When is a building, which is being commissioned in stages, considered to be ‘complete and fit for use’ within the meaning of the CIT regulations? The answer to this question determined when our client could begin depreciation – and thus recognise tax-deductible costs.
Client's situation
Our client – a limited liability company – has been carrying out the construction of a complex of buildings for let, intended ultimately for office use, since 2006. The project consisted of several phases; some buildings were divided into sections, and they were brought into use gradually.
For some sections of the building complex, the company obtained a partial occupation permit (for example, excluding a specific floor). Each of these buildings was structurally and technically fit for use, and the lack of a full occupation permit was solely due to the fact that selected areas had not yet been finished to the individual specifications of future tenants.
The issue
DMS TAX’s task was to assess at what point buildings should be deemed ‘complete and fit for use’ within the meaning of Article 16a(1) of the CIT Act – and, consequently, when the taxpayer may begin to claim depreciation allowances.
Our approach
In DMS TAX’s view, the buildings should have been regarded as complete and fit for use as soon as the decision granting a partial occupation permit was obtained – despite the fact that not all construction works had been completed. Since the property was actually being used for business purposes and generating rental income, the mere fact that certain parts were excluded in the decision should not deprive the taxpayer of the right to depreciation.
In view of the risk of a dispute with the tax authority, we recommended that the client apply for an individual tax ruling. The Minister of Finance did not share our view – he ruled that depreciation could only begin once a certificate of occupancy had been obtained for the entire building. On our recommendation, the company challenged the interpretation in court.
The right to accelerated depreciation – a real benefit over time
The Provincial Administrative Court in Wrocław fully endorsed our position. The court pointed out that a fixed asset must be complete and fit for purpose in the sense that it will actually be used in the taxpayer’s business, and that it is the building authority which decides on the possibility of early use of the facility – even if certain works have not yet been completed.
For the client, this meant the right to commence depreciation write-offs earlier: faster recognition of tax-deductible costs and a more favourable spread of the tax burden over time, starting from the moment the building actually began to generate income.
What this means
This case confirms that the point at which depreciation begins is determined by the actual readiness of the asset for use in the business’s operations – rather than the formal completion of the entire investment. For companies carrying out projects in stages, this often makes a significant difference to their accounts.