On 13 May 2016, the lower chamber of the Polish parliament (Sejm) enacted changes to the Tax Ordinance Act and certain other acts. Among the changes is the introduction of a general anti-avoidance rule ("GAAR"), an abuse of right clause for VAT and certain novelties in mandatory VAT reporting in Simple Audit File format.
The law has been adopted by the Senate on May 19, and has been submitted to the President for signing. We expect it to become effective in late June this year.
Applicability of the GAAR
The GAAR is to apply to activities performed primarily in order to achieving a “tax benefit” that is inconsistent with the purpose and substance of tax laws in the given situation and if the use of solutions of this kind is “artificial”. The Act requires certain circumstances to be taken into account when deciding whether a solution was in fact artificial or not. The first thing to consider is whether the solution in question is not excessively complex. For example, a transaction may be split up without any reasonable justification and carried through with the involvement of intermediaries despite there being no good business reason to involve them; there may be elements of the transaction designed to achieve a situation identical or nearly identical to the baseline situation, or mutually compensatory elements or elements that cancel each other out. Also, a solution may involve business risks incommensurate with the anticipated benefits other than tax gains, with the disproportion being so glaring that no rational entity would wish to opt for the given course of action.
If that is the case, the activities will not be viewed as legitimate, as acceptable to a responsibly operating entity pursuing lawful business objectives other than tax benefits inconsistent with the purpose and substance of tax laws.
Applicability of the GAAR is to be limited to cases when a taxpayer achieved an aggregate “tax benefit” in excess of PLN 100,000 in a given settlement period. The tax benefit may consist in the taxpayer reducing, avoiding or deferring its tax liability, creating or overstating a tax loss, creating a tax payment surplus or an entitlement to a tax refund, or increasing the amount of tax payment surplus or tax refund.
Consequences of GAAR
If it is found that there are grounds for applying GAAR, the Minister of Finance will issue a tax decision among others determining or setting the amount of tax due. The tax authorities will determine the tax consequences while ignoring the legal arrangements employed by the taxpayer (whenever the circumstances suggest that these activities were driven only by tax advantages), or by taking into account what is described as the “appropriate activity”, by which is meant a course of action which the taxpayer could have taken in the given circumstances if it had wanted to act reasonably in pursuit of lawful objectives other than the achievement of tax benefits. The tax authorities would need to: (i) prove that the taxpayer’s intention was indeed to avoid taxation, (ii) demonstrate the tax benefit gained as a result.
The Act provides that tax assessment decisions issued in cases concerning tax avoidance cannot be immediately enforceable. Once these decisions become final and non-appealable, the taxpayers will face no financial penalties other than default interest.
While a tax assessment proceeding is pending in tax avoidance cases, the parties involved may seek an opinion from the Council for Tax Anti-Avoidance Matters. This will be a collegiate body independent of the tax authorities, comprised of members: recommended by the Minister of Finance, appointed from among university academics, members of the Academy of Science of Poland or research institutes, and recommended by the President of the Supreme Administrative Court from among the retired judges of this court, the Joint Government and Local Authority Committee (Komisja Wspólna Rządu i Samorządu Terytorialnego), the Polish Tax Advisors Chamber (Krajowa Izba Doradców Podatkowych), the Minister of Justice, and the Social Dialog Council (Rada Dialogu Społecznego). The Council will issue non-binding opinions on whether or not the GAAR was applicable in a given case, at the request of the Minister of Finance or of the taxpayer (only in the appeal proceeding).
Legal remedies against application of GAAR
The taxpayer will be entitled to apply to the Minister of Finance for his opinion on disallowing the application of the GAAR. The opinion will protect a taxpayer before applying the GAAR, however the Minister of Finance will be able to amend an opinion already issued, on an ex officio basis, if it is found to be inconsistent with rulings of Poland’s Constitutional Tribunal or the Court of Justice of the European Union. If the described circumstances provide that the GAAR might be implemented, the Minister will refuse to issue an opinion.
Proceedings to issue an opinion of this kind will be conducted in accordance with special rules, and the entity applying for it will have to pay a fee of PLN 20,000. An opinion will be issued within 6 months of the filing date of the application. A refusal to issue an opinion will be appealable to the competent administrative court.
New scope of protection accorded by tax rulings
The Act provides for important changes in the scope of protection offered by tax rulings. These will not cover facts or elements of future events which are reasonably suspected of constituting tax avoidance or VAT abuses. Moreover, if the GAAR is applied or a case of VAT abuse identified, the rule whereby a taxpayer acting in compliance with a tax ruling may not suffer harm or may benefit from increased protection will no longer apply. What this means is that if the GAAR is applied, the taxpayer may end up having to pay outstanding tax with interest and face criminal fiscal liability without the benefit of protection accorded by its tax ruling.
GAAR to apply to activities/structures made before the new law takes effect if they generate tax benefits later
The transitional provisions of the new law ultimately say that the GAAR will apply to "tax benefits" obtained after the effective date. What this means is that the GAAR will apply to tax benefits obtained after the date of entry into force of the Act, even if the benefit is the result of activities performed before this date.
"Small anti-avoidance rule" in VAT Act
The GAAR as such will not apply to VAT. But the same amendment act makes sure the VAT Act will contain the definition of "abuse of right", which is the VAT counterpart of GAAR. In practice, the doctrine of abuse of rights, which serves the same purpose as GAAR, has been applied by CJEU and Polish administrative courts in VAT cases for some time now.
Duty to file VAT records without request
The new law imposes a duty to make monthly filings of VAT records (registers of VAT sales and purchases) to the Minister of Finance. Such reports are to be filed without request every month by the 25th day of the next month by electronic means using the Single Audit File for Tax format.
Polish and foreign businesses will generally have to start making monthly filings as from 1 July 2016.
Exceptions: SMEs will need to comply by 1 January 2017 and micro-enterprises by 1 January 2018.
The general anti-avoidance rule is a major novelty in the Polish tax system. As such, it has yet to accumulate case law and tax rulings relating to its practical application.
We think the way the Polish GAAR is regulated might raise doubts as to its constitutionality. The new law contains numerous indeterminate phrases (see, e.g., the definition of "tax avoidance") that are based on vague notions requiring interpretation. Neither does it draw a clear borderline between legitimate tax planning and tax avoidance. As a result, questions may arise as to whether it complies with the basic guidance provided by the Constitutional Tribunal with respect to the previous version of the rule (see CT judgement of 11 May 2004 in case no. 4/03).
Another controversy is that the law permits the GAAR to apply to tax benefits from activities performed before its commencement, which undoubtedly will be the source of numerous disputes.
In connection with the entry into force of the GAAR regulations, while it is still fresh, we recommend that you verify both your planned or performed activities due to the risk of the possibility of applying the GAAR.