Poland to amend both income tax laws to modify CFC Rules in 2018
December 2017 | SPECIAL REPORT: GLOBAL TAX
Financier Worldwide Magazine
December 2017 Issue
The Controlled Foreign Corporation (CFC) regulations have been introduced in Poland for the first time and are based upon the law dated 26 June 2014, which amended the 1992 Corporate Income Tax Law and the 1991 Personal Income Tax Law. The new rules became effective as of 1 January 2015.
The introduction of the CFC regulations was a further move by the Polish authorities to limit cross-border tax optimisation and close existing loopholes. The first steps included a series of amendments to the existing Double Taxation Treaties (DTTs), with the aim of introducing a switch-over clause allowing Poland to unilaterally change the method used for avoiding double taxation, from exemption with progression to ordinary credit.
These steps include the introduction of a ‘real estate-reach company’ clause (as provided for in Article 13.4 of the Organisation for Economic Co-operation and Development (OECD) Model Convention) which expands the categories of income subject to ordinary credit method, rather than being typically subject to an exemption method, to include business profits, capital gains and directors’ fees, often introducing specific anti-avoidance clauses and usually widening the scope of the exchange of tax information clauses.
Also, Poland expanded its network of tax information exchange treaties to 15 agreements (Andorra, Belize, Bermuda, British Virgin Islands, Gibraltar, Grenada, Guernsey, Jersey, Cayman Islands, Liberia, San Marino, Bahamas, Dominica, Isle of Man and the US (implementing FATCA)).
The CFC regulations have been structured as two new articles, each with basically the same language, and with 18 separate subsections, to be added to the 1992 Corporate Income Tax Law and the 1991 Personal Income Tax Law, as a new Article 24a and as a new Article 30f, respectively. The new provisions impose a 19 percent flat tax on income of a “controlled foreign corporation”.
The CFC provisions define a “foreign corporation” very widely as a legal person, a corporation in organisation, organisational body without legal personality or a partnership without legal personality – all of them without seat or place of management within the territory of Poland, in which the Polish taxpayer (corporate or individual) has a share in capital, voting rights or a right to participate in profits.
Further, a “controlled foreign corporation” has been widely defined as: (i) a foreign corporation with seat or place of management in a jurisdiction put on a “Polish black-list”, announced by the Ministry of Finance (a list announced on 17 May 2017 includes 26 countries and territories); or (ii) a foreign corporation with seat or place of management in a jurisdiction other than the ones referred to above, but with which Poland did not conclude an international treaty, in particular a DTT or the European Union did not conclude an international treaty, constituting a basis for receiving a tax information from tax authorities of such a country; or (iii) a most important category, namely a foreign corporation, which jointly meets the below criteria.
Firstly, a Polish resident taxpayer owns, directly or indirectly, for an uninterrupted period of at least 30 days, at least 25 percent of the capital, or 25 percent of the voting rights or 25 percent of shares involving participation in profits.
Secondly, at least 50 percent of the revenues of such a corporation in a fiscal year comes from passive item, i.e., dividends or other participation in profits of legal persons, capital gains, receivables, interest or loans or guarantees of any kind, as well as from royalties, IP rights, including revenues from alienation of such rights or alienation of or other proceeds from financial instruments.
Finally, at least one of the income categories received by the foreign corporation is subject, in the country of the seat or place of management of such a foreign corporation, to a tax which is lower by at least 25 percent than the 19 percent income tax rate applicable in Poland, i.e., lower than 14.25 percent, or is income tax-exempt or falls outside of the scope of income taxation – except for the dividends which are tax-exempt under the UE Parent-Subsidiary Directive.
The basis for the application of the 19 percent Polish CFC income tax will be the income of the foreign controlled corporation, calculated pro rata to the period in which the Polish taxpayer did hold at least the above-mentioned 25 percent stake in the corporation and to such taxpayer’s share in the profits of such a corporation, after the deduction of dividends received from such a corporation or amounts received from alienation of shares in such a corporation. The amounts which qualify for the above deduction, but could not have been deducted in any fiscal year, may be deducted in any of the five consecutive following years.
The CFC regulations provide for a set of deductions from the abovementioned 25 percent stake in the foreign corporation related to the stakes in such a corporation held by the other subsidiary (Polish or foreign) of the taxpayer, if certain conditions are met by such a subsidiary.
The calculated 19 percent Polish CFC income tax amount due may be reduced by the amount of the foreign income tax paid by a foreign controlled corporation – calculated pro rata to the Polish taxpayer’s share in the income of such foreign corporation. In order to properly calculate the taxable income, tax base and the amount of tax due related to the foreign controlled corporation, Polish taxpayers must maintain registers of foreign controlled corporations, to allow the determination of these amounts. Such a register must be made available to the tax or tax audit authorities within a period of seven days from the date of a request.
The CFC income tax shall not apply if a foreign controlled corporation has annual revenues of less than €250,000 or operates “a real business activity” in a country other than a member state of the European Union (EU) or European Economic Area (EEA) in which it is subject to an unlimited tax liability and its income does not exceed 10 percent of its gross revenues in that country. This is under the condition that there is a legal basis resulting from a DTT or other international treaty concluded by Poland or the EU with such a foreign country, allowing for receipt of tax information from the tax authorities of such a country.
The CFC income tax and the obligation to maintain the register of foreign controlled corporations shall not apply if the particular foreign controlled corporation operates “a real business activity” in a member state of the EU or EEA.
The above CFC rules are going to be significantly amended soon due to the Polish government having filed a new draft law amending, among others, the aforementioned 1991 Personal Income Tax Law and the 1992 Corporate Income Tax Law. The planned changes are based upon the EU Directive 2016/1164 from 12 July 2016 and lay down rules against tax avoidance practices that directly affect the functioning of the internal market.
In brief, among others, the most significant changes related to the current CFC regulations redefine the CFC company to be one in which: (i) the Polish resident taxpayer holds at least 50 percent of either the capital, voting rights in the parent entities or in the profit distribution (thus increasing the current holding threshold of at least 25 percent); (ii) the passive income of a CFC company constitutes at least 33 percent (thus decreasing the current passive income threshold of at least 50 percent), while including in the passive income list proceeds coming from insurance, banking or other financial activity and from transactions with related entities in case the CFC company does not generate any economic added value or such value is insignificant; and (iii) the effectively paid foreign income tax amount is lower than the difference between the Polish income tax rate (currently 19 percent) and such effectively paid tax amount, thus lowering the threshold of the income tax rate qualifying the company for being recognised as a CFC company from a current nominal rate lower than 14.25 percent to a rate lower than 9.5 percent (i.e., 50 percent of the 19 percent rate).
Also, the current exemption from the CFC regulation to foreign companies with annual proceeds (turnover) of less than €250,000 will be cancelled. These changes are expected to be passed by parliament, signed by the president and enter into force on 1 January 2018.
Dr Janusz Fiszer is a partner at GESSEL. He can be contacted on +48 22 318 69 23 or by email: firstname.lastname@example.org.
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Dr Janusz Fiszer