When a company in another country is used to avoid taxation – Minister of Finance explains
On 12 June 2017, the Ministry of Finance published on its website a warning before tax optimisation with the use of foreign companies in connection with regulations on the place of management. The Minister explains in detail which business structures constitute aggressive tax optimisation, and thus support a premise for applying the law circumvention rule included in the Tax Code, in consequence of which tax benefits derived from challenged operating procedure may be put into question by tax authorities.
The Minister of Finance noted the following types of optimisation:
when companies are registered in the territory of a foreign country (e.g. in a tax haven) which do not carry on actual activity in that territory, and in which a Polish taxpayer purchases shares through which the activity is to be continued in Poland, assuming that income of the company will be taxed abroad,
when companies are registered in the territory of a neighbouring country in order to purchase vehicles which, after having been registered abroad, are used in the territory of Poland by shareholders of such companies,
when foreign capital companies are actually managed from the territory of Poland.
The provisions of the CIT Act indicate that unlimited tax liability is Poland covers those taxpayers liable to corporate income whose management or seat is in Poland. So if a foreign company has its management in Poland, it is liable to pay income tax its entire income in Poland.
What is significant, the condition of having management should be understood not only as the place where the governing body is situated but also as the exercise in the Polish territory of the complex of activities which in functional terms make up the entire process of management of its activities and assets.
In practice, it means that even if a document has been signed by a management board in another country, it should be checked whether the circumstances in which such document has been created (correspondence, meeting places, evidence of staying in another country such as e.g. a management board member leasing/owning a flat abroad etc.) actually indicate that decision making process takes place abroad. In order to specify where management is exercised, important are both material decisions as well as those of every day nature, like e.g. commissioning tasks, placing orders. Of significance is also whether a management board member has at his/her disposal e.g. a permanent office abroad, whether there is any personnel providing services at such place or whether the place is only formal and there are many unrelated entities at the address of such place, and whether a management board member stays at that place during working hours. In his communication, the Minister has also taken into account the significance of the means of electronic communication owing to which decisions may be made in different locations. In such case it is important where those decisions have been prepared and where data required for those decisions has been collected and processed.
The communication indicates directly the circumstances which show that a foreign company’s management is in the territory of Poland. The most important ones, in our opinion, are the following:
management board members are the so called nominee directors, i.e. persons holding such functions on a service basis for many clients, who have no experience in a given industry sector and are residents of the country where a foreign company’s seat is located,
management board members are tax residents in Poland, are Polish nationals, which allows the assumption that they perform their work in the territory of Poland,
management board members visit the country where a company’s seat is located only in order to adopt a resolution or sign an agreement which has been negotiated in Poland,
resolutions/agreements/reports are signed by attorneys, basic company functions are outsourced,
instructions for bank operations are placed in Poland, cash is collected from Polish ATMs,
decisions regarding a company are consulted with Polish advisors (including tax advisors),
in the country where a company’s seat is located there is no office from which the company activities could be in reality carried on.
In addition, tax authorities will also take into account the circumstances in which a company has been established, e.g. whether the establishment was based on business aspects or advice received from legal or tax advisors, whether ready solutions were used and an existing company was acquired, one of the so called shelf companies.
If in the course of conducted activities tax authorities find that a company, although formally registered abroad, has management in Poland, the company will liable to pay tax in Poland on its entire income. This rule will be applicable both to future and past periods.
The understanding of the institution of management, as presented by the Ministry of Finance, coincides in many points with the OECD guidelines. It is worth noting that if tax authorities of other countries determine in the same way the place of management of Polish companies whose management board members e.g. live in those countries and make at least a part of management decisions there, they may conclude that a Polish company in essence is covered by unlimited tax liability not in Poland but in that country. Nevertheless, such a conclusion requires a thorough analysis of all circumstances in which the activities are conducted and consultation also with local tax advisors.
Barbara Otrzonsek, tax consultant, ATA Finance