When building or structure improvements occur?

One of the practical issues faced by taxpayers is determining whether expenses incurred in relation to a fixed asset constitute its improvement within the meaning of the income tax acts – thus increasing its initial value – or whether they are other types of expenditures that do not affect this value. In this article, we will take a closer look at several typical categories of expenditures incurred on buildings and structures in the context of Personal Income Tax (“PIT”), Corporate Income Tax (“CIT”), and Real Estate Tax (“RET”).

Improvements – general principles

Under both the Personal Income Tax Act (“PIT Act”) and the Corporate Income Tax Act (“CIT Act”), expenses related to the improvement of a fixed asset (through rebuilding, extension, reconstruction, adaptation, or modernization) increase its initial value, provided that the total expenditure exceeds PLN 10,000, and the improvement increases the asset’s usable value compared to the condition at the time it was put into service, measured in particular by its period of use, production capacity, product quality, or operating costs. In practice, this means that the taxpayer cannot recognize such an expense as a tax-deductible cost at the time it is incurred. Instead, such expenses are generally spread over time, i.e. they are settled as part of depreciation write-offs. Furthermore, as the tax base for structures in the case of RET is, as a rule, their initial value, determined for income tax purposes, the above-mentioned improvements translate into higher RET from structures. On the other hand, the initial value of a building, is a calculation element of the tax base for the so-called tax on income from buildings, regulated in income tax acts.

What should be taken into account?

A classic example of an expense not constituting an improvement is renovation. This term is not defined in either the PIT Act or the CIT Act. Administrative courts generally hold that the difference between renovation and improvement of fixed assets is that the former is aimed at maintaining or restoring the useful value of these assets (repairs), while the latter are aimed at starting or expanding business activity through conversion, extension, reconstruction, adaptation or modernisation, resulting in a significant change in functional characteristics. Renovation will therefore be activities restoring the original technical and functional condition of a fixed asset, including the replacement of worn-out technical components (see, for example, the judgment of the Supreme Administrative Court (“SAC”) of 26 January 2016, ref. no. II FSK 2919/13). Further interpretative guidance can be found, for example, in the judgment of the SAC of 6 November 2020, ref. no. II FSK 1740/18, in which the court stated: “Renovation should be understood as the performance of construction works in an existing building object aimed at restoring it to its original condition, (…), the use of construction materials other than those originally used is acceptable. Renovation is therefore in no way connected with the construction of new parts of an object, construction of a new object or its rebuilding.” When classifying expenditures as renovation costs, technological progress should be taken into account. The use of newer, more advanced materials or components (in line with current technological standards) does not in itself preclude the expenditure from being considered costs of renovation, even if these materials or components have different technical parameters than those which they replace. This is confirmed, among others, by individual tax rulings of the Director of National Tax Information (“DNTI”) of 8 December 2023, ref. no. 0111-KDIB1-2.4010.529.2023.1.AW; of 30 August 2022, ref. no. 0114-KDIP3-1.4011.562.2022.1.EC and of 3 December 2021, ref. no. 0111-KDIB1-1.4010.490.2021.1.EJ. Considering the above, for example, insulating a building for the very first time would constitute its improvement (see individual ruling of the DNTI of 16 December 2024, ref. no. 0111-KDIB1-3.4010.658.2024.2.DW). On the other hand, replacing an existing, defective or worn-out central heating system with a new one, performing the same functions, even if done using newer technologies, would not constitute an improvement (see individual ruling of the DNTI of 25 March 2025, ref. no. 0114-KDIP2-1.4010.93.2025.2.PK). It is also worth noting that replacing equipment located within a building will not constitute an improvement if that equipment is a separate fixed asset – for example, the replacement of lifts / elevators (see individual ruling of the DNTI of 11 June 2025, ref. no. 0111-KDIB2-1.4010.185.2025.1.AJ). Likewise, expenses incurred to adapt premises within a building to the individual needs of a specific tenant do not constitute improvements, since they do not increase the building’s overall usable value but merely serve that tenant’s specific needs. This has been confirmed, inter alia, in individual tax rulings of the DNTI of 24 March 2025, ref. no. 0111-KDIB1-2.4010.38.2025.2.ANK; of 4 January 2023, ref. no. 0111-KDIB1-1.4010.818.2022.1.SH; and of 17 November 2020, ref. no. 0111-KDIB1-3.4010.431.2020.1.MBD. Conversely, expenses aimed at raising the general rental standard of a building – thereby affecting rental income – should be classified as improvements that increase the building’s initial value (see individual tax ruling of the DNTI of 6 October 2023, ref. no. 0111-KDWB.4010.76.2023.1.AZE). Finally, another category of expenses worth mentioning are costs of removing so-called network collisions (e.g. electrical, sewage, water, or heating etc.). These are cases where construction work is required not because of wear and tear or defects but due to the need to relocate existing infrastructure conflicting with other facilities. For example, the construction of a road requires the dismantling of existing cables and pipes and their relocation, or even the construction of new sections of a network in a different location. Tax authorities generally hold that such expenditures do not constitute improvements to existing fixed assets (see individual tax rulings of the DNTI of 13 June 2024, ref. no. 0111-KDIB1-1.4010.197.2024.4.AND; of 26 March 2024, ref. np. 0111-KDIB1-3.4010.757.2023.3.AN; and of 26 November 2020, ref. no. 0111-KDIB1-1.4010.392.2020.1.MF).

Summary

The cited case law paints a generally consistent picture, providing guidance on the correct classification of expenses as improvements of fixed assets or other costs. However, we recommend caution – correct classification requires detailed technical analysis and consideration of the condition of a given fixed asset before and after works were carried out.