

Loansandborrowingsareinitiallyrecognizedatcost,beingthevalueofthefundsreceivedandincludingtransactioncostsassociatedwiththeborrowing/loan.Afterinitialrecognition,allinterest-bearingloansandborrowings,otherthanliabilitiesheldfortrading,aremeasuredatamortizedcost,usingtheeffectiveinterestratemethod.

Financialliabilities,exceptforhedgeditems,arevaluedatamortizedcostnotlaterthanattheendofthereportingperiod.Liabilitieswhichareheldfortradingaresubsequentlymeasuredatfairvalue.Anygain/lossfromre-measurementtofairvalueisincludedinthenetprofit/lossfortheperiod.

Thecompaniesthatdonotmeetstatutoryauditrequirementsmayelectnottoapplytheabovevaluationmethodsifitdoesnotaffectthetrueandfairpresentation.Inthiscase,investmentsmaybeaccountedforasfollows:

• short-terminvestments–atthelowerofcostormarketvalue,atfairvalueoratamortizedcost(ifamaturitydateisknown)withgains/lossesrecognizedintheprofitandlossaccount;

• long-terminvestments–atcostlessimpairmentoratfairvaluewithgains/lossesrecognizedintherevaluation


reserveinequity(surplusoverthecostofinvestment)orintheprofitandlossaccount(whenthefairvalueislowerthancostoftheinvestment).Ifamaturitydateisknown,long-terminvestmentsmaybestatedatamortizedcost.

Investments in subsidiaries, associates and jointly controlled entities and other long-term investments

Investmentsinsubsidiaries,associatesorjointventurescanbecarriedathistoricalcost,equityaccountedoratfairvalue.Ifcarriedatfairvalue,anincreaseinthefairvalueisrecordedintherevaluationreserve.Adecreaseinthefairvalueofapreviouslyre-valuedinvestment,whichdoesnotexceedtheamountofthepreviousrevaluation,reducestherevaluationreserveifthesurplusonrevaluationhasnotbeenamortizedbythedateofthemeasurement.Inallothercases,theeffectsofadecreaseinthevalueofaninvestmentarerecognizedasfinancialcosts.Anincreaseinthevalueofaninvestment,whichisdirectlyrelatedtoadecreasethathasbeenpreviouslyrecognizedasfinancecosts,isrecognizedasfinancialrevenueuptotheamountofsuchexpense.

Thefairvalueoffinancialinstrumentstradedonanactivemarketisestablishedwithrespecttothepriceslistedonsuchamarketasatthebalancesheetdate.Ifthereisnosuchalistedmarketprice,thefairvalueisestimatedbasedonthelistedmarketpriceofasimilarinstrumentorbasedontheexpectedcashflows.

Inventories

Theinventoryshouldbestatedatthelowerofcostornetrealizablevalue.

Capitalizationoffinancialcostsintheinventoryispermittediftheproductionprocessrequiresanecessarylongperiodofmanufacturing.Nospecificprovisionsrelatedtorealestateinventoryexist.

Construction contracts and provisions of National Accounting Standard 3 (KSR 3) ”Construction contracts”

AccordingtotheAct,revenuesfromconstructioncontractsshallbedeterminedatthebalancesheetdateinreferencetothestageofcompletionprovidingthat:

• theperformanceperiodoftheserviceislongerthan6months;

• thesubstantialpartoftheservicehasbeencarriedoutbeforethebalancesheetdate;

• thestageofcompletion,aswellastheanticipatedtotalcost,maybeestimatedreliably.

Thestageofcompletionshallbeestimatedusingthemethodapprovedbytheentityandbasedon:

• theshareofcostsincurredfromthecontractcommencementdateintotalestimatedserviceperformancecosts;

• thenumberofworkinghoursattributabledirectlytotheserviceperformance;

• themeasurementofworkcarriedout;


• anothermethod–providedthatitreflectsthestageofcompletionreliably.

Regardlessoftherevenuecalculationmethodused,whenitisprobablethattotalcontractcostswillexceedtotalcontractrevenue,theexpectedlossshallberecognizedasanexpenseimmediately.

InNovember2006theNationalAccountingStandard3”Constructioncontracts”wasissued.Thestandardcovers,amongother,thefollowingtopics:determinationofthestageofcompletion,determinationofrevenuesandcostsofuncompletedconstructioncontract,presentationanddisclosureofinformationinthefinancialstatements,deferredtaxresultingfromconstructioncontracts.TheprovisionsofKSR3areingeneralinconformitywiththeIAS11ConstructionContracts,althoughcertaindifferencesbetweenthesetworegulationsdoexist.

Foreign currency transactions

TransactionsdenominatedinaforeigncurrencyaretranslatedintoPolishcurrencyattheactualexchangerateappliedonthedateofthetransaction,or,iftheactualrateisnotknown,attheratepublishedbytheNationalBankofPoland.

Atthebalancesheetdate,assetsandliabilitiesdenominatedinforeigncurrencies(otherthansharesinsubsidiariesandassociatesvaluedusingequitymethod)aretranslatedusingtheNationalBankofPolandrates.

Foreignexchangedifferencesarisingonrevaluationaregenerallyrecordedasfinancialincomeorfinancialexpense.Forcertaintypesoflong-terminvestments

denominatedinforeigncurrenciesgainsarerecognizedintherevaluationreserve.Foreignexchangedifferencesrelatingtoliabilitieswhichareusedtofinancetheassetsunderconstructionarecapitalizedtothecostoftheconstructedassets.

Deferred tax

Deferredtaxiscalculated,usingtheliabilitymethod,onalltemporarydifferencesatthebalancesheetdatebetweenthetaxbaseofassetsandliabilitiesandtheircarryingamounts.Deferredtaxliabilitiesarerecognizedforalltaxabletemporarydifferences.Deferredtaxassetsarerecognizedforalldeductibletemporarydifferencesandunusedtaxlosses,totheextentthatitisprobablethattaxableprofitwillbeavailable,againstwhichthedeductibletemporarydifferencesandunusedtaxlossescanbeutilized.

Deferredtaxassetsandliabilitiesaremeasuredatthetaxratesthatareexpectedtoapply(asenactedatthebalancesheetdate)intheperiodwhentheassetisrealizedortheliabilityissettled.TheNationalAccountingStandardIncomeTaxes(KSR2)alsorequiresthatadditionaltaxcreditsgiventocompaniesoperatinginSpecialEconomicZonesarerecognizedasgovernmentgrantse.g.givingrisetoadeferredincome.Suchadeferredincomeistobeamortizedovertheusefullifeoftheasset.

Thosecompaniesthatdonotmeetthecriteriaforstatutoryaudit(seesection3.1.6.below)mayelectnottorecognizedeferredtaxes.


Leases

Aleaseisclassifiedasafinanceleaseifatleastoneofthefollowingsevenconditionsismet:

• thelegaltitleistransferreduponleaseexpiry;

• theassetmaybepurchasedbythelesseeatapricelowerthanthemarketvalueuponleaseexpiry;

• theleasetermislongerthan75%oftheeconomicusefullifeoftheleasedasset;

• thesumofthediscountedminimumleasepaymentsishigherthan90%ofthemarketvalueoftheleasedassetasattheleaseinception;

• theleasecanbeextendedonmorefavorableterms;

• ifcancelled,thelesseebearsallcancellationcosts;

• theassetisadaptedtothespecificneeds of the lessee.

Thosecompaniesthatdonotmeetcriteriaforstatutoryauditrequirements(seesection3.1.6.below)mayadoptsimplifiedaccountingforleases,i.e.toaccountfortheleasesinaccordancewiththetaxtreatment.

Business combinations

Businesscombinationsthatarenotundercommoncontrolareaccountedforusingthepurchasemethod.Thepoolingofinterestmethodmaybeusedforbusinesscombinationsthatareundercommoncontrol.

3.1.4. Financialstatements

AllentitiesrequiredtoapplytheprovisionsoftheActareobligedtopreparetheirfinancialstatementsandconsolidatedfinancialstatements(ifapplicable)foreachfinancialyear.Thefinancialyearneednotbethecalendaryear.

FinancialstatementsmustbepreparedinthePolishlanguageandexpressedinthePolishcurrency.AsrequiredbytheActthefinancialstatementsconsistof:

• introduction;

• balancesheet;

• incomestatement;

• statementofcashflows;

• statementofchangesinequity;

• additionalnotesandexplanations.

Joint-stockcompanies,limitedliabilitiescompanies,insurancecompaniesandstate-ownedcompaniesarerequiredtoprepare,inadditiontothefinancialstatements,theDirector’sreport–detailedcontentrequirementsarespecifiedinArticle49oftheAct.

Theformatofthebalancesheet,incomestatement,statementofcashflows,statementofchangesinequityandthecontentsofnotestothefinancialstatementsaredeterminedbytheAccountingAct.CompanieslistedontheWarsawStockExchangewhenpreparingthefinancialstatementsinaccordancewiththeActareguidedbyspecificregulationsforpublicentities.

Thefinancialstatementsofissuersofsecuritiesadmittedto,issuersof


securitiesintendingtofileforadmissionto,orissuersofsecuritiespendingadmissiontotradingononeoftheregulatedmarketsoftheEuropeanEconomicArea,maybepreparedinaccordancewithIFRS.ConsolidatedfinancialstatementsofissuersofsecuritiesadmittedtopublictradingonaregulatedmarketoftheEuropeanEconomicAreashallbepreparedinaccordancewithIFRS.Inaddition,thefinancialstatementsofentitiesbeingmembersofacapitalgroup,inwhichaparentcompanypreparesconsolidatedfinancialstatementsunderIFRS,maybepreparedinaccordancewithIFRS.ThedecisioninrespectofthepreparationoffinancialstatementsinaccordancewithIFRS,shallbetakenbyanapprovingbody.

EntitieswhichpreparetheirfinancialstatementsinaccordancewithInternationalFinancialReportingStandardsshallapplytheprovisionsoftheActinmattersnotregulatedbyIFRSincluding:

• theprinciplesofmaintainingaccountingbooks(itwillnot,however,includetheformatoffinancialstatements)(Chapter2)

• stocktaking(Chapter3)

• auditingandpublishingfinancialstatements(Chapter7)

• directors’report(Article49)

• protectionofdata(Chapter8)

• penalliability(Chapter9)

• specificandinterimprovisions(Chapter10)

Theentity’smanagementshallensurethattheannualfinancialstatementsarepreparedwithinthreemonthsfromthebalancesheetdate.Theannualfinancialstatementsshallbeapprovedbytheapprovingbodywithin6monthsfromthebalancesheetdate.Priortotheapproval,ifrequired,theannualfinancialstatementsaresubjecttoanaudit.Iftheannualfinancialstatementsofanentityarerequiredtobeaudited,theyshallbefiledwitharelevantcourtregistertogetherwithastatutoryauditor’sopinion,acopyoftheresolutionordecisionoftheapprovingbodyconcerningtheapprovaloftheannualfinancialstatementsandtheresolutiononprofitdistributionorlosscoverage,aswellaswithdirector’sreport,within15daysfromthedateoftheapprovaloftheannualfinancialstatements.

Thesameregulationsapplytotheparententitiesthatpreparetheannualconsolidatedfinancialstatementsofthecapitalgroupwiththeexceptionthataparentcompany,whichisasubsidiaryofanotherentityhavingitsregisteredofficeortheplaceofexecutivemanagementlocatedwithintheEuropeanEconomicArea(higher-levelparentcompany),isnotrequiredtoprepareconsolidatedfinancialstatements,if:

• ahigher-levelparentcompanyholdsatleast90%ofitsshares,andallothershareholdersoftheparentcompanyhaveagreedonexemptionapplication,and

• ahigher-levelparentcompanywillbeconsolidatingboththeparent


companybeingitssubsidiaryandallothersubsidiariesoftheparentcompanywhichwasexemptedfrompreparingtheconsolidatedfinancialstatements.

Insuchasituationtheconsolidatedfinancialstatementsandtheconsolidatedannualreportofahigher-levelparentcompanytogetherwiththestatutoryauditor’sopinion,translatedintoPolishbyaworntranslator,shallbefiledwitharelevantcourtregisterwithin30daysfromtheirapprovaldate.

3.1.5.Financialreportingoflistedcompanies

Regulatory environment

ThebasicprinciplesofthePolishcapitalmarketaresetoutbythefollowingregulations:

• theActonTradinginFinancialInstruments;

• theActonPublicOfferingandonTermsonwhichFinancialInstrumentsareIntroducedtoanOrganizedSystemofTradingaswellasonListedCompanies;and

• theActonSupervisionovertheCapitalMarket.

TheseprovisionsimplementtheEuropeanParliamentandCouncilDirectivesregardingthecapitalmarkets,adjustingthePolishprovisionstotheEuropeanCommunitystandards.ThemannerinwhichprospectusesarepreparedisinlinewiththeEU

ProspectusRegulation,andsecuritiesadmittedbyotherEUregulatorscanunderPolishprovisionsalsobeadmittedtotradinginPoland.PolishregulationswereadjustedtotheprovisionsoftheTransparencyDirective,makingthemarketmorefavourableforforeigninvestorsandforeignpubliccompanies.Increasingattentionisalsoappliedtomarketcommunication,protectionofminorityinvestors,counteractingfraudandinsidertrading.

Theregulationsregardinginvestmentfunds,containedintheLawonInvestmentFundsdated27May2004,asamended,reflecttheappropriateprovisionsoftheEUlawconcerningundertakingsforcollectiveinvestmentsintransferablesecurities.

Inparticular,theofferingofforeigninvestmentfundsinPolandisnowregulatedindetail.

ThePolishcapitalmarketissupervisedbytheFinancialSupervisionAuthority(KomisjaNadzoruFinansowego–FSA).TheFSAisasingleregulatoryauthoritysupervisinginsurance,pensionfunds,banksandfinancialmarketsinstitutions.TheFSA’smainfunctionisistoprotecttheinterestsofinvestors.

TheroleoftheFSAalsoincludessupervisionofbrokeragehouses,collectiveinvestmentinstitutionsandpubliccompaniesactingorofferedinPoland.ThecompetencesoftheFSAincludebothinitialcontrol,aswellassubsequentsupervisionoftheactivitybytheaforementionedentities,aswellasoverbrokersandinvestmentadvisors.


TheFSAmayimposefinesandotheradministrativemeasuresuponmarketparticipantswhofailtocomplywithPolishregulations.IncaseofentitieswhicharealsosubjecttosupervisionwithinotherEUjurisdictions,theFSAcooperateswithlocalmarketregulatorsinexercisingsupervision.

TheWarsawStockExchange(Giełda Papierów Wartościowych w Warszawie–WSE)istheprincipalmarketinPolandwherestocks,bonds,derivativesandotherfinancialinstrumentsaretraded.SecuritiesaretradedontwodifferentmarketswithintheWSE:the“mainfloor”(primarymarket)andthe“parallelmarket”.Inaddition,theWSEalsoownsastakeinanOTCmarketcalledBondSpot(previously:MTS-CeTo),andoperatesNewConnect,amultilateraltradingsystem.In2009thebondmarketCatalystwasopened.Tradedderivatives

includefuturecontractsonindicesandselectedstocks,optionsonindices,andotherinstruments.

Financial Reporting Requirements

FinancialreportingoftheentitiesadmittedtopublictradingbytheFSAisregulatedbytheDecreeissuedbyMinisterofFinancedated19February2009on current and periodic information published by issuers of securities and conditions for recognition as equivalent the information required by laws of non-EU member states.

Thefinancialreportingrequirementsforparticularperiodicreports(bothstandaloneandconsolidated)aresummarizedinthetablebelow.


Type of the report Content includes Filling deadline ***

Quarterly

• CondensedFinancialStatementsforthequarterendedandforallquarterstodatetogetherwithcomparabledata

• Thereisnorequirementtofilethereportforthesecondquarterasthesemiannualreportisfiled(doesnotapplytofunds)

• Thereisnorequirementtofilethereportforthefourthquarteriftheannualreportisfilledwithinthequarterlyreportfillingdeadline

• Nolaterthan45daysafterthequarterend

• Forthefourthquarternolaterthan60daysafterthefourthquarterend

Semiannual

• CondensedFinancialStatementsforthesixmonthperiod

• IndependentAuditor’sReviewReportontheCondensedFinancialStatementsforthesixmonthsperiod

• Nolaterthan2monthsafterthehalf-yearend

Annual• AnnualFinancialStatements

• IndependentAuditor’sOpinion

• Nolaterthan4monthsaftertheyearend

• Nolaterthan80daysaftertheyearendiftheentitydecidesnottofillreportforthefourthquarter

*** A listed company is obliged to publish the filling dates for all periodic reports within the first month of a given year in the form of a current report. The filling dates of all periodic reports need to be in line with the dates announced in this current report.


3.1.6.Auditrequirements

Auditshallberequiredinrespectofannualconsolidatedfinancialstatementsincludingannualfinancialstatementsofcapitalgroups,aswellastheannualfinancialstatementsofthefollowingentitieswhichcontinueasagoingconcern:

• banksandinsurers;

• entitieswhichoperateunderregulationsontradinginsecuritiesandregulationsoninvestmentfunds;

• entitieswhichoperateonthebasisofregulationsontheorganizationandoperationsofpensionfunds;

• jointstockcompanies,exceptforcompanieswhichareinthesetting-upprocessasatthebalancesheetdate;

• otherentitieswhich,inthepriorfinancialyearforwhichthefinancialstatementswereprepared,metatleasttwoofthefollowingconditions:

• theannualaveragenumberofemployeesinfull-timeequivalentsamountedtoatleast50people;

• the total assets as at the end of thefinancialyearwereatleastthePolishzlotyequivalentofEUR2,500,000;

• thenetrevenuefromthesalesofgoodsforresaleandfinishedgoodsandthefinancialtransactionsforthefinancialyear,wasatleastthePolishzlotyequivalentofEUR5,000,000.

Additionally,thefinancialstatementsofacquirersandnewly-formedcompaniesasaresultofabusinessacquisition,preparedforthefinancialyearinwhichthebusinesscombinationtookplace,andtheannualfinancialstatementsofentitieswhicharepreparedinaccordancewithIFRS,arerequiredtobeaudited.Furthermore,combinedannualfinancialstatementsofinvestmentfunds,whichhaveseparatesub-fundsandannualfinancialstatementsofthesub-funds,arerequiredtobeauditedandpublished.


3.2. SelectedAspectsofAccountingforRealEstateunderInternationalFinancialReportingStandards(applicableforannualperiodsbeginningon1January2013)

3.2.1.Introduction

Nowadays,anumberofrealestateentitiesapplyIFRSfortheiraccountingandreportingpurposes.CompaniesreportingunderInternationalFinancialReportingStandards(IFRS)continuetofaceasteadyflowofnewstandardsandinterpretations.ThevolumeofchangestoIFRSissignificantandislikelytocontinueintheforeseeablefuture.Thenatureofthechangesrangesfromsignificantamendmentsoffundamentalprinciplestosomeminorchangesincludedintheannualimprovementsprocess.Theywillaffectmanydifferentareasofaccountingofrealestateentitiessuchasthepresentationoffinancialstatements,financialinstruments,leases.Someofthechangeshaveimplicationsthatgobeyondmattersofaccounting,astheymayimpactbusinessdecisions,suchasthedesignofjointarrangementsorthestructuringoftransactions.Thechallengeforpreparerswillbetogainanunderstandingofwhatlies ahead.

BelowweconcentrateontheimplicationsofthenewlyissuedIFRS10,11,12and13fortherealestateandconstructionindustries.


3.2.2. InteractionbetweenIFRS10,IFRS11andIFRS12

3.2.2.1 Introduction

InMay2011,theInternationalAccountingStandardsBoard(IASB)issuedthreenewstandardsthatamendedconsolidationrulesofentities:

• IFRS10ConsolidatedFinancialStatements,

• IFRS11JointArrangementsand

• IFRS12DisclosureofInterestsinOtherEntities.

Thesenewstandardsareeffectiveforannualperiodsbeginningonorafter1January2013,andmustbeappliedretrospectively(withsomemodifications).InPolandandinthewholeEuropeanUnionstandardscomewithaneffectivedateof1January2014,soforthemajorityofcompanies2014wasthefirstyearnewruleswereapplied.

Themajorchangesintroducedareasfollows:

• IFRS10establishesasinglecontrolmodelthatappliestoallentities.ThechangesintroducedbyIFRS10requiremanagementtoexercisemorejudgementtodeterminewhichentitiesarecontrolled,comparedwiththepreviousrequirementsthatwereinIAS27.IFRS10doesnotchangeconsolidationprocedures(i.e.,howtoconsolidateanentity)fromtherequirementsthatpreviouslyexisted

inIAS27.ThoserequirementshavesimplybeenmovedtoIFRS10.Rather,IFRS10changeswhetheranentityisconsolidated,byrevisingthedefinitionofcontrolandaddingrequirementstoconsiderwhenmakingcontroldecisions.

• IFRS11dealswithjointlycontrolledentities(JCEs)andaddressesonlytwoformsofsuchjointarrangements(jointoperationsandjointventures).OneoftheprimaryreasonsfortheissuanceofIFRS11wastoincreasecomparabilitywithinIFRSbyremovingthechoiceavailableforJCEstouseproportionateconsolidation.Instead,JCEsthatmeetthedefinitionofajointventure(asnewlydefined)mustbeaccountedforusingtheequitymethod.ThisalsoconvergeswithUSGAAP,whichgenerallyrequirestheequitymethodforjointventures.Forjointoperations(includingformerjointlycontrolledoperations,jointlycontrolledassetsand,potentially,someformerJCEs),anentityrecognisesitsassets,liabilities,revenuesandexpenses,and/oritsrelativeshareofthoseitems,ifany.IFRS11isintendedtobroadenthefocusforclassifyingajointarrangement,sothatthestructureofthejointarrangementisnottheonlyfactorconsidered.WhereaspreviousregulationsofIAS31focusedexclusivelyonthelegalformoftheentity,IFRS11focusesmorebroadlyontherightsandobligationsarisingfromthearrangement.

• IFRS12summarizesallthedisclosurerequirementsrelatedtoanentity’sinterestsinsubsidiaries,


jointarrangements,associatesandstructuredentities,includinganumberofnewdisclosures.OneofthemostsignificantchangesintroducedbyIFRS12isthatanentityisrequiredtodisclosejudgementsthatweremadeindeterminingwhetheritcontrolsorhasjointcontroloveranotherentity.Evenifmanagementconcludesthatitdoesnotcontrolanentity,theinformationusedtomakethatjudgementwill

betransparenttousersoffinancialstatements.Thenewdisclosureswillalsoassistusersoffinancialstatementstomaketheirownassessmentoftheimpactonthefinancialresultsofthegroupincasereachingadifferentconclusionregardingentitiestobeconsolidated–byprovidingmoreinformationaboutcertainunconsolidatedentities.

Diagram 1 - Interaction between IFRS 10, IFRS 11, IFRS 12 and IAS 28

YES

NO

NO

YESJoint

operationJoint

venture

Does the investor have joint control

over an agreement?

Consolidation in accordancewith IFRS 10

Does the investor have significantinfluence over

an entity?

Classify jointarrangement in

accordance with IFRS 11

Account for assets,liabilities, revenue

and expenses

Account forinterest under

the equity method

Financialinstruments Other IFRS

Disclosures inaccordance with

IFRS 12

YES NO

Does the investor control an entity

by itself?

Disclosures inaccordancewith

IFRS 12 and otherrelevant IFRS


IFRS 12


IFRS 12 and otherrelevant IFRS


3.2.2.2.IFRS10-ConsolidatedFinancialStatements

ConsistentwithpreviousrequirementsIFRS10requiresthataparent(unlessexempt)presentconsolidatedfinancialstatements.Thatis,IFRS10requiresfinancialstatementsofthegroup,inwhichtheassets,liabilities,equity,income,expensesandcashflowsoftheparentanditssubsidiaries,arepresentedasthoseofasingleeconomicentity.IFRS10appliestoalltypesofentities,includingcorporations,partnerships,limitedliabilitycorporations,trusts,andothertypesofentities.Agroupconsistsofaparentanditssubsidiaries(i.e.,entitiesthattheparentcontrols).Whenanentityisaparentitneedstoassesswhetherit(theinvestor)controlstheotherentity(theinvestee).IFRS10providesanewdefinitionofacontroltogetherwithachangedguidanceonassessingwhethertheentityhascontrolof an investee.

Inmanycases,whendecision-makingiscontrolledbyvotingrightsthatalsogivetheholderexposuretovariablereturns,itisclearthatwhicheverinvestorholdsamajorityofthosevotingrightscontrolstheinvestee.However,inothercases(suchaswhentherearepotential

votingrights,oraninvestorholdslessthanamajorityofthevotingrights),itmaynotbesoclear.Inthoseinstances,furtheranalysisisneededbasedonthefactsandcircumstances(consideringtheApplicationGuidanceinIFRS10),todeterminewhichinvestor,ifany,controlsaninvestee.Diagrambelowillustratesthisassessment.

Excerpts from IFRS 10:

6 Aninvestorcontrolsaninvesteewhenitisexposed,orhasrights,tovariablereturnsfromitsinvolvementwiththeinvesteeandhastheabilitytoaffectthosereturnsthroughitspowerovertheinvestee.

7 Thus,aninvestorcontrolsaninvesteeifandonlyiftheinvestorhasallthefollowing:

(a)powerovertheinvestee;

(b)exposure,orrights,tovariablereturnsfromitsinvolvementwiththeinvestee;and

(c) theabilitytouseitspowerovertheinvesteetoaffecttheamountoftheinvestor’sreturns.


Diagram 2 - Definition of control

PowerDetermine which party, if any, has power, that is, the current ability to direct the relevant activities. Power arises from the rights, which may include:• Voting rights• Potential voting rights (e.g.

options or convertible instruments)

• Rights to appoint key personnel• Decision making rights within a

management contract• Removal or „kick-out” rightsHowever, power does not arise from protective rights.

ReturnsAssess whether the investor is exposed, or has rights to variable returns from its involvement with the investee. Returns can be positive, negative or both.Examples of returns include:• Dividents• Remuneration• Economies of scale, cost

savings, scarce products, proprietary knowledge, synergies or other returns that are not available to other interest holders

LinkageEvaluate whether the investor has the ability to use its power to affect the investor’s returns from its involvement with the investee. If applicable, determine whether the investor is a principal or an agent, considering:• Scope of its authority• Rights held by other parties• Remuneration• Exposure to variability from

other interests

Iden

tify

pow

er

Ass

ess

retu

rns

Eval

uate

link

age

Understand purpose and design of investee

The first criterion tohavecontrolrelatesto power.Aninvestorhaspowerwhenithasexistingrightsthatgiveitthecurrentabilitytodirecttherelevantactivities.Therefore,whenassessingwhetheraninvestorhaspower,therearetwocriticalconcepts:

• Relevant activities

• Existing rights

Relevantactivitiesaretheactivitiesoftheinvesteethatsignificantlyaffecttheinvestee’sreturns.Examplesofrelevantactivitiesinclude:

• Determiningandchangingoperatingandfinancialpolicies(whichmightincludetheitemsbelow)

• Sellingandpurchasinggoodsandservices

• Managingfinancialassetsduringtheirlife

• Selecting,acquiringordisposingofassets

• Researchinganddevelopingnewproductsorprocesses

• Makingcapitalorfundingdecisions

• Appointing,remuneratingorterminatingtheemploymentofaninvestee’sserviceprovidersorkeymanagementpersonnel

• Establishingoperatingandcapitaldecisionsoftheinvestee,includingbudgets.

Inmanycases,morethanoneactivitywillsignificantlyaffectaninvestee’sreturns.Thus,inordertodecidewhichparty,ifany,haspower,itisimportanttoidentifytheactivitiesthatmostsignificantlyaffectreturns.Thisdiffersfromjointcontrol,definedasthecontractuallyagreedsharingofcontrolofanarrangement,whichexistsonlywhendecisionsabouttherelevantactivitiesrequiretheunanimousconsentofthepartiessharingcontrol.Jointcontrolisdiscussedinmoredetailslater.


Oncetherelevantactivitiesareidentified,thenextstepistodeterminewhichinvestor,ifany,carriesexisting rights, i.e.hasthecurrentabilitytodirectthoseactivities,whichgiveshimthepoweroverinvestee.

Inordertogivethepowertherightsneedstobesubstantive.Forexample,thefollowingshouldbeconsideredwhenevaluatingwhetheraninvestor’srightsaresubstantive:

• Whyweretherightsgranted?

• Whatcompensationwasgiven(orreceived)fortheright?Doesthatcompensationreflectfairvalue?

• Didotherinvestorsalsoreceivethisright?Ifnot,why?

InadditionIFRS10introducesanewtermofprotectiverights,definedas:rights that are designed to protect the interest of the party holding those rights without giving that party power over the entity to which those rights relate.Controldoesnotarisefromprotectiverights.Examplesofprotectiverightsincludetherightto:

• Restrictaninvesteefromundertakingactivitiesthatcouldsignificantlychangethecreditriskoftheinvesteetodetrimentoftheinvestor

• Approveaninvestee’scapitalexpenditures(greaterthantheamountspentintheordinarycourseofbusiness)

• Approveaninvestee’sissuanceofequityordebtinstruments

• Vetotransactionsbetweentheinvesteeandarelatedparty

Insomecases,arightmightbedeemedprotective,suchastheabilitytosell

assets of the investee if an investee defaultsonaloan,whendefaultisconsideredanexceptionalcircumstance.However,iftheinvesteedefaultsonaloan,theinvestorholdingthatrightwouldneedtore-assesswhetherthatrighthasbecomeasubstantiveright(ratherthanaprotectiveright),basedonthechangeinfactsandcircumstances.

Example — Veto right over annual budget — protective or not?

An investor determined that approving the annual operating budget of an investee is the relevant activity. For example, this might be the case if the operating budget is detailed and management has little latitude to deviate from the budget. An investor has the right to veto this annual operating budget. If that investor does veto the budget, management of the investee must re-draft and re-propose the budget, and re-submit the budget to the investor holding the veto right.

In this fact pattern, because approving the annual operating budget is the activity that most significantly affects the investee’s returns, then a veto right over the annual operating budget would be substantive, and is not a protective right. Evaluating whether approving an annual operating budget is the most relevant activity will depend on facts and circumstances, and requires judgement.

The second criterion forassessingwhetheraninvestorhascontrolofaninvesteeisdeterminingwhethertheinvestorhas an exposure, or has rights, to variable returns from its involvement


withtheinvestee.Returnscanbepositive,negativeorboth.Examplesofexposurestovariablereturnsinclude:

• Dividends,fixedinterestsondebtsecuritiesthatexposetheinvestortothecreditriskoftheissuer,variableinterestondebtsecurities,otherdistributionsofeconomicbenefitsandchangesinthevalueofaninvestmentinan investee

• Remunerationforservicinganinvestee’sassetsorliabilities,feesandexposuretolossfromprovidingcreditorliquiditysupport,residualinterestsintheinvestee’sassetsandliabilitiesonliquidationofthatinvestee,taxbenefitsandaccesstoliquiditythataninvestorhasfromitsinvolvementwiththeinvestee

• Economiesofscale,costsavings,scarceproducts,proprietaryknowledge,synergies,orotherexposurestovariablereturnsthatarenotavailabletootherinvestors

Simplyhavinganexposuretovariablereturnsfromitsinvolvementwithaninvesteedoesnotmeanthattheinvestorhascontrol.Tocontroltheinvestee,theinvestorwouldalsoneedtohavepowerovertheinvestee,andtheabilitytouseitspowerovertheinvesteetoaffecttheamountoftheinvestor’sreturns.Forexample,itiscommonforalendertohaveanexposuretovariablereturnsfromaborrowerthroughvariableinterestpaymentsthatitreceivesfromtheborrower.However,thelenderwouldnotcontroltheborrowerifitdoesnot

havetheabilitytoaffectthosevariableinterestpayments(whichisfrequentlythecase).Itshouldbeemphasisedthatwithrespecttothiscriteria,thefocusisontheexistenceofanexposuretovariablereturns,nottheamountoftheexposuretovariablereturns.

The third criterionforhavingcontrolisthattheinvestormusthave the ability to use its power over the investee to affect the amount of the investor’s returns.Thelinkbetweenpoweroveraninvesteeandexposuretovariablereturnsfrominvolvementwiththeinvesteeisessentialforhavingcontrol.Aninvestorthathaspowerovertheinvesteebutcannotbenefitfromthatpower,doesnotcontrolthatinvestee.Aninvestorthathasanexposuretoavariablereturnfromaninvestee,butcannotuseitspowertodirectstheactivitiestomostsignificantlyaffectstheinvestee’sreturns,doesnotcontrolthatinvestee.

Whendecision-makingrightshavebeendelegatedorarebeingheldforthebenefitofothers,itisnecessarytoassesswhetherthedecision-makerisaprincipaloranagenttodeterminewhetherithascontrol.Thisisbecauseifthedecision-makerhasbeendelegatedrightsthatgiveitpower,thedecision-makermustassesswhetherthoserightsgivepowerforitsownbenefit,ormerelypowerforthebenefitofothers.Asanagentcannotcontrolovertheinvestee,itdoesnotconsolidatetheinvestee.Aprincipalmayhavecontrolovertheinvestee,andifso,wouldconsolidatetheinvestee.


3.2.2.3 IFRS11-JointArrangements

Therearemanyreasonswhyonemightuseajointarrangementtoconductbusiness,suchasto:

• Acceleratethedevelopmentofnewtechnologies

• Turnexistingtechnologiesintomarketableproducts

• Enternewmarketsorindustries

• Expandgeographically

• Protectsupplychainandproductioncapacity

• Leverageintellectualpropertyheldbyothers(includingcompetitors)

• Distributerisk

• Actasanalternativetoraisingbankorequityfinancing

• Bringinadditionalexpertise

• Complywiththerequirementofagovernmentstakeholder

• Facilitatedistributionofproduct

• Takethefirststepinacquiringa business

Asdiscussedinmoredetailbelow,IFRS11coversallarrangementsinwhichthereisjointcontrol.Inpractice,someagreementsthatarereferredtoas‘jointarrangements’or‘jointventures’actuallyincludearrangementswherebyonlyonepartyhascontrol,ornopartieshavejointcontrol.Otherarrangementsmay

notusetheterm‘jointarrangement’or‘jointcontrol’,butcouldstillbejointarrangements,asdefinedbyIFRS11.Somearrangementssplitownershipequally(50/50)betweentwoparties—whileothersmaygiveagreaterfinancialinteresttooneofthetwoparties.Nomatterwhatterminologyisusedtodescribethearrangement,oritspurpose,managementwillneedtocarefullyevaluatethetermsofthearrangement,andtherelevantfactsandcircumstances,todetermineifitqualifiesasajointarrangement.


4 Ajointarrangementisanarrangementofwhichtwoormorepartieshavejointcontrol.

5 Ajointarrangementhasthefollowingcharacteristics:

(a)Thepartiesareboundbyacontractualarrangement.

(b)Thecontractualarrangementgivestwoormoreofthosepartiesjointcontrolofthearrangement.

6 Ajointarrangementiseitherajointoperationorajointventure.

7 Jointcontrolisthecontractuallyagreedsharingofcontrolofanarrangement,whichexistsonlywhendecisionsabouttherelevantactivitiesrequiretheunanimousconsentofthepartiessharingcontrol.


Diagram 3 - is it a joint arrangement?

Do the decisions about the relevant activities requirethe unanimous consent of all of the parties that collectively

control the arrangement?

Joint arrangement

Does the contractual arrangement give all of the parties(or a group of the parties) control of the arrangement collectively?

Outside the scopeof IFRS 11(not a joint

arrangement)

NO

NO

YES

YES

IFRS11statesthatdecisionsabouttherelevantactivitiesrequiretheunanimousconsentofalltheparties,oragroupoftheparties,thatcollectivelycontrolthearrangement.Accordingly,itisnotnecessaryforeverypartytothearrangementtoagreetohaveunanimousconsent.Tohaveunanimousconsent,onlythosepartiesthatcollectivelycontrolthearrangementmustagree.Therequirementtohaveunanimousconsentensuresthatnosinglepartycontrolsthearrangement.Whiletherequirementforunanimousconsentisnotnew,IFRS

11clarifieswhenunanimousconsentexists.Forexample,insomecases,acontractualarrangementmayrequireaminimumproportionofthevotingrightstomakedecisions.Whenthatminimumcanbeachievedbymorethanonecombinationofthepartiesagreeing,thearrangementisnotajointarrangementunlessitspecifieswhichparties(orcombinationofparties)arerequiredtoagreeunanimouslytodecisionsabouttherelevantactivitiesofthearrangement.TwoscenariospresentedbelowinDiagram4clarifyonthis.


Diagram 4 - Joint control?

Scenario 1 Scenario 2

Requirement 75%votetodirectrelevantactivities

75%votetodirectrelevantactivities

Party A 50% 50%

Party B 30% 25%

Party C 20% 25%

Conclusion

Jointcontrol—AandBcollectivelycontrolthearrangement(sincetheirvotesandonlytheirvotes,togethermeettherequirement).Becausetheyaretheonlycombinationofpartiesthatcollectivelycontrolthearrangement,itisclearthatAandBmustunanimouslyagree.

Nojointcontrol—multiplecombinationsofpartiescouldcollectivelycontrolthearrangement(i.e.,AandBorAandCcouldvotetogethertomeettherequirement).Sincetherearemultiplecombinations,andthecontractualagreementdoesnotspecifywhichpartiesmustagree,thereisnounanimousconsent.

IFRS11statesthattherearetwotypesofjointarrangements:eitherajointoperationorajointventure.

Diagram 5 - Joint operation vs Joint venture

Type of Arrangement Joint operation Joint venture

Definition

Thepartieswithjointcontrolhaverightstotheassetsandobligationsfortheliabilitiesofthearrangement.

Thepartieswithjointcontrolhaverightstothenetassetsofthearrangement.

Parties with joint control

Jointoperator—apartywithjointcontrolinajointoperation

Jointventurer—apartywithjointcontrolinajointventure


Type of Arrangement Joint operation Joint venture

Accounting overview

AjointoperatoraccountsforthefollowinginaccordancewiththeapplicableIFRS:• Itsassets,includingitsshareof

anyassetsheldjointly

• Itsliabilities,includingitsshareofanyliabilitiesincurredjointly

• Itsrevenuefromthesaleofitsshareoftheoutputarisingfromthejointoperation

• Itsshareofrevenuefromthesaleoftheoutputbythejointoperation

• Itsexpenses,includingitsshareofanyexpensesincurredjointly

Ajointventureraccountsforitsinvestmentinthejointventureusingtheequitymethod—proportionateconsolidationisnotachoiceanymore.

Althoughtheterm‘jointventure’isbroadlyusedinpractice,thistermisnarrowlydefinedinIFRS11.UnderpreviousregulationsofIAS31,jointventuresincludedJCEs,jointlycontrolledassetsandjointlycontrolledoperations,whereasunderIFRS11,ajointventureisonlyonetypeofjointarrangement.

Diagram 6 — Similar concepts, different terms

Joint operationsThe parties that have joint control have rights to the assets and obligations for the liabilities

relating to the arrangement.

Accounting: recognise its assets, liabilities, revenue and expenses, and/or its shares of assets, liabilities,

revenues and expenses incurred jointly

Jointly controlled operations

Accounting: recognise its assets, liabilities, expenses and its

shares of income

Jointly controlled assetsAccounting: recognise its share of assets, its share of liabilities, its income, its expenses and its

share of expenses

Jointly controlled entities

Accounting: equity method or proportionate consolidation

Joint venturesThe parties that have joint

control have rights to the net assets of the arrangement.

Accounting: equity method

IAS

31IF

RS

11

Join

t ve

ntur

esJo

int

arra

ngem

ents


Whenclassifyingajointarrangementaseitherajointoperationorajointventure,thefirststepistoassesswhetherthereisaseparatevehicle.Ifnot,thejointarrangementisautomaticallyajointoperation.However,ifthereisaseparate

vehicle,thefollowingfactorsneedtobeconsidered:

• Legalformoftheseparatevehicle

• Contractualtermsandconditions

• Otherfactsandcircumstances

Diagram 7 — Classifying a joint arrangement

Joint operation

Joint venture

Does the legal form of the separate vehicle give the parties rights to the assets and obligations for the liabilities relating

to the arrangement?

Is the joint arrangement structured through a separate vehicle?

Do the terms of the contractual arrangement give the parties rights to the assets and obligations for the liabilities relating

to the arrangement?

Do other facts and circumstances give the parties rights to the assets and obligations for the liabilities relating

to the arrangement?

YES

YES

YES

NO

YES

NO

NO

NO

Whenclassifyingajointarrangementaseitherajointoperationorajointventure,itiscriticaltounderstandthepurposeanddesignofthejointarrangement.Itiscriticaltounderstandwhetherthejointarrangement:

• Primarilyaimstoprovidethepartieswithanoutput(i.e.,thepartieshaverightstosubstantiallyalloftheeconomicbenefitsoftheassets)

• Dependsonthepartiesonacontinuousbasisforsettlingitsliabilities

Ifbothoftheabovearecharacteristicsofthejointarrangement,thenthatindicatesthatitisajointoperation.Insomecases,significantjudgementwillbeinvolvedtodecide.


Fact pattern — A separate vehicle is established, over which two parties have joint control. Neither the legal form nor the contractual terms of the joint arrangement give the parties rights to the assets or obligations for the liabilities of the arrangement. Other facts and circumstances are as follows:

• The purpose of the joint arrangement is to construct a residential complex for selling residential units to the public

• Contributed equity by the parties is sufficient to purchase land and raise debt finance from third parties to fund construction

• Sales proceeds will be used as follows (in this priority):

• Repayment of external debt

• Remaining profit distributed to parties

Analysis — Since there is a separate vehicle, and because neither the legal form nor the contractual terms of the joint arrangement give the parties rights to the assets or obligations for the liabilities of the vehicle, the preliminary analysis indicates that this is a joint

venture. The fact that the parties are the only source of cash flows at inception does not mean that the joint arrangement is a joint operation. Accordingly, there is nothing in the facts and circumstances that suggests the parties have rights to the assets, or obligations for the liabilities, since they only expect to receive any net profits after the external debt is repaid. Therefore, this would be a joint venture.

Variation — The contributed equity is not sufficient to purchase the land and raise debt financing. There is an expectation, or requirement, that the parties will have to contribute cash to the joint arrangement through a series of cash calls. Determining whether the series of cash calls implies that the parties are substantially the only source of cash flows contributing to the arrangement, and therefore, whether the parties have an obligation for the liabilities of the arrangement, (i.e., whether the arrangement is a joint operation) is a matter of judgement. If the joint arrangement gives the parties rights to the net assets, it would be a joint venture.

Example — Construction and real estate sales


TosumupitseemsthatthemainimpactofIFRS11willbefeltwhereproportionateconsolidationwasusedtoaccountforJCEsunderIAS31,andsuchentitiesareclassifiedasjointventuresunderIFRS11.ThisisbecausethetransitiontoIFRS11willresultinsubstantialchangestothefinancialstatementsofthejointventurer.JointventuresmustbeaccountedforusingonlytheequitymethodunderIFRS11.Thiswillresultinrecognisingonlyasinglelineiteminvestmentinajointventureinthestatementoffinancialposition,andasinglelineitemfortheproportionateshareofnetincomeandchangesinequityinthestatementofcomprehensiveincome.Thiscouldpotentiallybeasignificantchangeinthepresentationoftheseareasofthefinancialstatementsofaffectedentities.

3.2.2.4.IFRS12-DisclosureofInterestsinOtherEntities

IFRS12combinesthedisclosurerequirementsforanentity’sinterestsinsubsidiaries,jointarrangements,associatesandstructuredentitiesintoonecomprehensivedisclosurestandard.

Incomparisontopreviousregulationstheadditionaldisclosuresappearsmostlyinrelationtosubsidiariesthatarenotwhollyowned.OneofthenewrequirementsofIFRS12isthatanentitydisclosesthesignificantjudgementsandassumptionsithasmade(andchangesthereto)indeterminingwhetherornotithascontroloveraninvestee.TherequirementinIFRS12ismoreexpansivethantherequirementinIAS27,whichonlyrequiredentitiestodisclose

circumstanceswhen:(1)asubsidiarywasconsolidatedandtheparentownedlessthanamajorityofvotingrights;and(2)aninvesteewasnotconsolidated,andtheinvestorownedmorethanamajorityofvotingrights.Thischangeinthedisclosurereflectsthedegreeofjudgementthatisrequiredtodeterminewhetheranentityiscontrolled,andconsequently,consolidated.Forexample,


1 TheobjectiveofthisIFRSistorequireanentitytodiscloseinformationthatenablesusersofitsfinancialstatementstoevaluate:

(a) thenatureof,andrisksassociatedwith,itsinterestsinotherentities;and

(b) theeffectsofthoseinterestsonitsfinancialposition,financialperformanceandcashflows.

3 IfthedisclosuresrequiredbythisIFRS,togetherwithdisclosuresrequiredbyotherIFRSs,donotmeettheobjectiveinparagraph1,anentityshalldisclosewhateveradditionalinformationisnecessarytomeetthatobjective.

4 AnentityshallconsiderthelevelofdetailnecessarytosatisfythedisclosureobjectiveandhowmuchemphasistoplaceoneachoftherequirementsinthisIFRS.Itshallaggregateordisaggregatedisclosuressothatusefulinformationisnotobscuredbyeithertheinclusionofalargeamountofinsignificantdetailortheaggregationofitemsthathavedifferentcharacteristics.


anentityisrequiredtodisclosehowitevaluatedpotentialvotingrights(e.g.,options)andwhetheritisaprincipaloran agent.

Similarlyadditionaldisclosurerequirementsarisesinrelationtosignificantjudgementsandassumptionsmadewhendeterminingwhetherornotthejointcontroloveranarrangementexists.TherequirementsinIFRS12reflectsthedegreeofjudgementthatisrequiredtodeterminewhetheranentityhasjointcontrol.Thefollowingareexamplesofsignificantjudgementsforwhichdisclosuremayberequired:

• Whetherarightismerelyaprotectiveright(whichdoesnotgivejointcontrol)orasubstantiverightthatgivesanentityjointcontrol

• Whetheramanagerofanarrangementisactingasprincipalorasagent,whichwouldlikelyaffecttheconclusionwhetherthemanagerhascontrolorjointcontrol

• Whetherajointarrangementisajointoperationorajointventure,sinceitsclassificationisnotmerelybasedonlegalformunderIFRS11(asitwasunderIAS31)

3.2.3. IFRS13Fairvaluemeasurements–implicationsfortherealestatesector

IFRS13wasissuedbytheInternationalAccountingstandardsBoardinMay2011andstartedtobeeffectiveforannualperiodsbeginningonorafter1January

2013.IFRS13describeshowtomeasurefairvalueunderIFRSwhenitisrequiredorpermittedbyIFRS.Thestandarddoesnotchangewhenanentityisrequiredtousefairvalue,butprovidesaframeworkforsituationswhereanotherstandardrequiresorpermitsfairvaluemeasurements.

IFRS13definesfairvalueasthepricethatwouldbereceivedtosellanassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsatthemeasurementdateundercurrentmarketconditions(i.e.anexitprice)regardlessofwhetherthatpriceisdirectlyobservableorestimatedusinganothervaluationtechnique.

Thefairvaluemeasurementassumesthatmarketparticipantshavesufficientknowledgeandawarenessoftheassetoraliabilitythatwouldbeusualandcustomaryinsuchamarkettransaction.Thedefinitionemphasizesthatthefairvalueshouldbebasedonmarketmeasurements,maximizingtheuseofobservablemarketinputs,suchasquotedprices.Iftheobservablemarketinputsarenotavailable,othervaluationtechniquesshould be applied.

IFRS13doesnotprescribewhichvaluationtechniquemustbeusedinaparticularcircumstance.Thevaluationtechniqueusedtomeasurefairvalueshouldbeappropriateforthecircumstances,andoneforwhichsufficientdataisavailable.Valuationtechniquesthataretypicallyusedincludethemarketapproach,theincomeapproachandthecostapproach.Themarketapproachusespricesandotherrelevantinformationgeneratedby


markettransactionsinvolvingidenticalorcomparableassets.Inincomeapproach,thevaluationisbasedonestimatedfutureincomeandprofitorcashflows.Thecostapproachreflectstheamountthatcurrentlywouldberequiredtoreplacetheservicecapacityofanasset(oftenreferredtoascurrentreplacementcost).

RealestateentitiesmaybeaffectedbyIFRS13invariousaspectsoftheirbusinesswhen:

• Measuringpropertyinterestsatfairvalue

• Testingpropertyinterestsforimpairment

• Determiningthefairvalueofidentifiableassetsandliabilitiesaspartofthepurchasepriceallocationappliedinabusinesscombination

• Measuringaninterestinarealestatejointventureorassociateatfairvalue

• Compilinganddisclosinginformationonthefairvaluesofpropertyinterests,includingbutnotlimitedtosignificantassumptions,adjustmentstounobservableinputsandqualitativeandquantitativesensitivityanalysis.

Regardlessofwhethervaluationsareperformedexternallyorinternally,managementmustunderstandthemethodologiesandassumptionsusedinthevaluationsanddeterminewhethertheassumptionsarereasonableandconsistentwiththerequirementsofIFRS13.

IFRS13requiresanentitytomaximizetheuseofrelevantobservableinputsandminimizetheuseofunobservable

inputs.IFRS13alsoincludesafairvaluehierarchybasedontheinputsusedtodeterminefairvalueasfollows:

• Level1–quotedprices(unadjusted)inactivemarketsforidenticalassetsorliabilities.

• Level2–inputsotherthanquotedmarketpricesincludedwithinLevel1thatareobservablefortheassetorliability,eitherdirectlyorindirectly.

• Level3–unobservableinputs(valuationtechniquesthatdonotmakeuseofobservableinputs).

ManyoftheIFRS13disclosuresarerequiredforeachclassofassets(andliabilities).IFRS13requirestheseclassesofassets(andliabilities)bedeterminedbasedon:

(a)thenature,characteristicsandrisksoftheassetorliability;and

(b)thelevelofthefairvaluehierarchywithinwhichthefairvaluemeasurementiscategorised.

Thedeterminationoftheappropriateclassofassetswillrequiresignificantjudgement.Atoneendofthespectrum,thepropertiesinanoperatingsegment(asdefinedbyIFRS8OperatingSegments)maybeaclassofassetsforthepurposeofthedisclosuresrequiredbyIFRS13.Thismaybethecaseevenifthereisalargenumberofpropertiesinthesegment,ifthepropertieshavethesameriskprofile(e.g.,thesegmentcomprisesresidentialpropertiesincountrieswithpropertymarketsofsimilarcharacteristics).Attheotherendofthespectrum,IFRS13disclosuresmaybe


requiredforindividualpropertiesorsmallgroupsofpropertiesiftheindividualpropertiesorgroupsofpropertieshavedifferentriskprofiles(e.g.,arealestateentitywithtwoproperties–anofficebuildinginadevelopedcountryandashoppingcentreinadevelopingcountry).

ThepreviousrequirementsinIAS40forhowfairvalueisdeterminedhavebeenreplacedbytherequirementsinIFRS13.However,certaindisclosure

requirementsunderIAS40willremaineffective.Thenewdisclosuresaretobeappliedprospectivelyforannualperiodscommencingon1January2013.Thenewdisclosureswillnotrequirecomparativedata.

Illustrativesetofdisclosuresforarealestateentitythathasinvestmentpropertiesmeasuredatfairvalueonitsstatementoffinancialposition,initsfirstsetoffinancialstatementsfollowingtheadoptionofIFRS13ispresentedbelow.

Disclosures

Investment property at fair value (measured at

fair value on the recurring basis)

Investment property at cost

(for which fair value is disclosed)

IFRS 13 New

requirements

IAS 40 Old

requirements

IFRS 13 New

requirements

IAS 40 Old

requirements

Fairvalueattheendofthereportingperiod Required Required Required Required

Levelofthefairvaluehierarchywithinwhichthefairvaluemeasurementinitsentiretyiscategorised

Required Notrequired Required Notrequired

ForLevel2andLevel3measurements,valuationtechniqueandtheinputsused,andchangesinthevaluationtechnique,ifapplicable,andthereasonsforthosechanges


ForLevel3measurements,quantitativeinformationregardingthesignificantunobservableinputs

Required NotrequiredNot

requiredNotrequired

AmountoftransfersbetweenLevel1andLevel2,thereasonsandrelatedaccountingpolicies


requiredNotrequired

ForLevel3measurements,reconciliationfromtheopeningbalancestotheclosingbalances(includinggainsandlosses,purchases,sales,issues,settlements,transfersinandoutofLevel3andreasonsandpoliciesfortransferandwhereallsuchamountsarerecognised)

Required RequiredNot

requiredNotrequired

ForLevel3measurements,thetotalgainsorlossesincludedinprofitorlossthatareattributabletothechangeinunrealisedgainsorlossesrelatingtothoseassetsandliabilitiesheldatthereportingdate,andadescriptionofwheresuchamountsarerecognised

Required RequiredNot

requiredNotrequired


Disclosures

Investment property at fair value (measured at

fair value on the recurring basis)

Investment property at cost

(for which fair value is disclosed)

IFRS 13 New

requirements

IAS 40 Old

requirements

IFRS 13 New

requirements

IAS 40 Old

requirementsForLevel3measurements,adescriptionofthevaluationprocessesusedbytheentity


requiredNotrequired

ForLevel3measurements,anarrativedescriptionofthesensitivityofthefairvaluemeasurementtochangesinunobservableinputsifachangeinthoseinputsmightresultinasignificantlydifferentamountand,ifapplicable,adescriptionofinterrelationshipsbetweenthoseinputsandotherunobservableinputsandofhowtheymightmagnifyormitigatetheeffectofchangesintheunobservableinputs


requiredNotrequired

Ifthehighestandbestuseofanon-financialassetdiffersfromitscurrentuse,disclosethatfactandthereasonforit



3.3.SelectedIFRSissuesandtheirimplicationsforrealestateentities

3.3.1. Bankcovenants

WithsignificantnumberofrealestateloansmaturinginEuropeinthenextyears,thefinancingandrefinancingofpropertyactivitiesisstilloneofthekeychallengesfortherealestatesectorandshould,inevitably,beoneofthekeyattentionitemsinfinancialreporting.Takingtheaboveintoconsideration,theappropriatecovenantsdisclosuresinthefinancialstatementsarekeytoprovidetotherecipientsofthefinancialssignificantinformationaboutliquidityofthecompany.InternationalFinancialReportingStandardsdescribewhichdisclosuresarerequired,howeverthecompaniesshouldconsideranyotherinformationthatmaybevaluableforthereadersandareperceivedonthemarketasagoodpractice.

IFRS 7:

“18Forloanspayablerecognizedattheendofthereportingperiod,anentityshalldisclose:(a) detailsofanydefaultsduringtheperiodof

principal,interest,sinkingfund,orredemptiontermsofthoseloanspayable;

(b) thecarryingamountoftheloanspayableindefaultattheendofthereportingperiod;and

(c) whetherthedefaultwasremedied,orthetermsoftheloanspayablewererenegotiated,beforethefinancialstatementswereauthorizedforissue.

19If,duringtheperiod,therewerebreachesofloanagreementtermsotherthanthosedescribedinparagraph18,anentityshalldisclosethesameinformationasrequiredbyparagraph18ifthosebreachespermittedthelendertodemandacceleratedrepayment(unlessthebreacheswereremedied,orthetermsoftheloanwererenegotiated,onorbeforetheendofthereportingperiod).”


Belowwepresentsomeoftheleadingpracticesindisclosingthefinancialdebtcovenantsinthefinancialstatements.

Company Adisclosedatablewithabreakdownofallloans,includingallapplicablecovenants

Loan type Transaction

Carrying amount

31.12.2012 (€/000)

No. of properties

used as security

Market value 31.12.2012 of properties

used as security [€]

Final due date

ReimbursementFinancial covenants

Mortgageloan

Monteneroshoppingmall,Bisaccia

17,352 1 31,910 02-Apr-13

annualrepaymentof€1.4millionwithfinalballoonof€17.4million

N/A

Mortgageloan

FIATportfolio 45,604 3 121,090 30-Jun-15


LTV‹=70% DSA›=10%

Mortgageloan

ComitPensionFundPortfolio

162,438 10 281,570 19-Dec-15 Bullet LTV‹=80%

Mortgagecurrentaccount

RGD-IGD(50%BS)-Darsena

16,529 1 18,875 30-Nov-12 BulletDebt/Equity‹= 5


PropertyinBeinasco

6,176 1 9,770 21-Dec-15 Bullet N/A


PropertyinBeinasco

21,714 1 37,630 21-Dec-15 Bullet N/A

Mortgageloan

FondoImmobiliPubbliciportfolio

88,826 13 126,469 24-Apr-13 Bullet

LTV‹=70%Consolidated LTV‹=65% ICR›=1.1

Mortgageloan

PropertyinCorsoMatteotti,4-6–Milan

61,342 1 107,330 2-Aug-15


LTV‹=60% ICRUntil2/08/13›=120%then150%

Bonds

TelecompropertiesoftheImser60securitisation(*)

521,547 177 1,796,103 20-Sep-21repaymentplanasdescribedbelow(***)

LTV‹=80%, ICR›=159%(**) LTV‹=80% ICR›=1.59(**)

Mortgageloan

VariouspropertiesinmajorItalianCities(ProjectOffice)

65,897 5 126,450 28-Jul-14


LTV‹=60% ICR›1.300

Mortgageloan

PropertyinviaMessina, 38–Milan

14,594 1 22,700 19-Nov-14 BulletLTV‹=65% ICR›=1.7


Loan type Transaction

Carrying amount

31.12.2012 (€/000)

No. of properties

used as security

Market value 31.12.2012 of properties

used as security [€]

Final due date

ReimbursementFinancial covenants

Mortgageloan

PropertyinNerviano

27,946 1 55,920 31-Dec-16

annualrepaymentof€1.9millionwithfinalballoonof€21million

N/A

Mortgageloan

PropertyinGalleriadelCorso,4–Milan

44,553 1 84,230 4-Aug-15 Bullet

PropertyLTV‹=65% LTVBS‹=75% ICRIMMOBILEfrom›=1.15to›=1.20from30/06/13 ICRBS›=1.30

Mortgageloan

Propertiesin Rozzano -MilanofioriandviaPergolesi–Milan

56,758 2 88,630 29-Dec-15 Bullet

ICR›=170%-LTV‹=(70%Y1-Y3-65%Y4-60Y5)-ConsolidatedLTV‹=65%

Mortgageloan

PropertyinCorsoMarconi,10Turin

14,634 1 34,540 24-Feb-15

annualrepaymentof€0.3million,€0.75millionfromMarch2013andfinalballoonof€13.2million

N/A

Mortgageloan

PropertyinviaVolta,5–Varese

12,456 1 20,800 31-Dec-16 Bullet N/A

Mortgageloan

PropertyinPiazzaSigmundFreud,Milan

141,130 1 252,360 27-Jul-16 Bullet

LTV‹=65%Consolidated LTV‹=60% ICR›=110%ConsolidatedICR›=140%

2012 Annual financial report of Beni Stabili S.p.A. SIIQ


Company Bdisclosedatableshowingtheloancovenantsandthelevelofcomplianceasat31December2012:

Financing Ratios/covenants Limit(1) 12/31/2012 12/31/2011

Syndicatedloans and bilateralloans KlepierreSA

Netdebt/Valueofholdings(Loan-to-Value) ≤60% 43.6% 45.8%

EBITDA/Netinterestexpenses ≥2.0 2.6 2.5

Secureddebt/Valueofholdings ≤20% 15.7% 14.5%

Valueofholdings,groupshare ≥€6Bn €13.1Bn €13.2Bn

Ratiooffinancingsofsubsidiaries(excludingSteen&Strom)overtotalgrossfinancialdebt

≤30% 3.6% 7.9%

BondissuesKlepierreSA

Secureddebt/RevaluedNetAssetValue(excludingSteen&Strom)(2) ≤50% 9.0% 9.2%

(1) Most constraining contract limit.

(2) NAV including transfer duties after deferred tax.

Kleppiere 2012 Annual Report

AdditionaldisclosurethatisnotrequiredbyIFRS7(aspresenedabove)butisconsideredtobegoodpracticeissensitivityanalyseswithrespecttotheapplicablecovenants.Itisrecommendedtoincludeinformationaboutimpactofarationalchangeintheoperatingratios(e.g.fairvalueofproperties)onthefinancialcovenantsaswellasaterminalvaluesoftheserations,thatwouldleadtobreachofcovenants.

Belowwepresentthesampledisclosurethatgivetheinformationaboutheadroombetweentheentity’soperatingratiosanditsminimumfinancialcovenants:

„TheGrouptesteditscompliancewithitsfinancialcovenantsregularlyandoperatedcomfortablywithintheselimitsthroughout201X.Propertyvaluescoulddeclineby50%atthebalancesheet

datebeforetherewouldbeabreachoffinancialcovenants.

Incaseofbreachingoneormorecovenantstheentity’smanagementwouldberequiredtodiscloseadditionalinformationasdescribedinpoint18(b)and19ofIFRS7.Ifbreachesinmeetingthefinancialcovenantspermitthebanktoimmediatelycallloansandborrowings,thecompanyisobligedtopresentthatpartofaloanasacurrentliabilityinitsstatementoffinancialpositionasatyearend.Thecurrentornon-currentclassificationofloansmaydirectlyimpacttheperceivedandrealliquidityoftheentity,especiallywhereloancovenantsarebreached.Thatiswhythemanagementshoulddeterminethatappropriatewaiversareobtainedpriortoyear-endtosupportanycurrent


classificationoftheliabilityaswellasassesstheimpactofwaiversobtainedpriortotheyear-end,andwhethertheyeffectivelyprovideaperiodofgraceendingatleast12monthsafterthereportingperiod.”

3.3.2 IFRS10ConsolidatedFinancialStatements–implicationsforfundmanagers

RecentlyissuedIFRS10ConsolidatedFinancialStatementshasasignificantimpactontheconsolidationprocessoftherealestateinvestmentfundsandfundmanagersaccountingfortheirfunds.Determiningwhetherornotafundmanagershavetoconsolidatetheirmanagedfundshaslongbeenanissue.Thenewstandardhavechangedhowfundmanagersshallassessthefundstheymanageforconsolidation.Itislikelytochangethenumberoffundsthatareconsolidatedasfundmanagersmayreachdifferingconsolidationconclusionsoverfundstheymanagecomparedwiththeirpreviouspractice.

ThenewdefinitionofcontrolincludedinIFRS10(furtherdiscussedinChapter3.2.2.2)mayleadtoconsolidationofentitiesthatwerenotpreviouslyincludedinthegroup,potentiallyresultinginmoreassetsandliabilitiesonthebooks.Asaresultassetorfundmanagersmaybeobligedincertaincircumstancestoconsolidatetheassetorfundsintotheirownfinancialstatementsinasituationwhentheyhave:

• powerovertheinvestee,

• exposure,orrights,tovariablereturnsfromitsinvolvementwiththeinvestee,

• abilitytouseitspowerovertheinvesteetoaffecttheamountofthereturnstotheassetmanager.

Inmostcases,itisclearwhenallthreecriteriahavebeenmet.However,carefulconsiderationwillberequiredtoassesswhetheranassetmanageractsasaprincipal(and,therefore,mayneedtoconsolidatethefund)orasanagent(inwhichcase,itrecognizesonlyitsdirectinterestanditsmanagementfee).

Thefactorstobeconsideredinclude,butarenotlimitedto:

• Scopeoftheassetmanager’sdecisionmakingauthority(Anassetmanagerdoesnotusuallyhavediscretiontomakechangeseithertotheactivitiesthatitispermittedtodirect,ortothedecisionsthatitispermittedtomakewithoutthepriorapprovaloftheotherinvestorsinthefund.Thiswouldgenerallyindicatethatitisanagentactinginafiduciarycapacity.However,considerationmustalsobegiventothelevelofinvolvementtheassetmanagerhasindeterminingthescopeofitsauthority:thatinvolvementmayindicatethattheassetmanagerhastheopportunityandincentivetoobtaintheabilitytodirecttherelevantactivities,whichcouldindicatethattheassetmanagerisaprincipal.)

• Rightsheldbyothers(Ifoneparty(investor)holdsaremovalright(thatis,asingleinvestorcandecidetokickouttheassetmanager),andthatrightissubstantive,thentheassetmanageris


consideredanagent.However,iftheirexerciserequiresagreementbymorethanoneparty,thenitisnotconclusiveastowhethertheassetmanagerisaprincipaloranagent.Themoreinvestorsthatwouldhavetoagreetoremovetheassetmanager,thelessimportantthatremovalrightis,whendeterminingiftheassetmanagerisaprincipal);

• Exposuretovariabilityinreturnsthroughtheremunerationoftheassetmanager(Ifthefeereceivediscommensuratewiththeservicesprovided,andthearrangementincludes‘market’terms,theassetmanagerislikelytobeconsideredanagent.However,thegreaterthefee,andexposuretovariability,relativetotheexpectedreturnsfromtheinvestee(thefund),themorelikelyitisthattheassetmanagerisaprincipal,andwouldconsolidatetheunderlyinginvestments).

• Variablereturnsheldthroughotherinterests(Whenanassetmanagerholdsotherinterestsinaninvestee,whichisnotuncommonintherealestate

industry,thismayindicatethatitisnotanagent.Byvirtueofholdingotherinterests,decisionsmadebytheassetmanagermaydifferfromthoseitwouldhavemadeifitdidnotholdthoseotherinterests.Forinstance,thismaybethecasewhenanassetmanagerprovidescreditenhancementtothefund,orholdsalargedirectinterest.)

IFRS10includesthefollowingexamplesthathighlightallfourfactorsdiscussedabove,but,inparticular,theyillustratehowthirdpartyrightsandvariabilityoftotalreturnsshouldbequalitativelyconsideredintheassessmentofaprincipal/agentrelationship.Ingeneral,theexamplesdemonstratethatthemoreeasilythefundmanagercanberemoved,thehigheralevelofexposuretovariabilityofreturnswillberequiredbeforetheentitywouldconcludeitisactingasaprincipal.Althoughtheseexamplesprovideguidanceonassessingaprincipal/agentrelationship,theyarenotintendedtocreate‘brightlines’but,rather,areforillustrativepurposesonly.

Example (IFRS 10 reference)

Scope of decision

making rights

3rd party rights to remove fund

managerRemuneration Other

interestsPrincipal/

Agent

13 Narrowlydefinedremit None 1%ofnetasset

value10%directinterest Agent

14A Widerangingdiscretion

Removalforcause

1%ofnetassetvalueand20%ofprofitsafterahurdleisreached

2%directinterest Agent


3.3.3 Accountingforinvestmentpropertyunderconstruction

2009wasthefirstyearthatcompanieshadtoapplytheamendmenttoIAS40thatincludesinvestmentpropertiesunderconstruction.Asaresultofthisamendment,companiesthatmeasuretheirinvestmentpropertiesatfairvaluealsoneedtomeasuretheirinvestmentpropertiesunderconstructionatfairvalueunlessthefairvalueisnotreliablydeterminable.IAS40paragraph53statesthefollowing:“Ifanentitydeterminesthatthefairvalueofaninvestmentpropertyunderconstructionisnotreliablydeterminablebutexpects

thefairvalueofthepropertytobereliablydeterminablewhenconstructioniscomplete,itshallmeasurethatinvestmentpropertyunderconstructionatcostuntileitheritsfairvaluebecomesreliablydeterminableorconstructioniscompleted(whicheverisearlier).”

UndertherevisedIAS40aquestionmayariseregardingthemainvaluationprinciplestobeappliedinrelationtotheinvestmentpropertyunderconstructionunderfairvaluemodel.Alackoftransactionpricesofsimilarpropertiesunderconstructionusuallyrequirestheuseofestimationmodels.IAS40doesnotcontainanyspecificguidanceastothevaluationofIPUCandreferenceisoftenmadetoInternationalValuationStandards(IVS).ThevaluationofIPUCis

Example (IFRS 10 reference)

Scope of decision

making rights

3rd party rights to remove fund

managerRemuneration Other

interestsPrincipal/

Agent

14B Widerangingdiscretion

Removalforcause


20%directinterest Principal*

14C Widerangingdiscretion

Removalwithoutcauseby independent board


20%directinterest Agent

15 Widerangingdiscretion

Removalwithoutcausebywidelydispersedinvestors


35%directinterest Principal

*Example 14B of IFRS 10 states “having considered its remuneration and the other factors, the fund manager might consider a 20% investment to be sufficient to conclude that it controls the fund.”


complexandjudgmentalarea,thereforethereisaneedformoredetailedguidance.Commonmethodsfoundinclude:(i)thehypotheticaldeveloper’smethodotherwiseknownasthe“residualmethod”valuation,and(ii)thediscountedcashflow(DCF)method.

Thehypotheticaldeveloper’smethoddeductscostsofconstruction,financeandanticipatedprofit(apercentagecost)fromanexitvalue,i.e.thegrossdevelopmentvalueofthecompletedproject.TheDCFapproachuses(project)riskadjusteddiscountfactors.

BoththeEuropeanPublicRealEstateAssociation(EPRA)andtheInternationalValuationStandardsBoard(IVSB)havereleasedmoredetailedguidancetoassist(andimproveconsistencyamongst)preparersoffinancialstatements,valuers,advisersandinvestors.TheIVSBprinciplesaresubstantiallyconsistentwithEPRA,withtheexceptionthatIVSBdoesnotspecificallycautionagainsttherecognitionofadevelopmentgainuntiltheprojectrisksaresubstantiallyeliminated.

Asaresultoftheaboveaquestionmayarisewhenthefairvalueforinvestmentpropertyunderconstructioncanbereliablydetermined.

Theanswertothisquestionisnotstraightforwardasitinvolvesjudgmentand,inprinciple,itismanagementthatneedstoassessthereliability.AsmentionedaboveEPRAadvisescautionagainstrecognizingadevelopmentgainuntilasubstantialpartoftheprojectriskshasbeenreducedoreliminated.

However,EPRAdoesnotprovideguidelinesastowhichcriteriashouldbeapplied.Indicatorsthatmaybeusedassesswhetherthesubstantialrisksareeliminatedmayinclude:

• Allrequiredbuildingandlettingpermitshavebeenobtained;

• Developmentcostscanbereliablyestimated.Thismaybethecasewhenafixedpriceconstructioncontractwiththemaincontractorisagreed;and

• Thevalueofthecompletedpropertycanbereliablyestimated.Thismaybethecasewhenasubstantialproportionoftherentableareahasbeenleasedtotenants.

AccordingtotheIVSB,itisimportantthatallprojectriskshavebeenidentified,evaluatedandquantified.Basedontheseidentifiedrisksandtheassessmentofsufficientcomparablemarketdata,thevaluernormallydeterminestheadjustmentneededtoreflectprojectrisks.Inanyevent,anyinvestmentpropertyunderconstructioncarriedatcostisstillsubjecttoimpairmentprovisionsofIAS36ImpairmentofAssets.IAS36requiresarecoverableamounttobedeterminedasthehigherof:(i)valueinuse;or(ii)fairvaluelesscosttosell.Eveniffairvalueisconsideredunreliable,avalue-in-usecalculationmustbeperformed,whichisadiscountedfuturecashflowanalysis.IfsuchadiscountedfuturecashflowmustbepreparedforIAS36purposes,itmaynotbethatdifficulttochangeentityspecificassumptionsintomarketspecificassumptions.

Contact4


REAL ESTATE GROUP

AnnaKicińska

[email protected]

+48225577542

AnnaKicińskaisaPartnerandLeaderforCSERegionoftheEYRealEstateAdvisoryGroupresponsibleforrealestateTransactionSupport,StrategicAdvisoryandRealEstateM&A.Shehasovernineteenyearsofrealestateexperienceinvaluation,transactionsupport,marketanalysis,andcorporaterealestatemanagement.SheisacertifiedPolishappraiserandamemberofTheRoyalInstitutionofCharteredSurveyors(MRICS).

AnnaAndrzejewska

[email protected]

+48225577543

AnnaAndrzejewskaisaManagerintheRealEstateAdvisoryGroup.Shespecializesinstrategicadvisoryconsultancyintherealestatesector,especiallyinthepreparationandimplementationofthestrategyofcorporateportfoliodevelopmentandmanagementaswellasininvestmentprocessmanagement.ShegraduatedfromtheUniversityofŁódźwithMaster’sdegreeinFinanceandBankingandspecializationinInvestmentsandRealEstate.Shecompletedapost-graduateSchoolofRealEstateValuationatWarsawSchoolofTechnology.Sheisacertifiedpropertymanager.

AnnaBorkowska

[email protected]

+48225576486

AnnaBorkowskaisaManagerintheRealEstateAdvisoryGroup.Shehaseightyearsofrealestateexperienceinconductingvaluationsforaccounting,investmentandloansecuritypurposesaswellasprovidingbothdevelopersandinvestorswithmarketandfeasibilitystudiesforcommercialproperties.AnnagraduatedfromFacultyofEconomicsatWarsawUniversityofLifeScienceswithspecializationineconomicsandorganizationofenterprises.Shecompletedapost-graduateSchoolofRealEstateValuationatWarsawSchoolofTechnology.AnnaisamemberoftheRoyalInstitutionofCharteredSureyors(MRICS).


RafałKędzierski

[email protected]

+48225577939

RafalKedzierskiisaManageroftheRealEstateAdvisoryGroup.Hespecializesinmerger&acquisitionconsultancyintherealestatesectorandfundraisingforrealestateprojects.RafalhasamasterdegreeinFinanceatKozminskiUniversity.HealsostudiedBusinessAnalysisandValuationattheLondonSchoolofEconomicsandPoliticalScience.

PawełNowakowski

[email protected]

+48225576616

PawełNowakowskiisaManagerintheRealEstateAdvisoryGroup.GraduateoftheWarsawSchoolofEconomics,PawełobtainedaMasterdegreeineconomics(specialization:enterprisemanagementandRealEstate).Pawełgainedmarketexperienceworkingforseveralglobalrealestatecompaniesandstrategicconsultancyfirm.Hehasconductednumerousvaluationsforinternal,investmentandloansecuritypurposes,embracingbothsingleassetaswellasportfolioofoffice,retailwarehouseandhotelproperties.HeiscertifiedPolishappraiserandamemberofTheRoyalInstitutionofCharteredSurveyors(MRICS).


ASSURANCE SERVICES

KatarzynaTwarowska

[email protected]

+48225578505

KatarzynaisExecutiveDirectorinAssurance,EYWarsaw,MemberoftheRealEstateGroup,EYLeaderinAssuranceServicesforRealEstateforCentralandSouthEasternEuropeCertifiedCoachandCEOofBusinessWomenLeadersFoundation(Fundacja Liderek Biznesu).SheGraduatedfromWarsawUniversityofTechnology.KatarzynaisexperiencedinworkingwithmultinationalandbiggestPolishcompanies,includingWarsawStockExchangeregistrants.SheisPolishCharteredAuditor.

MonikaBiniek

[email protected]

+48225578391

MonikaisaManagerinAssurance,EYWarsaw.Monikahasmorethan7yearsofexperienceinaudit.ShegraduatedfromUniversityofWarsaw.Shehasabroadexperienceinauditofstandaloneandconsolidatedfinancialstatements,preparedinaccordancewithPolishAccountingStandardsaswellasInternationalFinancialReportingStandards.MonikaisexperiencedinauditingpubliccompanieslistedonWarsawStockExchange.

MateuszFlis

[email protected]

+48225578421

MateuszisaManagerinAssurance,EYWarsaw,MemberofEYRealEstateGroup.HegraduatedfromWarsawSchoolofEconomics.Mateuszhasover7yearsofcomprehensiveauditexperienceofseparateandconsolidatedfinancialstatementspreparedinaccordancewithIFRS,USGAAPandPolishAccountingAct.HehasabroadexperienceinthecooperationwithlargestPolishandforeignclients,includingcompanieslistedontheWarsawStockExchange.HeisPolishCharteredAuditor.


TAX SERVICES

MichałThedy

[email protected]

+48225577547

MichałThedyisheadoftheTaxRealEstateGroupatEY’sWarsawoffice.Hehassixteenyears’taxadvisoryexperiencecoveringinvestmentsonthePolishrealestatemarket,taxandbusinessaspectsofmergers,acquisitionsandothertypesofrestructuringaswellastaxeffectiveplanningmethods.Michałistheco-authorofthebook“TaxationoftheRealEstateMarket”andnumerouspublicationsintherealestateindustrypress.Heisacertifiedtaxadvisor.

SebastianIckiewicz

[email protected]

+48225577524

SebastianisaSeniorManagerinTransactionTaxGroupandTaxRealEstateGroupatEY’sWarsawoffice.Heisacharteredtaxadvisorandhas13yearsofexperienceintaxadvisoryinEYandotherrecognizedtaxadvisoryfirms.Sebastian’sexperienceincludesparticipationinnumeroustaxbuy-sideorvendorduediligenceprojects,taxreviewassignments,taxstructuringprojectsandpost-closingreorganisationsandoptimisations(mergers,de-mergers,disposalsofassets,etc.).HewasinvolvedinthebiggesttransactionalprojectsonthePolishmarketforcorporateclientsandinvestmentfunds,especiallyintherealestateandtelecommunicationssector.SebastianalsoattendedspecifictrainingcoursesontaxduediligenceandtaxstructuringwithinEYinPolandandabroad.


AnnaPleskowicz

[email protected]

+48225577904

AnnaPleskowiczisSeniorManagerinTaxRealEstateGroupatEY’sWarsawoffice.ShehasbeenwithEYsince2004.Sheisacertifiedtaxadvisor.Herskillsincludeadvisingonglobalrestructurings,internationaltaxplanning(corporateissues,financingetc.),providingtaxadvisoryservicesondomestictaxlaw.Shewasinvolvedinprojectsconcerningtaxissuesinrelationtotheprocessofsettingup,operatingandrestructuringofcompanies,taxassistanceinestablishingtaxeffectiveexitscenarios,adviseontaxeffectiveplanningmethods,includinginternationaltaxstructuringprojects.In2008AnnaworkedatthePolishTaxDeskinNewYork.Annaisaco-authorofthebook“TaxationoftheRealEstateMarket”andco-authorofthebook„Internationaltaxplanning”,anauthorofvariousarticlesrelatingtotaxissues.

MichałSawicki

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+48225577026

MichalSawickiisManagerinTaxRealEstateGroupatEY’sWarsawoffice.HehasbeenwithEYsince2007.Heisacertifiedtaxadvisor.Hisskillsincludeadvisingonglobalrestructurings,internationaltaxplanning,taxaccounting.Hewasinvolvedinprojectsconcerningtaxissuesinrelationtotheprocessofsettingup,operatingandrestructuringofcompanies,taxassistanceinestablishingtaxeffectiveexitscenarios,adviseontaxeffectiveplanningmethods,includinginternationaltaxstructuring.Michalisanauthorofvariousarticlesrelatingtotaxaspectsofinvestingontherealestatemarketandco-authorofthebook“TaxationoftheRealEstateMarket”.


ŁukaszKupryjańczyk

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ŁukaszisaTransactionTaxSeniorManagerandmemberofTaxRealestateGroupatEY’sWarsawoffice.Heisacharteredtaxadvisorwitha67-yearexperienceintaxadvisoryandiscurrentlyintheprocessofobtainingACCAqualifications.Hisprofessionalexperienceincludes:numerousstructuring-andtaxduediligenceprojects,day-to-daytaxadvisory,taxreviewsandassistanceintaxoptimizations.Heparticipatedinarangeofvendor/buysidesupportandrestructuringsofbusinesses(suchasmergers,spin-offs,etc.).Heassistedinmanyinvestment/dis-investmentprojectsforrealestateclientsandinvestmentfunds.

Łukaszisanauthorandco-authorofnumerouspublicationsinpress.

MichałKoper

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+12127737012

MichałKoperisManagerinPolishTaxDeskatEY’sGlobalTaxDeskNetworkinNewYorkoffice.HehasbeenwithEYsince2006.HeisacertifiedPolishtaxadvisor.HisprofessionalskillsincludeadvisingontaxplanningforinternationalinvestmentsinPoland,taxeffectiveownershipstructuresandfinancingschemes,globalrestructurings,providingtaxadvisoryservicesondomestictaxlaw.Hewasinvolvedinprojectsconcerningtaxaspectsofsettingup,operatingandrestructuringofcompanies,taxassistanceinestablishingtaxeffectiveexitscenarios.Michałisaco-authorofthebook“TaxationoftheRealEstateMarket”andauthorofvariousarticlesrelatingtotaxissues.


LEGAL SERVICES

ZuzannaZakrzewska

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+48225577816

Zuzannaisanadvocatewithfifteenyearsofexperienceinlegaladvisoryfordomesticandinternationalentitiesfromdifferentsectors.Shehasextensiveexperienceinprovidinglegalsupportanddaytodaylegaladvisestocompaniesparticularlyfromtherealestate,financialservicesandenergysector.ZuzannaspecializesinprovidinglegalassistancerelatedtothecorporatelawincludingrestructuringprocessesandM&Atransactions.Shehasadvisedinanumeroustransactionsinvolvingtheacquisitionofcompaniesandassetsrelatedtorealestatebothonthebuyersandsellersside.Zuzannaalsoadvisedclientsduringprocessesofexaminationoflegalstatusoftherealestateaswellasduringnegotiatingoftheleaseagreements.

BarbaraChochołowska

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+48225577592

BarbaraChochołowskaisalegalcounselwithelevenyearsofexperienceinworkingfordomesticandinternationalentitiesfromdifferentsectors.DuringyearsofpracticeBarbarahasworkedonavarietyofcomplexcorporateandrealestate-relateddealsinvolvingmulti-jurisdictionalandinternationalmatters.

TherangeofherexpertisecoversconductinglegalduediligenceandprovidinglegaladviceinconnectionwithM&Atransactionsandrestructuringprojects.Shehasstrongexperienceinprovidinglegalsupportrelatedtotherealestatemattersincludingtherealestateduediligenceandthetransactionsoftherealestateacquisitions(i.e.boththeassetandthesharedealtransactions).Shealsosupportsclientsindraftingandnegotiatingtheleaseagreementsandthemanagementcontractsofcommercialandindustrialspaces.


KatarzynaKłaczyńska

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+48225577961

KatarzynaKłaczyńska,LL.M.,isanattorneyspecializinginenergyandenvironmentalmatters.Shehasadvisedonanumberofhigh-profileregulatoryprojects,includingactingasaleadingcounselforpowersectorcompaniesandthePolishgovernmentregardingclimatechangeregulationsanddevelopingadvocacystrategyconcerningrevisionofthecurrentEnvironmentalImpactAssessmentmodelonbehalfoftheBusinessAssociationofPolishPowerPlants.Shehasworkedonanumberofenvironmentalandregulatoryduediligenceprojectsforthevarietyofsectors.Sheisalsoexperiencedinenvironmentalaspectsofshalegasinvestments.

KatarzynaisamemberoftheNewYorkBar.ShegraduatedfromJagiellonianUniversityinPoland,andHarvardLawSchool,whereshewasgrantedGammonFellowshipforAcademicExcellence.

MagdalenaKasiarz-Lewandowska

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+48225576207

MagdalenaKasiarz-LewandowskaisanadvocateandaSeniorAssociateinEYLawwithtenyearsofexperienceinadvisingonthesale,reorganizationandliquidationofcompanieswithinternationalcapital(conductingM&Atransactionsandlegalaudits),advisingontherestructuringofcapitalgroups,includingmergers,divisionsandtransformationsofcompanies,aswellascross-bordermergers.Sheadvisedinnumeroustransactionsonsharesandassetsrelatedtorealestatebothonthebuyersandsellersside.Shealsospecializesinprovidingtheongoinglegalassistanceinthescopeofcivillawandcompanylaw,includingpreparationandnegotiationofleaseandserviceagreements.


JoannaToruniewska

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+48124243264

JoannaToruniewskaisalegalcounselwithmorethanfiveyearsofexperienceinadvisingfordomesticandinternationalentitiesfromdifferentsectors.TherangeofherexpertisecoversconductinglegalduediligenceandprovidinglegaladviceinconnectionwithM&Atransactionsandrestructuringprojects.Sheassistedtheentrepreneursintherealestatetransactions,includingduediligencebeforetherealestateacquisitions,preparingandnegotiatingdifferenttypesofrealestateagreements(i.e.saleandpurchaseagreements,leaseagreements)aswellasadvisingoninvestmentfinancing.Shealsorepresentedtheclientsbeforethecourtsduringthecasesregardingtherealestate issues.

PiotrWoźniak

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+48713751022

PiotrWoźniakisalegalcounselwithsixyearsofexperienceinrealestateandpropertydevelopmentlegalaspects.AgraduateoftheFacultyofLawattheUniversityofWrocław.PiotralsocompletedpostgraduatestudiesoncommercialcompanieslegalregulationsatUniversityofWrocławandpostgraduatestudiesonlegalaspectsofconstructionprocessattheWarsawSchoolofEconomics.BeforejoiningEYPiotrwasworkinginrealestatedepartmentsintwohighqualitylawfirmsinWarsaw.Piotrspecializesinrealestatetradinglaw,spatialplanningandlanddevelopmentlawandconstructionlaw.Piotradvisesclientsonmatterrelatingtopropertypurchase,locationofdevelopmentsandcontractingwitharchitectsandconstructioncompanies.Heisresponsibleforcomprehensiveadviceonpreparationstageofdevelopmentprojectsanddaytodayproblemsconnectedwithdevelopmentprocess.Hehasstrongexperienceinprovidinglegalsupportrelatedtocommercializationofshoppingcentersandofficespacelease.Piotrhasalsoadvisedininfrastructureprojectsi.e.windfarms,shellgasplatformsandgastransmissionnetworks.


Appendix



Withholding tax rates under Poland’s double tax treaties (payments from Poland)1

Dividends (%) Interest (%) Royalties (%)

Albania 5/10(d) 10 5

Algeria(gg) 5/15(d) 0/10(k) 10

Armenia 10 5 10

Australia 15 10 10

Austria 5/15(a) 0/5(k) 5

Azerbaijan 10 10 10

Bangladesh 10/15(a) 0/10(k) 10

Belarus 10/15(e) 10 0

Belgium 5/15(cc) 0/5(k) 5

Bulgaria 10 0/10(k) 5

Canada 5/15(a) 0/10(pp) 5/10(qq)

Chile 5/15(c) 15(dd) 5/15(h)(ee)

China 10 0/10(k) 7/10(h)

Croatia 5/15(d) 0/10(k) 10

Cyprus 0/5(oo) 0/50(k) 5

CzechRepublic 5 0/5(k) 10

Denmark 0/5/15(s) 0/5(k) 5

Egypt 12 0/12(k) 12

Estonia 5/15(d) 0/10(k) 10

Finland 5/15(y) 0/5(k) 5

France 5/15(a) 0 0/10(p)

Georgia 10 0/8(k) 8

Germany 5/15(jj) 0/5(k) 5

Greece 19 10 10

Hungary 10 0/10(k) 10

Iceland 5/15(y) 0/10(k) 10

India 15 0/15(k) 20(bb)

Indonesia 10/15(c) 0/10(k) 15

Iran 7 0/10(k) 10

1Generallyeffective1January2014.



Ireland 0/15(kk) 0/10(k) 0/10(v)

Israel 5/10(b) 5 5/10(h)

Italy 10 0/10(k) 10

Japan 10 0/10(k) 0/10(i)

Jordan 10 0/10(k) 10

Kazakhstan 10/15(c) 0/10(k) 10

Korea(South) 5/10(a) 0/10(k) 10

Kuwait 0/5(z) 0/5(k) 15

Kyrgyzstan 10 0/10(k) 10

Latvia 5/15(d) 0/10(k) 10

Lebanon 5 0/5(k) 10

Lithuania 5/15(d) 0/10(k) 10

Luxembourg(ii) 0/15(oo) 0/5(k) 5

Macedonia 5/15(d) 0/10(k) 10

Malaysia 0 15 15

Malta 0/10(hh) 0/5(k) 5

Mexico 5/15(d) 0/10/15(k)(aa) 10

Moldova 5/15(d) 0/10(k) 10

Mongolia 10 0/10(k) 5

Morocco 7/15(d) 10 10

Netherlands 5/15(a) 0/5(k) 5

NewZealand 15 10 10

Nigeria(gg) 10 0/10(k) 10

Norway 0/15(hh) 0/5(k) 5

Pakistan 15(j) 0/20(k) 15/20(n)

Philippines 10/15(d) 0/10(k) 15

Portugal 10/15(o) 0/10(k) 10

Qatar 5 0/5(k) 5

Romania 5/15(d) 0/10(k) 10

RussianFederation 10 0/10(k) 10(w)

SaudiArabia 5 0/5(k) 10

Singapore 0/10(r) 0/10(k) 10

SlovakRepublic 5/10(c) 0/10(k) 5



Slovenia 5/15(d) 0/10(k) 10

SouthAfrica 5/15(d) 0/10(k) 10

Spain 5/15(d) 0 0/10(f)

SriLanka 15 0/10(k) 0/10(l)

Sweden 5/15(d) 0 5

Switzerland 0/15(ll) 0/5/10(mm) 0/5/10(nn)

Syria 10 0/10(k) 18

Tajikistan 5/15(d) 10 10

Thailand 19(t) 0/10/20(k)(m) 5/15(f)

Tunisia 5/10(d) 12 12

Turkey 10/15(d) 0/10(k) 10

Ukraine 5/15(d) 0/10(k) 10

UnitedArabEmirates 0/5(z) 0/5(k) 5

UnitedKingdom 0/10(ff) 0/5(k) 5

UnitedStates 5/15(g) 0 10

Uruguay(gg) 15 0/15(k) 15

Uzbekistan 5/15(c) 0/10(k) 10

Vietnam 10/15(d) 10 10/15(q)

Yugoslavia(u) 5/15(y) 10 10

Zambia(gg) 10/15(d) 10 10

Zimbabwe 10/15(d) 10 10

Nontreatycountries 19 20 20(x)

(a) Thelowerrateappliesiftherecipientofthedividendsisacompanythatownsatleast10%ofthepayer.

(b) Thelowerrateappliesiftherecipientofthedividendsisacompanythatownsatleast15%ofthepayer.

(c) Thelowerrateappliesiftherecipientofthedividendsisacompanythatownsatleast20%ofthepayer.

(d) Thelowerrateappliesiftherecipientofthedividendsisacompanythatownsatleast25%ofthepayer.

(e) Thelowerrateappliesiftherecipientofthedividendsisacompanythatownsmorethan30%ofthepayer.

(f) Thelowerrateappliestoroyaltiespaidforcopyrights,amongotheritems;thehigherrateappliestoroyaltiesforpatents,trademarksandindustrial,commercialorscientificequipmentorinformation.

(g) Thelowerrateappliesiftherecipientofthedividendsisacompanythatownsatleast10%ofthevotingsharesofthepayer.


(h) Thelowerrateappliestoroyaltiespaidfortheuseof,ortherighttouse,industrial,commercialorscientificequipment.

(i) Thelowerrateappliestoculturalroyalties.

(j) Thisrateappliesiftherecipientofthedividendsisacompanythatownsatleastone-thirdofthepayer.

(k) The0%rateappliestoamongotheritems,interestpaidtogovernmentunits,localauthoritiesandcentralbanks.Inthecaseofcertaincountries,theratealsoappliestobanks(thelistofexemptorpreferredrecipientsvariesbycountry).Therelevanttreatyshouldbeconsultedinallcases.

(l) The0%rateappliestoroyaltiespaidfor,amongotheritems,copyrights.The10%rateappliestoroyaltiespaidforpatents,trademarksandforindustrial,commercialorscientificequipmentorinformation.

(m) The20%rateappliesiftherecipientoftheinterestisnotafinancialorinsuranceinstitutionorgovernmentunit.

(n) Thelowerrateappliestoknow-how;thehigherrateappliestocopyrights,patentsandtrademarks.

(o) The10%rateappliesif,onthedateofthepaymentofdividends,therecipientofthedividendshasownedatleast25%ofthesharecapitalofthepayerforanuninterruptedperiodofatleasttwoyears.The15%rateappliestootherdividends.

(p) Thelowerrateappliestoroyaltiespaidforthecopyright,theuseofortherighttouseindustrial,commercialandscientificequipment,servicescomprisingscientificortechnicalstudies,researchandadvisory,supervisoryormanagementservices.Thetreatyshouldbecheckedinallcases.

(q) Thelowerrateappliestoknow-how,patentsandtrademarks.

(r) Thelowerrateappliestocertaindividendspaidtogovernmentunitsorcompanies.

(s) The0%rateappliesifthebeneficialownerofthedividendsisacompanythatholdsdirectlyatleast25%ofthecapitalofthepayerofthedividendsforatleastoneyearandifthedividendsaredeclaredwithinsuchholdingperiod.The5%rateappliestodividendspaidtopensionfundsorothersimilarinstitutionsoperatinginthefieldofpensionsystems.The15%rateappliestootherdividends.

(t) BecausetherateunderthedomesticlawofPolandis19%,thetreatyrateof20%doesnotapply.

(u) ThetreatywiththeformerFederalRepublicofYugoslaviathatappliedtotheUnionofSerbiaandMontenegroshouldapplytotheRepublicsofMontenegroandSerbia.

(v) Thelowerrateappliestofeesfortechnicalservices.

(w) The10%ratealsoappliestofeesfortechnicalservices.

(x) The20%ratealsoappliestocertainservices(forexampleadvisory,accounting,marketresearch,legalassistance,advertising,managementandcontrol,dataprocessing,searchandselectionservices,guaranteesandpledgesandsimilarservices).

(y) Thelowerrateappliesifthebeneficialownerisacompany(otherthanapartnership)thatcontrolsdirectlyatleast25%ofthecapitalofthecompanypayingthedividends.

(z) Thelowerrateappliesiftheownerofthedividendsisthegovernmentoragovernmentinstitution.

(aa) The10%rateappliestointerestpaidtobanksandinsurancecompaniesandtointerestonbondsthatareregularlyandsubstantiallytraded.

(bb) BecausetherateunderthedomesticlawinPolandis20%,thetreatyrateof22.5%doesnotapply.

(cc) Thelowerrateappliesiftherecipientofthedividendsisacompanythatownseitherofthefollowing:


• atleast25%ofthepayer• atleast10%ofthepayer,providedthevalueoftheinvestmentamountstoatleast€500,000orits

equivalent(dd) Thetreatyrateis15%foralltypesofinterest.However,underamost-favored-nationclausein

aprotocoltothetreaty,the15%rateisreplacedbyanymorebeneficialrateagreedtobyChileinatreatyenteredintowithanotherjurisdiction.Forexample,underChile’staxtreatywithSpain,a5%rateappliestocertaintypesofinterestpayments,includinginterestpaidtobanksorinsurancecompaniesorinterestderivedfrombondsorsecuritiesthatareregularlyandsubstantiallytradedonarecognizedsecuritiesmarket.

(ee) Thegeneraltreatyrateforroyaltiesis15%.However,underamost-favored-nationclauseinaprotocoltothetreaty,the15%rateisreplacedbyanymorebeneficialrateagreedtobyChileinatreatyenteredintowithanotherjurisdiction.Forexample,underChile’staxtreatywithSpain,thegeneralwithholdingtaxrateforroyaltiesis10%.

(ff) The0%rateappliesifthebeneficialownerofthedividendsisacompanythatholdsatleast10%ofthesharecapitalofthepayerofthedividendsforanuninterruptedperiodofatleasttwoyears.

(gg) Thetreatyhasnotyetenteredintoforce.

(hh) The0%rateappliesifthebeneficialownerofthedividendsisacompanythatholdsdirectlyatleast10%ofthecapitalofthecompanypayingthedividendsonthedateonwhichthedividendsarepaidandhasheldthecapitalorwillholdthecapitalforanuninterrupted24-monthperiodthatincludesthedateofpaymentofthedividends.

(ii) Thewithholdingtaxrateslistedinthetableareeffectivefrom1September2013.

(jj) Thelowerrateappliesiftherecipientofthedividendsisacompany(otherthanapartnership)thatownsdirectlyatleast10%ofthepayer.Certainlimitationstotheapplicationofthepreferentialratesmayapply.

(kk) Thelowerrateappliesifthebeneficialownerofthedividendsisacompanythatholdsdirectlyatleast25%ofthevotingpowerofthepayer.UndertheIrelandtreaty,ifIrelandleviestaxatsourceondividends,the0%rateisreplacedbyarateof5%.

(ll) The0%rateappliestodividendspaidtoacompany(otherthanapartnership)thatholdsdirectlyatleast10%ofthecapitalofthecompanypayingthedividendsonthedatethedividendsarepaidandhasdonesoorwillhavedonesoforanuninterrupted24-months.The0%ratemayalsoapplytodividendspaidtocertainpensionsfunds.

(mm)The10%rateappliestointerestpaidbefore1July2013.Forinterestpaidonorafter1July2013,the5%rateappliesunlessanexemptionapplies.The0%rateappliestosuchinterestifanyofthefollowingconditionsissatisfied:

• thebeneficialowneroftheinterestisacompany(otherthanapartnership)thatholdsdirectlyatleast25%sharecapitalofthepayeroftheinterest.

• thepayeroftheinterestholdsdirectlyatleast25%ofthesharecapitalofthebeneficialowneroftheinterest.

• anEU/EEAcompanyholdsdirectlyatleast25%ofthesharecapitalofboththebeneficialowneroftheinterestandthepayeroftheinterest.

(nn) Forroyaltiespaidbefore1July2013,the10%rateappliesifSwitzerlandimposesinitslocalprovisionsawithholdingtaxonroyaltiespaidtononresidents.Otherwise,a0%applies.Forroyaltiespaidonorafter1July2013,a5%rateappliesunlessanexemptionapplies.The0%rateappliestosuchroyaltiesifanyofthefollowingconditionsissatisfied:

• thebeneficialowneroftheroyaltiesisacompany(otherthanapartnership)thatholdsdirectlyatleast25%ofthesharecapitalofthepayeroftheroyalties.


• thepayeroftheroyaltiesholdsdirectlyatleast25%ofthesharecapitalofthebeneficialowneroftheroyalties.

• anEU/EEAcompanyholdsdirectlyatleast25%ofthesharecapitalofboththebeneficialowneroftheroyaltiesandthepayeroftheroyalties.

Furthermore,ifPolandentersintoanagreementwithanEUorEEAcountrythatallowsittoapplyaratethatislowerthan5%,suchlowerratewillalsoapplytoroyaltiespaidbetweenPolandandSwitzerland.

(oo) Thelowerrateappliesifthebeneficialownerisacompany(otherthanapartnership)thatholdsdirectlyatleast10%ofthecapitalofthecompanypayingthedividendsforanuninterruptedperiodof24months.

(pp) The0%rateappliesto:

• interestarisinginPolandandpaidtoaresidentofCanadawithrespectofaloanmade,guaranteedorinsuredbyExportDevelopmentCanada,oracreditextended,guaranteedorinsuredbyExportDevelopmentCanada,

• interestarisinginCanadaandpaidtoaresidentofPolandwithrespectofaloanmade,guaranteedorinsuredbyanexportfinancingorganizationthatiswhollyownedbytheStateofPoland,oracreditextended,guaranteedorinsuredbyanexportfinancingorganizationthatiswhollyownedbytheStateofPoland,

• interestarisinginPolandorCanadaandpaidtoaresidentoftheotherContractingStateinrespectofindebtednessarisingasaresultofthesalebyaresidentoftheotherContractingStateofanyequipment,merchandiseorservices(unlessthesaleofindebtednessisbetweenrelatedpartiesorwherethebeneficialowneroftheinterestisapersonotherthanthevendororapersonrelatedtothevendor).

(qq) Thelowerrateappliestocopyrightroyaltiesandsimilarpaymentswithrespectoftheproductionorreproductionofliterary,dramatic,musicalorartisticworkandroyaltiesfortheuseof,ortherighttouse,anypatentorforinformationconcerningindustrial,commercialorscientificexperience(withsomeexceptions).

(rr) TheagreementwiththeSocialistFederalRepublicofYugoslaviashouldapplytoBosnia-Herzegovina.

(ss) The5%rateappliesiftherecipientisacompany(otherthanapartnership)thatholdsdirectlyatleast25%ofthecapitalofthecompanypayingthedividends.

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