The real estate industry often offers various incentives for tenants, the costs of which are borne by landlords. This allows landlords to increase the attractiveness of their offers and attract stable, long-term tenants. Such incentives often allow them to meet market standards.
At the same time, these mechanisms can have significant tax consequences. As is often the case, the regulations and interpretation practices regarding tax settlements for real estate investments can be ambiguous and complex.
Fit-out costs, i.e. preparing the property for rent
One of the main expenses that a landlord may incur are the so-called fit-out costs. As a rule, these are renovation and finishing works, consisting in the owner adapting the rented space to the needs of a specific tenant, in accordance with their expectations.
The scope of fit-out work can be very wide – from basic activities such as replacing plaster or painting walls – to more serious work such as changing the layout of rooms or installing systems.
Therefore, there may be a difficulty in settling such an expense – whether it is a tax-deductible cost that should be settled through depreciation write-offs (as a separate fixed asset or as an improvement to the property), or a one-off cost (settled on a one-off basis or over time – in accordance with the duration of the lease agreement concluded with the tenant).
When to recognize the cost of fit-out?
First, it's important to determine whether the expenditure translates into an improvement to the building's fixed asset—the primary goal is to increase its value. On the other hand, many projects involve solely adapting the property to the needs of a specific tenant. Replacing carpeting is hardly considered an improvement to the building's physical assets, but upgrading the internet infrastructure to fiber optics can impact the office's valuation. This line of reasoning is also accepted by tax authorities.
Expenditures incurred for improvement
As a rule improvements that are permanently attached to the property are accounted for through depreciation write-offsThis was indicated, for example, in the interpretation of 3 January 2023, no. 0114-KDIP2-1.4010.198.2022.2.MR1, where it was stated in the context of, among others, the value of funds returned to the tenant as fit-out in the premises, in the part concerning expenditures permanently related to the building (constituting an improvement to the building, which by law belong to the building).
Such permanent improvements include replacing windows, modernizing the electrical system, and reconstructing a floor to increase its usability.
Expenditures that do not increase the value of the property
However, the case of costs incurred for adaptations that do not constitute improvements is decidedly more interesting. It should be noted that in practice, we encounter the view that fit-out works, which adapt the premises to the needs of a specific tenant, do not translate into the value of the fixed asset, as they are for the sole use of a single tenant. After the lease expires, the landlord will be required to re-adapt the premises to the requirements of the new tenant – which involves the liquidation of the existing work. Therefore, it is difficult to conclude that such costs increase the value of the property, and therefore, such expenditures are classified by landlords as expenditures that do not increase the value of the property.
And so, until recently, such costs were quite uniformly recognized as indirect costs, settled on a one-off basis when incurred. The accepted view was that such expenses were related to the moment of concluding the lease agreement – as a one-time event – and not to the duration of the lease agreement.
Nevertheless, in September 2024, the Supreme Administrative Court in its judgment (ref. no. II FSK 1486/21) indicated that the costs of so-called secondary fit-outs (not included in the sale) may, however, be settled over time, proportionally to the duration of the lease agreement. He pointed out that in the case of certain works, they cannot be considered a condition for entering into a lease agreement, but rather constitute an element of its implementation.
After that time, the Director of the National Tax Information also issued several interpretations indicating that expenses incurred for the implementation of fit-out works should be recognized in proportion to the length of the lease agreement (e.g. interpretation of 2 April 2025, reference number 0114-KDIP2-1.4010.61.2025.2.DK).
Surprisingly, interpretations are still being issued in parallel, according to which the authorities still allow the possibility of including expenditures in costs on a one-off basis (e.g. interpretation of 9 February 2026, reference number 0114-KDIP2-1.4010.682.2025.2.PK). It is therefore clear that the position of the tax authorities remains ambiguous.
Each case requires individual assessment.
Accounting for fit-out costs can be a significant challenge, especially considering the numerous variables that influence their tax treatment. Detailed factual determination is crucial. Not only the type and nature of the expenses incurred may be important, but also, for example, the structure of the agreement with the tenant and the manner in which the expenses are regulated.
An additional difficulty is the already mentioned unstable interpretations of tax authorities and the practice of applying the regulations. Consequently, to reduce tax risk, it may be advisable to seek the support of a tax advisor and, in selected cases, also apply for an individual interpretation.
Transaction costs
In the case of real estate, transaction costs must also be taken into account, particularly the payment of civil law transaction tax (PCC), notary fees, and interest. In this case, the most questionable issue is whether any of these costs are included in the property's initial value.
Initial value of the fixed asset
The initial value of a fixed asset, which constitutes the basis for depreciation, is its purchase price and, in the case of internal production, the cost of production.
The purchase price is deemed to be the amount due to the seller, increased by the costs related to the purchase accrued until the date of transfer of the fixed asset or intangible asset for use, in particular by the costs of transport or e.g. assembly, interest, commission.
The cost of production, however, is considered to be the value, at purchase price, of the tangible assets used to produce them: tangible assets and external services used, labor costs and related costs, and other costs that can be included in the value of the produced fixed assets. The cost of production does not include general administrative expenses, selling costs, other operating expenses, and financial transaction costs, in particular interest on loans (credits) and commissions, excluding interest and commissions accrued up to the date the fixed asset is put into use.
Cost associated with purchasing real estate
In accordance with the interpretation of October 16, 2020, reference number 0114-KDIP2-1.4010.348.2020.1.JF, it is important, however, that these expenses actually condition the purchase of a given property and these costs result in its acquisition:
- "It should be noted that the definition of "purchase price", which consists of the amount due to the seller and the costs related to the purchase, refers to the completed act and indicates that the scope of the analyzed concept includes only those costs the incurring of which resulted in the acquisition of a fixed asset or an intangible asset, and in the analyzed case - real estate.
Such costs may include fees incurred for the tax on civil law transactions or the costs of notarial services for concluding the final real estate purchase agreement., which require the form of a notarial deed to be valid – which the tax authorities agree to.
Interest and commissions on loans or credits taken out to finance the purchase or construction of an asset fixed assets accrued until they are accepted for use also affect the initial value of the fixed asset – as expressly mentioned in Article 16g, paragraph 3 of the CIT Act. They will increase the initial value of the property..
Interest and commissions on loans or credits charged after accepting the real estate (fixed asset) for use they will be an expense at the time of payment, they will not increase the initial value of the property
In this respect, however, it is necessary to remember Article 15c of the CIT Act, which limits the costs of debt financing.
Letting fee
An equally common expense in the real estate industry is the remuneration of agents tasked with finding tenants. These expenses are a crucial element of the commercialization process and—like other tenant incentives—have a direct impact on revenue levels and property values.
What is a letting fee?
In order to reach a wider group of entities interested in renting space, entities may incur expenses for agent commissions (intermediaries) related to finding a new tenant for the space or extending the lease agreement by an existing tenant.
Costs incurred for such services may constitute a cost of obtaining income – they are used to attract tenants and thus generate income
As a rule, these expenses constitute indirect costs in business activities, as indicated by, among others, interpretations: 0114-KDIP2-1.4010.189.2023.1.MR1; 0114-KDIP2-2.4010.108.2021.1.RK; 0114-KDIP2-2.4010.27.2023.1.AP, however, it may be problematic to determine the moment of recognition of a given tax cost - it is possible to settle such a cost on a one-off basis, but also over time.
The moment of recognition of the tax cost in the form of an agent's commission
Tax authorities generally accept the view that expenses related to commission for services provided by an intermediary, which include all efforts to retain and acquire financially secure tenants for owned properties, are a one-off expense related to customer acquisition – and therefore these costs are to constitute an indirect cost settled on a one-off basis on the date they are incurred.
However, some argue that intermediation costs should be recognized over time, proportionally to the period to which they relate. As indicated in the non-final judgment of the Provincial Administrative Court, contracts concluded through intermediaries are concluded for a period longer than one year – therefore, these expenses relate to a period exceeding the tax year:
"As a result of the active actions of the Contractors, the Company has concluded a number of lease agreements for the Centre's space, which generate and will generate revenues for the Company. Each of the concluded lease agreements is concluded for a period longer than one year. These costs, being generally related to the Company's business activities, constitute indirect costs of obtaining revenues. It is impossible to link these costs to the generation of specific revenues. Therefore, since the expenses for Commercialization services relate to a period exceeding the tax year, it is not possible to determine what part of them relates to a given tax year, therefore they should constitute costs of obtaining revenues in proportion to the length of the period to which they relate.” Judgment of the Provincial Administrative Court of December 3, 2020, reference number I SA/Sz 663/20 (not final)
Nevertheless The Supreme Administrative Court did not agree with the Provincial Administrative Court (ref. II FSK 283/21)) indicating, among other things, that these costs are related to services aimed at acquiring tenants, and therefore do not concern real estate lease agreements or the period for which they were concluded. In the Supreme Administrative Court's opinion, the remuneration for commercialization services, including the so-called success fee, in the analyzed case constituted remuneration for activities aimed at finding tenants and concluding lease agreements, and not for the use of the real estate during a specified period. Consequently, these expenses should be classified as indirect costs, deducted on the date they are incurred.
Summary
The above discrepancies demonstrate that qualifying expenses related to real estate purchase and commercialization can be challenging and often controversial. Given the large amounts often involved in this market, it's definitely worth taking steps to minimize tax risk, for example by requesting a tax ruling.
If you are planning to purchase commercial real estate or are already using it for profit, please contact us – we will be happy to handle the tax and legal aspects of the entire project.
