Tax avoidance clause in the Polish tax law
January 2015 | EXPERT BRIEFING | CORPORATE TAX
Following the regulations of tax systems in other European states, the Polish Ministry of Finance is working on implementing to the Tax Ordinance a regulation regarding tax avoidance (‘tax avoidance clause’). According to the communicated reasons for the regulation, the Ministry aims to remove loopholes in the tax law and prevent the artificial structures used by taxpayers to avoid paying tax. Currently, no regulation exists in the Polish tax law to restrict the actions of taxpayers aimed at possible tax savings if such action has a business reason. This means that a taxpayer is allowed to act in each legal matter to achieve an intended business effect. In practice, there are situations where some restructuring proceedings are performed, not in a 1-2 step plan but according to plans based on 3-5 steps. Using the event of merger or acquisition, taxpayers usually perform a couple of other smaller transactions which may result in tax savings.
The clause should cover, in general, actions performed primarily to avoid paying tax. The border between tax avoidance and tax optimisation is not clear, so the scope of the clause has been greatly discussed between the Ministry of Finance and business representatives. The most important topic of the discussion is the wording of the clause and how it will be applied in practice by the tax authorities.
The clause is generally directed at large international corporations or wealthy individuals with the mean to profit for strategies that enable tax savings. However, the current wording of the clause covers not only activities intended to illegally avoid paying tax, but also on legal forms of tax optimisations using certain structures or instruments. It is essential for business entities to have assurance that tax optimisations undertaken through legal measures will not result in penalties and estimated tax arrears.
To exclude low-value optimisations performed by taxpayers, the legislator has proposed a minimum annual threshold of the avoided tax burden in the amount of 50,000 PLN, which is around €12,000. The threshold amount is not sizeable and it is possible that an M&A transaction performed by a small or medium-size entrepreneur in a tax optimal manner will be covered by this clause. It is also possible that the entrepreneur selects a legal structure for the transaction with no intention of avoiding tax, but which, on the basis of the clause, is labelled by the tax authorities as tax avoidance. In light of the above issues, it is vital that the premises of the clause consider the different cases of Polish taxpayers and are adjusted to the specifics of Polish business.
To give Polish taxpayers assurance in terms of how the clause will be applied, the Ministry of Finance has proposed to include in the Tax Ordinance the opportunity to ask whether a planned action may be considered tax avoidance. For this purpose, if a corporation would like to know the outcome under tax law of an intended tax optimisation strategy, it may apply for a ‘security opinion’ which provides a document confirming that the action to be undertaken is consistent with the tax law and does not constitute tax avoidance.
Opinions will be issued, within six months, by the Council for Tax Avoidance, which will be independent from the tax authorities. According to the proposed regulations, the opinion should be issued against payment depending on the other parties to a transaction. If the other parties are foreign entrepreneurs, or subjects controlled by foreign entrepreneurs, the charge for the opinion shall be 30,000 PLN. In other cases involving Polish taxpayers, the proposed charge is 15,000 PLN. For large transactions planned for a long time before closing, the six-month period and the above amounts may be justified, although they may seem exaggerated given the current terms of issuing binding rulings.
For the reasons outlined above, the clause is being criticised by entrepreneurs. It should be noted that a couple of years ago, the Polish Tax Ordinance featured a similar clause which was declared unconstitutional by the Polish Constitutional Tribunal. In terms of the work currently being done on the tax avoidance clause, the Ministry of Finance has stated that it will take into consideration the notes and instructions of the Tribunal when drafting the wording of the clause in compliance with the constitution and adjust it to the requirements of local tax law.
According to the announcements of the Ministry of Finance from the first half of 2014, the regulation in question should be effective at the beginning of 2015. Due to the difficulties in adjusting the clause to the Polish constitution and ongoing discussion on the topic, the proposed deadline for the implementation of the clause is actually June 2015.
Grzegorz M. Gajda is a partner and Katarzyna Gajda is a senior associate at BSJP Brockhuis Jurczak Prusak Sp. k. Mr Gajda can be contacted on +48 (0)61 850 19 26 or by email: firstname.lastname@example.org. Ms Gajda can be contacted on +48 (0)61 850 19 26 or by email: email@example.com.
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Grzegorz M. Gajda and Katarzyna Gajda
BSJP Brockhuis Jurczak Prusak Sp. k.