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Major changes in Polish tax environment aimed at tightening tax system
Significant amendments are set to be introduced to Polish corporate income tax (CIT) and Tax Ordinance Acts. The purpose of the enacted legislation is to close existing tax loopholes and improve the tax collection process. Taxand Poland discusses how these new updates could affect multinationals.
The CFC regime
The notion of the controlled foreign company (CFC) is going to be introduced in Polish tax law. The basic assumption of the planned CFC provisions is to tax the income of foreign companies held/controlled by a Polish taxpayer, regardless of potential taxation in the country in which the CFC is a resident. Additional taxable basis at the level of the Polish shareholder may be decreased by:
- Dividends paid out by the CFC to the Polish shareholder
- Proceeds from the sale of shares in the CFC
A non-resident entity is deemed to be a CFC when it has its seat or the place of management in:
- A tax haven listed in the appropriate Regulation of the Ministry of Finance (tax haven test)
- A jurisdiction with which Poland did not conclude an international agreement, in particular a double tax treaty
- A jurisdiction with which the European Union did not conclude an international agreement, being the basis for obtaining tax information (agreement test)
- A jurisdiction which satisfies the following conditions jointly:
- A Polish tax resident holds, directly or indirectly, for a period of at least 30 days not less than (i) 25% share in capital or (ii) 25% of voting rights in supervisory / executive bodies or (iii) 25% share in rights to profits in this company (share test)
- At least 50% of revenues of the company stems from passive sources (dividends, capital gains, interest, royalties etc) (income test)
- At least one of the above mentioned passive revenues is (i) exempt or outside of the scope of taxation (excluding Parent-Subsidiary Directive exemption) or (ii) taxed with a rate lower than 14.25% in the country of residence or place of management of the CFC (rate test)
Polish tax residents will be obliged to keep a register of foreign companies and present it to the tax authorities within 7 days upon request.
It is proposed to introduce a general anti-avoidance clause in order to prevent taxpayers from creating artificial structures/ legal constructions aimed at obtaining significant tax benefits. The drafted bill has been released and is currently under consultation.
Thin capitalisation & in-kind settlements
Other changes introducing more restrictive provisions are related to thin capitalisation (which are to be applicable to both direct and indirect links) and in-kind settlements (taxation at the level of the entity settling its liability in-kind).
OECD BEPS implementation
The OECD’s BEPS recommendations with respect to transfer pricing are already being introduced to Polish tax law. In March the Ministry of Finance announced the instructions on business restructurings performed between related entities. The document presents detailed instructions for the tax authorities on how to verify the application of the arm’s length principle in the case of business restructurings. A special department in the Ministry of Finance has been created which will focus on business restructurings from a TP perspective.
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Concerning each of the mentioned tax updates, multinationals should stay abreast of updates within Poland to ensure compliance and maximise any available benefits. Specficially mulitnationals should:
- Plan properly to avoid 19% tax on income generated by a CFC. Taxpayers are allowed to deduct from taxable income dividend received from CFC. Consequently, CFC regulations may be managed through proper dividend planning
- Pay attention to the proposed amendments regarding the anti-avoidance clause and monitor these on an on-going basis. Irrespective of the fact that the clause has not been introduced yet, it is advisable to pay more attention to substance/business reasons-related issues when conducting restructuring processes
- Revise financing structures to eliminate the potential impact of modification of thin capitalisation regulations. Additionally, they should reassess their plans to settle their liabilities in-kind, bearing in mind the fact that such operations will trigger taxation at the level of the paying out entity
- Focus on the business substance of the transactions concluded with related entities, taking into consideration OECD BEPS guidance
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