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Changes to Income Tax

27 May 2010

The Polish Ministry of Finance (MF) has recently published a general proposal for amendment of their income tax laws. The Proposal contains guidelines for drafting the exact wording of the tax regulations amendments. This publication is the first step leading to legislative change which is likely to occur as of 2011. Taxand Poland looks at the proposal in detail and identifies the impact.

Given the extensive scope of the proposed amendments and their potential implications on businesses, both foreign and domestic investors, the guidelines deserve the right amount of attention from the outset, the main elements of which are:

  • extension of tax exemption to foreign investment and pension funds
  • exchange of shares exempt also for shareholders subject to personal income tax
  • anti-abuse clause widened
  • limitation on tax-free step-ups
  • changes in taxation of partnerships.

The envisaged changes aim at removing current discriminatory incompatibilities with EU law and clarification of the tax issues currently giving rise to taxpayer uncertainty and inconsistencies in the administrative courts' position. However, their objective is clearly also designed to eliminate loopholes and inefficiencies of the corporate tax system and safeguard the state tax revenue from leakage (erosion of the tax base), including but not limited to those resulting from tax evasion or tax avoidance.

Below we address some of the key issues included in the MF's guidelines.

  • The MF intends to equalise the tax status of foreign investment and pension funds with their Polish counterparts by exempting them from the Polish corporate taxation (subject to certain conditions being met, for example, where a fund is subject to tax on the entirety of income in the country of residence within the EU or EEA).
  • Important changes are planned as regards the Merger Directive implementation.

Currently under the domestic law the tax exemption for exchange of shares is not available for shareholders being natural persons, subject to personal income tax. This seems in breach of the EU law. Thus the MF plans to extend this exemption to include such shareholders.

Also, the definition of the exchange of shares will be revised - in the interest of clarity, but not without shortcomings.

Importantly, the MF plans to extend the application of the anti-abuse clause, currently applicable only to mergers and divisions, to dividend interest and royalty payments. The tax benefits are to be denied when a given transaction is not carried out for valid commercial reasons but its principal (or one of the principal) objective(s) is to avoid or evade taxation.

The MF intends to extend the application of the "continuation rule" to valuation of assets constituting an enterprise or an organised part of an enterprise received by a taxpayer in the form of an in-kind contribution. As of today this rule applies only to fixed and intangible assets. As a result of the change the initial value of other assets will be determined based on the values disclosed in the tax books of the enterprise being subject to contribution, relative to the date of its acquisition.

It is proposed to state clearly that contributions-in kind made to partnerships are not subject to taxation, both under the PIT and CIT Act - which is likely to put an end to a long-lasting controversy in this matter. However, the "continuation rule" is to be introduced regarding the valuation of assets contributed in-kind to a partnership or acquired through transformation of a partnership - for the purposes of their depreciation or upon their disposal their historical value will be taken into account. Additionally, some changes regarding the taxation rules of liquidation of a partnership and withdrawal of a partner are also considered.

Taxand's Take

The amendments proposed by the MF are of a significant nature and may affect the Polish income tax landscape. Not only will they eliminate areas of uncertainty (sometimes provoking new doubts and reservations, though) but also potentially limit access to some techniques in the area of optimisation planning. This may be the case, for example, with the tax-free step-ups on investment in progress acquired in the form of an in-kind contribution of an enterprise (or its organised part), as well as certain solutions making use of partnerships. For that reason the envisaged changes should definitely be taken into account by multinationals upon drafting restructuring or tax optimisation schemes.

Whether or not the amendment will enter into force and what shape it will eventually take depends on the outcome of the legislative path. Most probably the exact content and wording of the new laws will be known no earlier than in autumn 2010.

Your Taxand contact for further queries is:
Rados?aw Czarnecki
T. +48 22 324 59 19

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