The Act changing the Income Tax Acts was signed by the President on 16 September,2014. Most of the changes will become effective as of 1 January 2015. Below we present the major ones.
Changes and modification to the thin capitalization rules
The change that will affect the taxpayers the most, are the new thin capitalization rules. Taxpayers will have several regimes to choose from. The present rules that cover loans granted only by DIRECT shareholder and direct sister-shareholder may be applied also in year 2015 if the loan is transferred in 2014. If not, then next year there will be two new regimes: one based on 1:1 ratio of debt to the so called "own equity", which includes i.a. paid-in share capital plus reserve capital plus retained earnings. This regime covers loans granted by related entities, either directly or INDIRECTLY. The second regime which you can choose, provides a limit on the interest that can be tax deductible - the limit is calculated basing on the published reference rate on loans (at present 2.5%) plus1.25% times the tax value of assets (excluding intangibles). Interest arrived from this formulae is further limited in each year to 50% of the operating profit for that year. This second model would cover ALL loans, irrespective whether received from a related entity or not.
More details can be obtained from our advisers. The businesses should review their present and planned activities to account for the impact of these changes on their businesses and chose the regime most suitable for them. Therefore, you should plan your actions still this year.
Introduction of the CFC rules in Poland
These rules will apply on the income of the foreign company whose shareholder is a tax resident of Poland. The tax rate shall be 19% and it will be payable by the shareholder. The shareholder will have the obligation to keep a register and accounting of its foreign company according to Polish accounting regulations. Additionally, the shareholder will have to file in Poland an annual tax return for the foreign company.
Which companies qualify as CFC? This is the initial big question and the rules in this respect are vast.
A company is considered to be a CFC (Controlled Foreign Company) if:
Case One:
the foreign company has its registered office or management in a tax haven mentioned in the decree,
Case Two:
the foreign company has its registered office or management in a country which has not concluded a treaty with Poland or EU on information exchange,
Case Three:
the foreign company fulfills all of the three conditions below:
a. the Polish shareholder holds directly or indirectly at least 25% shares (or voting rights or rights to profit) of the foreign company for an uninterrupted period of 30 days, – in short the shareholder test
b. at least 50% of the earning of the foreign company is derived from passive income (e.g dividends, sale of receivables, interest, copyrights, IP, etc) – in short the passive income test
c. at least one of the passive income is taxed at a tax rate lower than 14.25% or is exempt or excluded from taxation in that country, unless the exemption is based on the EU Directive on parent-subsidiary income – in short the low tax rate test.
There are exclusions from the above.
Companies tax resident in an EU or EEA country, are excluded from the CFC rules if they conduct in such a country genuine business activity.
Other companies may be excluded from the CFC rules (but not always from the obligation to keep in Poland the books of its foreign company) if their annual earnings are below EURO 250 000 Euro OR if the controlled foreign company’s profitability on the genuine activity is below 10% and there is a treaty which allows for the exchange of information.
The CFC rules apply also to Branches and other PE structures.
More details can be found in the Act or you we can assist in this review. You structures of doing cross-border business should be reviewed before the rules become effective.
Changes to Transfer Pricing rules
Only the provisions relating to who is subject to transfer pricing adjustments and to the scope of obligatory documentation is extended. The arm’s length principle and methods were left untouched.
The main change is that from 2015 “organization units without a legal personality” will be subject to transfer pricing. This simply means that such business forms like: civil partnerships (in short s.c.) and all kinds of other partnerships which are transparent for income tax, now may have their income adjusted according to the arm’s length principle.
The other main change is that the documentation should be made in case when an agreement is signed to form a corporation without legal personality, to form a joint undertaking (joined venture) and similar cooperation agreements. The documentation should describe the principles for the split of profits between the parties to such an agreement.
This documentation requirement applies in a situation when the parties to the agreement are related or when any of them is a party resident in a tax haven.
The above is a summary of the major changes in the income tax Acts – there are many other changes: - small, but also important. These changes require the tax payer to review the business before 2015, to adapt to the impact they may have on the business.
Source: Hanna Szarpak, Licensed tax Adviser nr 446, TCA Advisers sp. z o.o. Warsaw, , www.tca.com.pl, 20140923
The above news is only for information purposes and has been summarized in a reader-friendly way, but in no case is complete or precise. We do not take any responsibility to the maxium extent allowed by law, for any action taken under this news. You should refer to the original Act or seek professional tax advice from professionals authorized to render tax advice under the Act on Tax Advice of 5 July 1996 (Legal Journal of 2011, No 41 item 213 with amendments).