Fit-out contribution

Companies that lease out commercial space in buildings, such as shopping malls, employ various strategies aimed at attracting potential tenants. As this industry is so competitive, such companies need to encourage potential tenants to sign a lease. One commonly used approach is to carry out adaptation and finishing works in the leased premises (known as Fit-out works). The accounting and tax aspects of the costs related to such Fit-out works require detailed analysis and review, especially following the interpretation published by the Director of the National Tax Information Office on June 29, 2023.

What are Fit-out works? 

Fit-out is the process of adapting and arranging the interior of a building or premises for a specific purpose, such as meeting certain legal requirements or tenant needs. The scope of Fit-out activities is mainly determined by the nature of the tenants business and is precisely defined in the lease agreement. These works can be categorized as follows:

• Primary Fit-out - adaptation works that tailor the space to the specific needs of the initial tenant. These can be done both before and after completing the investment.
  
  

• Secondary Fit-out - works carried out after the building is in use, aimed at adapting the space for the subsequent tenant by altering the existing finishings of the leased area

It should be emphasized that both primary and secondary Fit-out works are closely tied to a specific tenant and their needs. Consequently, they are not acceptable for other tenants who, in line with current business standards, expect the space to be tailored to their own requirements. Additionally, it's worth noting that Fit-out works are fundamentally a necessary condition for the lease agreement to come into effect.

Are Fit-out works tax deductible?

The relevant interpretation of the Director of the National Tax Information Office (No. 0114-KDIP2- 1.4010.272.2023.1.MR1 from June 29, 2023), indicates that expenses for Fit-out Contributions, both for Primary Fit-out and Secondary Fit-out, constitute revenue-generating costs, that are separate from costs directly related to revenues, as referred to in Article 15 para. 4d of the Corporate Income Tax Act. These expenses should be recognized at the moment they are incurred and not recorded as prepaid expenses.

Expenses related to Fit-out Contributions should be classified as indirect costs. This is due to the inability to directly attribute these expenses to the rental income generated within a specific period. The absence of Fit-out works prevents the signing of a lease agreement, thus making it impossible to commence the leasing service. The completion of these works is necessary to generate income and to maintain and secure the source of income. In summary, Fit-out expenses should be recognized as revenue-generating costs (based on Article 15 para. 4d of the Corporate Income Tax Act in relation to Article 15 para. 4e of the Corporate Income Tax Act) on the date they are incurred, i.e., once off on the date that the costs are recorded in the accounting books based on the invoice received.

It should also be noted that Fit-out costs will not increase the utility value of the building due to their temporary nature. The Fit-out of the leased premises is individually tailored to a specific tenant's needs.

BPG Polska Audyt sp. z o.o. specializes in accounting and tax advisory services for real estate companies (office buildings, warehouses, shopping malls, photovoltaic farms ) owned by Polish and foreign investment funds. BPG is a member of the international KRESTON Global network.

Contact person: pawel. brejzek@bpg.pl