When can the tax office classify rental income as business income? The Supreme Administrative Court (NSA) defends entrepreneurs.

On Monday, the Supreme Administrative Court (NSA) issued a resolution in a seven-judge panel regarding the taxation of lease, tenancy and similar agreements. The motion to the court was submitted by the Ombudsman for Small and Medium-sized Enterprises. The case concerned the conditions under the Personal Income Tax Act (PIT Act) determining which profits from property letting are taxed as income from business activity rather than from rental.

In the operative part of the resolution dated 24 May 2021 (case no. II FPS 1/21), the Supreme Administrative Court clarified that income earned by taxpayers from lease, sublease, tenancy, subtenancy and other similar contracts is classified without limitation as income from the source listed in Article 10(1)(6) of the Personal Income Tax Act of 26 July 1991, unless the assets have been included by the taxpayer in the assets related to their business activity.

The court held that if the taxpayer:

a) does not undertake actions aimed at clearly distinguishing an enterprise by creating an organised set of tangible and intangible components intended for that activity,

b) does not establish an organisational structure enabling the management of that separated part of the assets,

c) does not develop a strategy for the activity (plans for its development, market research to identify potential tenants’ needs, adapting the assets to those needs), but merely invests surplus funds (earned from various income sources) in the purchase of real estate (including premises) which are then rented out,

then it cannot be considered that the assets are connected with business activity.

“This is good news for entrepreneurs who lease out assets withdrawn from their business activity and tax the rental income under the lump-sum tax on registered income. The resolution prevents tax authorities from treating income from the lease of such assets as income from business activity,” commented Deputy Ombudsman Jacek Cieplak on the website of the Office of the Ombudsman for Small and Medium-sized Enterprises.