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Entry into force of Polish GAAR in July
The GAAR gives the tax authorities the right to determine tax without taking into account artificial or contrived arrangements undertaken in order to gain tax advantages contrary to the object and purpose of the tax law. Under the GAAR, the tax consequences are determined according to the transactions that would have been performed if the taxpayer had acted appropriately (i.e. had the taxpayer not acted in an artificial manner and had reasonable goals other than obtaining tax advantages). As a consequence of such re-classing, the taxpayer may be charged late-payment interest on potential tax deficiencies. It is not yet clear whether the application of the GAAR will also entail penalties of any kind.
Certainly, the GAAR introduces a new standard into Polish tax law that may entail more uncertainty, not only in relation to tax structuring but also in the course of day-to-day business operations.
Due to the potentially significant tax consequences, it is important to be familiar with some of the premises of the Polish GAAR right now.
The new Polish GAAR includes some specific terms / elements such as: tax advantage, relevant action, artificial action, etc., the definition of which will be crucial when applying the GAAR. Apparently, the practical interpretation of these new elements will be crucial when applying the GAAR.
In this respect, one of the most significant new terms is a tax advantage. Pursuant to the new laws, a tax advantage is the result of an artificial action made contrary (in given circumstances) to the tax law. Examples of tax advantages include:
- not determining the tax liability
- delay in determining the tax liability or reduction of its amount
- establishing or overestimating tax loss
- establishing overpayment or right to tax refund
- increasing the amount of tax overpayment or tax refund
Importantly, tax advantages can be challenged by the tax authorities if they are gained in an artificial manner. When determining artificiality of the taxpayer’s conduct, the tax authorities will look at the following aspects:
- unjustified division of the transaction,
- unjustified economic involvement by third parties, despite lack of economic and business justification,
- appearance of elements leading to the same or similar position to the one existing before an activity,
- appearance of elements which annul or offset each other,
- economic risk which goes beyond the expected advantages other than tax advantages, to the extent that an entity would not reasonably choose such mode of action
The new rules include some limitations on the use of GAAR. On this basis, the GAAR cannot be applied if:
- the tax advantages obtained by the taxpayer in a given period do not exceed the amount of PLN 100k PLN (approx. EUR 22.7k)
- the taxpayer has obtained a “protecting opinion” (see below)
- the tax advantages concern VAT as well as charges or other non-tax budgetary payments (separate rules on anti VAT avoidance have been introduced in the VAT Law)
- application of other provisions allow to counteract the tax avoidance
Regarding the “protecting opinion”, it is a new measure similar to tax rulings by means of which taxpayers can get legal protection for their planned operations that might be considered as tax avoidance subject to the GAAR. A request for a “protecting opinion” should include, inter alia, the factual background, planned operations, business and economic justification, tax implications and the taxpayer’s own standpoint. Importantly, a fee is charged for issuing that “protecting opinion” which amounts to PLN 20k (approx. EUR 4.5k).
The tax proceedings related to the GAAR are to be centralised, i.e. if a tax decision is issued on the basis of the GAAR, the tax proceedings or audit must be initiated or overseen by the Minister of Finance.
In order to handle queries regarding the application of the GAAR, a special body has been set up – the Council for Prevention of Tax Avoidance. This Council will take part in tax avoidance proceedings by advising the Minister of Finance on the application of the GAAR.
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The introduction of the new GAAR provisions is a significant change in the Polish tax system. It will undoubtedly give the tax authorities a new and powerful tool in the battle against tax avoidance practices.
On the other hand, it is unclear how far the new legislation will reach. It mainly depends on the practical interpretation of the new rules, in particular, the on the definition of what constitutes a tax advantage. According to the new provisions, the GAAR will apply to the tax advantages obtained after the new rules take effect. Hence, some questions arise such as, for example, whether the favourable tax results of previous transactions (e.g. high amortisation write-offs, increased cost of sale following share-for-share transaction) should also be deemed as tax advantages.
Another question concerns the validity of already issued tax rulings that should provide legal protection for taxpayers with respect to operations that have entailed some tax advantages. Should those tax rulings be repealed because of application of the GAAR?
It seems that the vagueness of several concepts in the GAAR would enable the tax authorities to challenge numerous transactions and treat them as a part of tax avoidance.