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Additional criteria may apply for tax exemptions in the case of dividend payments as of 1 January 2016

2015-10-28

The Act on the amendment of the personal income tax act, corporate income tax act and certain other acts is waiting to be signed by the President. The Act, generally discussed in connection with changes in regards to documentation of related party transactions, implements also provisions which restrict the cross-border transfer of profits by related companies.  

The amendment transposes to Polish law a general anti-abusive clause, provided for in Directive 2015/121, which the European Commission justifies by the need to tackle aggressive tax planning and gaining undue advantages by entities from differences in the national tax systems and from international rules on the avoidance of double taxation with help of the exemptions implemented by Directive 2011/96/EU (the so called Parent-Subsidiary Directive).

The primary purpose of Directive 2011/96/EU was to abolish withholding tax on profit distributions and to eliminate double taxation of such profits by tax exemptions or credits in the parent’s Member State. In the Polish CIT Act, such exemptions were implemented in Article 20.3 and Article 22.4.

As a result of the amendment, envisaged to enter into force on 31 December 2015, Article 22c is to be added to the CIT Act, which will exclude the application of the above exemptions, if dividend income and other revenue from a share in profits of corporate entities is received in connection with the execution of an agreement or other act in law the purpose of which was to obtain the exemption from CIT, and such exemption when obtained does not result only in the elimination of double taxation of such income, and the activities in question are not genuine. The legislator explains that the lack of genuine nature should be understood as a situation where the activity is not effected for valid commercial reasons.

The clause is based on the criterion whether the arrangements made by taxpayers and bringing about tax effects are “genuine”, to be understood as whether they reflect economic reality. The arrangement is not genuine to the extent that it is not put into place for valid commercial reasons, while the assessment whether the arrangement in question is abusive should take into account an objective analysis of all relevant facts or circumstances. So the artificial nature of a legal structure may be shown by excessive complexity or lack of economic content, which leads to conclusion that it would not be applied by a reasonable entity. Also intermediary structures, mutually compensating elements, hiding a true purpose and meaning of an economic transaction as well as an inadequate or unnecessary legal structure for the execution of such transaction, may show that the arrangements undertaken are not genuine.

In the rationale to the amendment the legislator presented as an example of abusive practices a situation where the parent has transferred to its subsidiary a specific intangible asset, and subsequently uses such asset in exchange for a licence fee. Income from received assets, generated on the subsidiary level, is to be distributed as dividend to the parent. In such situation it may be said that one of the main purposes of the arrangements is to obtain a tax advantage consisting in the exemption of dividend from tax at the recipient, and thus they should be refused the nature of genuine arrangements based on commercial reasons. Therefore, they cannot be regarded as genuine since one of the main purposes of the arrangements is to obtain a tax advantage consisting in the exemption of dividend from tax at the recipient.

The implementation of the anti-abusive clause will result in restricted possibilities to use tax privileges provided for in Parent-Subsidiary Directive, if actions undertaken by a taxpayer are to defeat the purpose of the Directive and bring undue advantages to entities from differences in the national tax systems and the provisions on the avoidance of double taxation.