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Tightening of the tax system continued – tax law circumvention rule


On the website of the Government Legislation Centre we may find a draft law amending the Tax Regulations and certain other laws, which has been already approved by the Council of Ministers. The aim of intended amendments is to implement to the Polish legal regime an anti-tax avoidance rule, known in the legislations of many countries, including Germany, Austria, France or the UK. The examples of tax avoidance given in the rationale to the draft law include, among others, bonds issued in Singapore. We informed about this way of tax optimisation this year in our Newsletter in January.

The draft assumes that Chapter IIIa, devoted completely to prevention of tax avoidance (Articles  119a to 119zf), will be added to the Tax Regulations, as well as amendments of other provisions of the Tax Regulations and the Goods and Services Tax Act, connected with implementation of the tax law circumvention rule.

Tax avoidance

The essence of the amendment is Article art. 119a.1, pursuant to which a transaction made primarily in order to achieve a tax benefit which is contrary in the given circumstances with the subject matter and objective of the provision stipulated by the tax law, does not bring about that tax benefit if the way of proceeding was artificial. The way of proceeding should be deemed artificial if it would not be applied by an entity operating reasonably and guided by lawful goals other than achievement of a tax benefit which is contrary with the subject matter and objective of the provision stipulated by the tax law. Artificial nature of transactions may be demonstrated, in particular, by: unjustified division of operations, engagement of intermediary entities without any economic or business rationale, achievement of the status quo which is exactly the same or similar to the status quo before the transaction was made, existence of mutually eliminating or offsetting elements, or an economic or business risk exceeding expected non-tax benefits to such extent that no entity operating reasonably would choose such way of proceeding. While the notion of a tax benefit should be understood, on one hand as non-origination or lowering the amount of a tax liability, its postponement in time, or origination or overstatement of a tax loss, while on the other hand as origination of overpayment or right to tax refund, or increasing the amount of overpayment or tax refund. Moreover, the legislator also noted that, for the purposes of applying the new regulations, the notion of a transaction should be understood as a set of interconnected transactions, made by the same or different entities. It is worth noting here a recent judgment of the Supreme Administrative Court (judgment of 15 January 2016, case ref. no. FSK 3162/13) described in our previous Newsletter. The Court found therein that in the case of ostensibility referred to in Article 199a of the Tax Regulations, the parties to the legal transaction must be exactly the same both in the pretended (ostensible) transaction and in the hidden transaction (that is actually to take place). So after the discussed tax law circumvention rule becomes effective, courts will have legal grounds to negate tax effects of a set of interconnected transactions, regardless of the number of entities involved therein and their roles.

Tax Avoidance Prevention Council

The draft assumes the establishment of an independent body named the Tax Avoidance Prevention Council, which is to given opinions whether application of Article 119a of the Tax Regulations, excluding the achievement of tax effects by entities in consequence of making artificial transactions, is reasonable. The body should comprise nine members appointed for a term of office of four years, designated, among others, by the Minister of Finance, the Minister of Justice, the President of the Supreme Administrative Court, the National Council of Tax Advisors, the Social Dialogue Council.

The Council will give an opinion whether application of Article 119a of the Tax Regulations is reasonable at the request of the Minister of Finance, submitted upon his own initiative as well as in connection with a request of a party made in an appeal against a decision. What is important, a position whether application of Article 119a of the Tax Regulations is reasonable may be taken at a meeting attended by at least 50% of members of the Council, by the absolute majority of votes.

Tax proceedings in the case of tax avoidance

Where there is a of a suspicion that the case in question may satisfy the conditions under Article 119a of the Tax Regulations, tax proceedings will be conducted in principle by the Minister of Finance. During such proceedings the Minister may ask the Tax Avoidance Prevention Council for its opinion. The Council will also give an opinion at the request made by a party in an appeal against a decision regarding the application of Article 119a of the Tax Regulations. Both the party and the Minister of Finance will be able to present to the Council their positions in the case or any additional documents. So the Council will have to give an opinion including its position whether the application of the tax law circumvention rule is reasonable, along with statement of reasons (provided that each member of the Council may submit a dissenting opinion). 

Security opinions

The taxpayers will have at their disposal a new instrument of protective nature, namely security opinions. An opinion will be issued at the request of the interested party, where such request should contain, among others, exhaustive description of the transaction along with indication of relations between the parties to the transaction, indication of objectives of actions taken, their economic and business rationale, specification of tax effects and benefits, and the taxpayer’s own position in the matter.   

When a security opinion has been issued, it will mean for the taxpayer that Article 119a of the Tax Regulations is not applicable to the transaction, presented in the request, which is planned or has been commenced or already made. However, if according to the authority the above provision is applicable, the Minister of Finance will refuse to issue a security opinion. In such situation the taxpayer will have the right to file a complaint to the administrative court.

A request for issue of a security opinion will be subject to a relatively high fee, amounting to as much as PLN 20,000. What is important, the interested parties will be able to file a joint request. The opinion should be issued without unnecessary delay, no later than within 6 months of request receipt.

The amending Act is to become effective 30 days after its publishing, provided that the provisions relating directly to the tax law circumvention rule (Articles 119a to 119f) will be applicable to transactions made after the effective date of the Act, according to the rule that the law does not have retroactive force. Also in the case of individual binding rulings, selected new regulations are to be applicable to rulings which are issued after the effective date of the Act.

After the intended provisions regarding the tax law circumvention rule become effective, we will present more detailed information about its operation in the Newsletter.