As of 1 January 2015 numerous amendments to Poland's Corporate Income Tax Act and Personal Income Tax Act came into force. The changes are aimed at "closing remaining loopholes" in the Polish tax system. The latest changes reflect Poland's commitment to stop tax base erosion and profits shifting and to implement the OECD's recommendations.
The changes include the introduction of provisions on recognition of non-cash revenue, introduction of modified and stricter thin capitalisation rules (in particular new debt to equity ratio 1:1 instead of 3:1) and the new definition of qualified lenders including direct and indirect parent and sister companies and introduction of an obligation to prepare transfer-pricing documentation by partners entering into partnership agreements, joint-venture agreements or any other similar agreements.
From an international tax planning and optimisation perspective, the most important and revolutionary change is the introduction of controlled foreign companies (CFC) rules to the Polish tax system.
Until the end of 2014, Poland did not have CFC rules. The CFC rules which came into force at the beginning of 2015 impose a 19% corporate income tax (CIT) at the Polish taxpayer's level on income generated by the taxpayer's CFCs.
Both Polish individual taxpayers and Polish corporate taxpayers holding CFCs are subject to Polish CFC rules. When deciding whether the CFC rules apply, it is crucial to determine if a Polish tax resident owns an entity which qualifies as a CFC.
Which entities qualify as CFCs?
To qualify as a CFC:
- 50% or more of the revenue in any given tax year must be from passive income eg dividends, disposal of shares or royalties;
- at least one type of passive income must be taxed at a rate lower than 14.25% or tax-exempted (exemptions based on the Parent-Subsidiary Directive are not taken into account) eg dividend from a Maltese subsidiary to its Cypriot parent which is owned by a Polish ultimate parent company; and
- the Polish parent company must have held at least 25% of the shares directly or indirectly for at least 30 days.
Direct foreign subsidiaries in tax havens (ie a country or territory listed in the regulation of the Minister of Finance specifying countries and territories applying harmful CIT rules) and foreign subsidiaries located in a country that does not have tax information exchange with Poland will also be treated as CFCs.
The following entities are recognised as foreign companies:
- Legal entities;
- Capital companies in organisation;
- Tax-transparent partnership, if (under foreign law) it is treated as a legal entity and in that foreign country is subject to tax on its income regardless of where the income is earned; and
- Organisational unit without legal personality other than a partnership whose registered office or management is not in Poland and in which a Polish tax resident holds shares, voting rights in supervisory or constitutive bodies, or a right to participate in the profit.
In principle, the 19% CIT is imposed on the income earned by a CFC in proportion to the number of shares held in it by the Polish tax resident and also in proportion to the period of possession of the shares during the fiscal year of a CFC. Stricter rules apply to CFCs from tax havens as it is presumed that the Polish taxpayer holds 100% rights to participate in the profit during the whole fiscal year of the tax haven CFC.
The Polish tax payer may decrease the CFC tax base by the amount of dividend received from the CFC and price received for the disposal of shares in the CFC.
The income of the CFC amounts to its revenue (minus its costs) generated in the CFC's tax year and it should be calculated according to Polish tax rules. It might be expected that the requirement to calculate the CFC's income according to Polish tax rules will cause numerous problems in practice.
Exemptions to the CFC-taxation
Certain exemptions to the CFC taxation were also introduced. A foreign EU/EEA company is not covered by the CFC rules if its entire income is subject to taxation in a member state of the EU or EEA, provided that it 'actually conducts business activity'.
Companies from beyond the EU/EEA are not covered by the CFC rules if one of the following conditions is fulfilled:
- The annual revenue of the CFC does not exceed EUR 250,000; or
- The CFC actually conducts business activity in a country that is not a member state of the EU/EEA and:
- It is subject to taxation on its entire income in that country;
- Its income does not exceed 10% of the entire revenue resulting from conducting business activity in that country; and
- There is a legal basis for exchange of tax information between Poland and the country of CFC's origin.
Polish tax law does not provide a legal definition of the term "actual business activity". However, certain guidelines were formulated in this respect. In particular the following indicators of "actual business activity" should be taken into account:
- Registration of the CFC is related to the existence of a business entity actually carrying out business activities ie the company has premises, qualified staff and equipment used in the conducted business activity;
- The CFC does not create a structure detached from economic reality;
- There is a correlation between the scope of business carried out by the CFC and premises, staff or equipment in possession of this company;
- The concluded agreements are consistent with the economic reality, are economically justified and are not obviously contrary to the CFC's interests; and
- The CFC independently fulfils basic economic functions using its own resources and management staff which is present at CFC's premises.
Additional reporting obligations are now imposed on Polish tax residents holding CFCs including keeping separate records of CFCs unless the CFC conducts actual business activity in the EU/EEA country and its entire income is subject to taxation in such a country.
Implications for cross-border structures
The latest changes to Polish tax law have resulted in many cross-border tax optimisation structures now being ineffective from a Polish tax perspective. We have been working closely with our clients to eliminate negative consequences of CFC rules on their business.
The introduction of CFC rules has made tax planning and tax optimisation more difficult but not impossible. For more information, contact a member of the Polish Tax team.