Developer investor (residential construction )

Developer's Act

When we plan to buy an apartment, we often wonder how the funds we pay into the developer's account are protected. What is the best way to secure the construction in case of failures, financial troubles of the developer, bankruptcy. The answer, we will find in the Developer Act - that is, the Act on the Protection of the Rights of the Buyer of a Dwelling. A detailed analysis of this legal act, which regulates real estate development activities in Poland, is described below. 

  • what is the developer's act
  • whom it concerns
  • changes to the law in 2021

What is the development law?

The Development Law regulates issues related to the activities of companies that build residential units and single-family houses.  

The Development Law introduced a number of changes, primarily with regard to securing funds belonging to customers. Their payments obligatorily go into a housing trust account, from where the developer receives them only after the bank verifies the advancement of construction.

Who is affected by the law?

The Development Law applies to entrepreneurs who, in the course of their business activities, undertake to construct and then unencumber a residential unit or a single-family house, which is the subject of a development agreement. Thus, regardless of whether the development activity is carried out within the framework of a company or by cooperatives or other entities, the Development Law applies to all of them. The protection under it is extended to all individuals, and the obligations of the parties to a development agreement are strictly regulated by the law.

Trust accounts

How does a trust account differ from a standard developer's bank account? First of all, in that the developer did not have direct access to the funds deposited there by customers until the relevant stage of construction was completed (in the case of an open trust account).

For this reason, the entire investment task was divided into several stages. Starting from the completion of the foundations, through the open or shell state, the entire construction work had to be divided into individual sequences. The customer, receiving one of the most important documents related to the purchased property, the prospectus, was given all this information in precise detail. What's more, his payment schedule was just closely correlated with the progress on the construction site.

Moreover, it should be noted that the bank holding the developer's open escrow account verified the progress of the work after the completion of each stage of construction. And only after their approval did it pay the entrepreneur certain sums, which were released precisely from the trust accounts.

Trust account

How exactly does it work and what types of housing trust accounts do we have?

The account, as we have already managed to find out, is designed to protect the funds of purchasers of residential units from the possible bankruptcy of the developer, or intentional dishonest action. However, when the construction has been completed and the premises can be freely used - such protection is no longer needed. 

At the outset, it should be noted that there are two types of trust accounts. These are open, and closed trust accounts. 

What does each give, what are the differences between them, and what type of account is most beneficial to the buyer?

Open trust account

An open housing escrow account makes the developer receive funds from the bank for each completed stage of the development project. Always the Building Inspector goes to the construction site after the completion of a particular investment stage. If he finds that there are no deficiencies, the bank pays the developer the accumulated buyers' funds for a particular stage of the development, and the funds paid out in this way can only be used by the developer to complete the construction. 

An open residential escrow account provides a greater chance, compared to a closed one, for a positive finalization of the development process. The developer can use funds that a predetermined bank releases during the construction process. 

Closed housing trust account

A closed residential escrow account differs from an open one in that the developer literally has "frozen" the funds that buyers pay into it until ownership of the apartment or single-family house is transferred. This forces the developer to make a gigantic financial commitment to complete the construction without using the funds that are accumulated in the account of a closed residential trust account. 

Establishment of the Developer's Guarantee Fund.

The Developer's Guarantee Fund is another pro-consumer tool, giving greater security to buyers of a residential unit or single-family house. This institution will be a kind of fund, in the account of which developers will transfer the equivalent of one percent of each payment made by a customer under a signed development agreement into an open trust account (or under the previously mentioned reservation agreement). This is supposed to be an additional safeguard for buyers in case of financial trouble for the developer. In the case of a closed residential trust account, the value of the deposit will be 0.1% of its value.

In terms of additional paperwork to the customer, one of them will be the need to expand the prospectus 

Development law - summary

The Development Law is a document that over a decade ago was intended to regulate the primary market. Over the decade it has been in effect, it must be admitted that it has fulfilled its role perfectly. Nonetheless, with changing realities, it needed to be amended, which will come into force as early as next year. While the mode of entering into development agreements itself will not change, the changes will be felt primarily by developers. Customers will be given broader protection, which should translate into an even higher level of trust in developers.

Construction of service units with tourist accommodation.

In commercial areas, where there is often no natural industry, municipalities enacting their local zoning plan do not allow the construction of residential blocks. Instead, they are allowed to erect buildings with "service premises with tourist accommodation." As a result, the municipality can count on higher tax revenues to the budget. 

The rate is set by the municipality by resolution, in 2023 for residential premises the tax is 1.15 zlotys per square meter of floor space, for commercial premises 33.10 zlotys
For example, in the municipality of Rewal, the rate in 2024 will be for service premises; PLN 23.10 , ( the rate retained unchanged from 2018) data from : https://rewal.pl/podatki-2024/

The aforementioned provisions cause developers to build buildings for tourist and recreational accommodation. They then separate independent units in them (for which they establish land and mortgage registers) and sell them as apartments, which at first glance are no different from typical residential units. This is because it is up to the buyers to decide whether to use them for their own purposes (residential or recreational) or to rent them out to tourists.

What is the difference between a commercial unit and a typical residential unit?

The gross price of such units will be higher than that of ordinary apartments. Taxation will not be 8 %VAT, but is charged at 23% VAT rate.

  1. Buying a property "for business":
    • We can receive a VAT refund,
    • We tax rental income in the same way as other business income (that is, usually with a 19 percent income tax),
    • income from the sale of the premises is also taxed in the same way as other business income (except for residential premises),
    • we do not benefit from income tax exemption on the sale of the premises regardless of the passage of time.
  1. Buying a property "privately."
    • too, we can receive a VAT refund,
    • Rental income is taxed under the general rules (income tax 17/32%) or a flat rate of 8.5/12.5% - as you choose,
    • we tax the income from the sale of the premises with income tax 19%, as long as the sale took place within five years from the end of the year of acquisition of the premises (and possibly enjoy an exemption due to the use of the proceeds for our own housing purposes),
    • if the sale of the premises takes place after the aforementioned 5 years, no tax income arises at all.

It is worth mentioning that it is not at all necessary to indicate in the preliminary agreement, development agreement or final property transfer agreement whether the purchase is made in connection with our business or not. This is because in terms of VAT, only the name of the buyer counts, and in terms of income tax, the decision of the taxpayer himself to bind the asset in question to his business (i.e. you can buy the premises privately and then include them in the fixed asset register) is decisive. 

Instead, it's always a good idea to provide a TIN to the contract, so that the seller will immediately issue a correct invoice for a hassle-free VAT refund. 

When can you count on a VAT refund?

After successful verification, the refund is paid to the taxpayer's bank account. VAT is reimbursed as a rule:

  • on time 60 days from the filing of the application - if the taxpayer performed any taxable activity in the accounting period to which the refund applies,
  • on time 180 days - when the taxpayer did not perform any taxable activities during the accounting period.

We look forward to working with you - PM Development Patrick Cruz