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The Polish Inland Revenue fights with tax optimization

2012-10-02

The government limits increasingly the tax optimization possibilities for business operations. The results thereof are numerous amendments of bilateral double taxation treaties which took place in the recent years. Last week the Polish Parliament passed a law allowing ratification of the amendments in the double taxation convention with Luxembourg; three months ago such a law was passed with respect to the convention with Cyprus. If the ratification procedures are finished by the end of this year, the amended conventions, significantly limiting the possibilities of tax optimization, will come into force as of 2013.

Also in the national law unfavorable amendments are being prepared. The Ministry of Finance published a draft amendment to the Corporate Income Tax Act and to the Personal Income Tax Act. The draft contains a few changes being unfavorable for the taxpayers, e.g.: equal tax treatment of limited joint stock partnerships and legal persons, introduction of further restraints on deductibility of interest as allowable costs (so-called ‘thin capitalization’) and taxation of datio in solutum, e.g. transfer of ownership in order to discharge a money debt.

Changes concerning limited joint stock partnerships

A form of limited joint stock partnership is often used for the purpose of tax optimization, sometimes with inclusion of an CIT- exempted investment fund as a shareholder.

At present a limited joint stock partnership is tax transparent, which means that the company does not pay any income tax; the tax is paid by its partners and shareholders. The income derived by the limited joint stock partnership is, in principle, taxed only once: at 19% rate of CIT (in case of a shareholder/partner being a legal entity) or with PIT calculated according to tax brackets, or at 19% linear PIT rate (in case of a shareholder/partner being a natural person). At the beginning of this year in the jurisprudence of the Supreme Administrative Court appeared a view, according to which a part of the profits attributable to the shareholders is taxable only at the moment of  money distribution and not during the fiscal year, as is the case in other partnerships.

If the planned amendment comes into effect, double economic taxation will appear with respect to a limited joint stock partnership: once at the level of the partnership and then at the level of the shareholders/partners at the moment of profit distribution. A joint stock partnership will then lose its current attractiveness as a form of tax optimization.

As the draft amendment does not provide for any transitional rules with respect to existing joint stock partnerships, they would become CIT- payers as of 1 January 2013. Such legislation procedure raises doubts concerning its compliance with the Polish Constitution, so that some modifications of the amendment can be expected.

More loans covered by ‘thin capitalization’

The present wording of legal provisions with respect to thin capitalization limits the possibility of interest deduction as allowable costs only in the case of loans (credit facilities) granted by a directly related ‘mother-company’ of the borrower or by its ‘sister-company’.

According to the draft amendment, the ‘thin capitalization’ clause shall cover the loans granted not only by directly related persons but also by indirectly related entities. The amendment extends the ‘thin capitalization’ rules by covering also the loans granted by entities holding indirectly at least 25% of shares of the borrowing company. Furthermore, the limitation shall cover interest on loans granted to the borrower by a related company, if the same entity holds directly or indirectly at least 25% of shares in both companies.

The new regulations would be applicable with respect to loans transferred after 31 December 2012.  

Taxation of non-cash dividends

The amendment envisages cancellation of a further means of tax optimization, i.e. giving in payment (datio in solutum). In the present jurisprudence, there is an opinion that the transfer of ownership  to the property in lieu of the payment of dividend does not cause the revenue point connected with disposal of the property.. (However, if the taxpayer first sold the property in order to pay dividend from obtained funds, he would have to disclose revenue from the sale).It causes unjustified differences in the treatment of those two economically comparable situations.

The draft amendment determines that the payment of remuneration in form of an asset transfer is equivalent to its disposal for consideration and should be taxed accordingly. In such a case the revenue shall equal the market value of the transferred property, but no less than the value of settled liabilities. The above provisions will be also applicable to determination of tax consequences of   non-cash sale.

The  regulations described above will come into force starting as of 2013 provided that the amendment is published by the end of November 2012. As for now, the draft amendment is still not in the Parliament (as at 16 October 2012).

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