Michał Gosek

Tax adviser (Poland)
Associate Partner
Phone: +48 61 624 49 39

Continuing the topic of handling tangible assets (see part 1) in this article we are describing the consequences you may face when you dispose of (e.g. sell) a tangible asset if you included its modernisation costs in eligible costs.

Obligation to maintain ownership of assets related to capital expenditures

According to §6(1) of the SEZ Regulation, expenditures eligible for state aid are the costs of the investment project incurred in the SEZ during the lifetime of the permit, less input tax and excise duty (if they are deductible under separate regulations), which include without limitation:

  1. the cost of acquisition or the cost of own production of tangible assets, provided that they are included (under separate regulations) in the taxpayer's assets (item 2);
  2. the cost of extension or modernisation of existing tangible assets (item 3).

On one hand, it is unquestionable that expenses for modernisation of a tangible asset may be treated as eligible costs and thus be included in the base for assessment of the available tax exemption. On the other hand, you must not forget about the obligation to maintain ownership of the asset used in a special economic zone for a certain period. In this context, you should consider two issues:

  1. if you sell a modernised tangible asset 5 (or 3 where appropriate) years after including it in your tangible and intangible assets records but before 5 (or 3 where appropriate) years after you incurred the expenses for its modernisation, will you face any negative consequences of such sale?
  2. will the disposal of the modernised tangible asset before the requisite period require you to reduce the base for assessment of capital expenditures by that asset's acquisition cost only or by the sum of expenditures for its acquisition and modernisation?

Disposal of a modernised tangible asset sooner than 5 years after the modernisation

In the first place, we would like to remind you that according to §5(2) of the SEZ Regulation, to enjoy the income tax exemption you have to:

  • maintain the ownership of the capital expenditure-related assets for 5 years from the date the assets were entered into the records of tangible assets and/or intangible assets in the meaning of income tax regulations (or for 3 years in case of small and medium-sized enterprises);
  • continue operations in the area where the aid was granted for at least 5 years from completion of the investment project (or for at least 3 years in case of small and medium-sized enterprises).

A literal interpretation of §5(2) of the SEZ Regulation suggests that the 5-year period of ownership should be counted from the date of adding the asset to the tangible assets records. The date of incurring the modernisation expenditures or recognising them in the books is irrelevant in this case. Importantly, the modernisation itself is not a tangible asset. Consequently, the increase in the initial value of the tangible asset following its modernisation does not affect the obligation to maintain ownership of the capital expenditure-related assets for at least 5 years.

The law stipulates no adverse consequences if the taxpayer disposes of the modernised tangible asset more than 5 years after including it in the records but less than 5 years of the modernisation date.

In this context, you may ask about the consequences of disposing of a modernised tangible assets sooner than 5 years of adding them to the tangible and intangible assets records. It seems that the base for assessment of eligible costs should be reduced by the acquisition cost plus modernisation cost. The tangible asset is all in all the same asset as before the modernisation. The modernisation itself cannot be a separate asset. It would be illogical and would defeat the purpose of the law if you kept the expenditures for modernisation in the base of eligible costs, while the acquisition cost should be excluded because the statutory periods are not kept.

Sale of a tangible asset vs its liquidation

Liquidation of an asset is a whole different story than its disposal. If a modernised tangible asset is liquidated more than 5 years after it was included in the tangible and intangible records, the consequences are the same as in the case of sale. Tax authorities have confirmed this e.g. in the advance tax ruling of 17 November 2017 issued by the Head of the National Tax Information Service (file no. 0111 – KDIB1 – 3.4010.350.2017.1.IZ).

Certain controversy arises when a modernised tangible asset is liquidated sooner than 5 years after including it in the records.
According to §5(2) of the SEZ Regulation, one of the conditions to enjoy the state aid in the form of a tax exemption is to maintain ownership of the assets purchased with money eligible for aid for 3 or 5 years, as the case may be. Tax authorities are consistent in their view that this provision does not apply if an enterprise rents or leases some redundant assets to another entity. Even though removed from a SEZ area, such assets are still owned by the lessor. This approach is based on literal interpretation of the law and has long been questioned by the Ministry of the Economy claiming that it defeats the purpose of the provision.

Importantly, also tax authorities in most of their advance tax rulings agree with taxpayers that liquidation of a tangible asset does not breach §5(2) of the SEZ Regulation. Consequently, unlike in the case of sale of tangible assets, their liquidation within 5 (or 3) years after they are added to the tangible and intangible assets records would not reduce the total eligible costs.
In our opinion, this approach is quite controversial. Unless the liquidation of tangible assets involves replacement with new assets caused by rapid technological development, it may deprive you of the tax exemption to the extent in which the exemption was granted in connection with the purchase of that asset. While the lease of an asset fulfils the definition of maintenance, the liquidation does not.

Moreover, the regulations that governed that matter before the SEZ Regulation came into force (each zone used to be governed by a separate regulation until 30 December 2008), included a similar provision, but it required that the asset ownership not be transferred in any way. It seems that the above change was not a coincidence but rather an attempt to tighten up the regulations.
If you have additional questions or doubts about the issues discussed in this article, Rödl & Partner experts in Cracow, Gdansk, Gliwice, Poznan, Warsaw and Wroclaw will be glad to help you.

Michał Gosek,

Agnieszka Szczotkowska