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The issue of property taxation of residential buildings rented by entrepreneurs for residential purposes has raised questions of interpretation for years. How tax rates differentiate rents?

High rates for entrepreneurs

The Act on Local Taxes and Fees provides for different tax rates, which is due to the different purpose of the real estates and, consequently, the different real estate profitability. The lowest rate is PLN 0.73 per square metre (areas used by public benefit organisations), while the highest rate is PLN 34.00 per square metre of usable area (use of the property for business activity) – so in the case of property occupied for business activity, the rate is approx. 50 times higher!

This higher tax rate is sometimes applied by the tax authorities to, among others, real estate intended for long-term rental to students. The tax authorities argue that the building used by the entrepreneur, which is owned by that entrepreneur, is used for the business activity of commercial rental of flats to students. According to the authorities’ position, in such cases the students renting the flats for the duration of their studies do not realise their permanent housing needs and the building is aimed at making a profit for the entrepreneur.

Decisions by city or municipal authorities then emphasise that such rentals are temporary in nature and cannot be regarded as meeting the basic housing needs of the tenants. The above arguments are supposed to justify the application of the highest property tax rate.

Polish local-government appeal courts often uphold the positions of the tax authority (city or municipality), holding that a residential building rented by an entrepreneur to students should be taxed at the rate provided for buildings occupied for business purposes.

Students can breathe

Fortunately for students who are renting flats for the medium to long term such actions by authorities should come to an end.

The Supreme Administrative Court in Poland improved the situation of tenants, in a resolution of 21 October 2024 (ref. III FPS 2/24), resolved this issue by stating that residential buildings leased for residential purposes, even if they are owned by an entrepreneur and leased as part of a business activity, should be taxed at the rate applicable to residential buildings, as long as they serve to satisfy the residential needs of the tenants. Supreme Administrative Court therefore dispelled doubts as to whether the letting of premises by a flat rental company to students can lead to lower taxation.

The court emphasised that the actual use of the building is crucial.

If the tenants are pursuing their residential needs in it, the building cannot be considered to be occupied for business purposes.

Thus, the application of the highest property tax rate is unjustified.

The Voivodeship Administrative Court in Krakow, Poland, has also changed its position on this!

Improval of the jurisprudence

Recently, in similar circumstances, we obtained a favourable ruling for an entrepreneur before the Voivodeship Administrative Court in Krakow. The Mayor of the City of Kraków argued that there is a consistent line of case law ruling out low taxation of student-rented premises due to the students’ inability to meet a permanent housing need. The Polish local-government appeal court in Kraków upheld the position of the Mayor. But the Voivodship Administrative Court in Krakow found the mentioned decision to be invalid due to the arguments put forward by the Supreme Court – the actual use of the flat. Following this, the case was referred back to the Mayor of Krakow.

This means that the resolution of the Supreme Administrative Court of 21 October 2024 (ref. III FPS 2/24) dispels interpretative doubts and points to the actual use of the building for residential purposes as the key assessment criterion. And the actual use of the entrepreneur’s residential building affects the property tax treatment.

It is therefore not sufficient that the company derives income from the rental of the premises. It must be established whether the premises are suitable for ordinary habitation and whether they are used for such purposes for longer than a hotel stay.

Vacant or short-term rental properties (so-called BnB – Bed and Breakfast) will continue to be taxed at a higher rate.