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Possibility to deduct a loss of a Polish taxpayer’s foreign branch

2017-05-30

In the settlement of corporate income tax, a taxpayer in principle has no right to deduct a tax loss incurred by its branch (permanent tax establishment) located in another country. However, in certain circumstances the impossibility to deduct a tax loss of a foreign branch in a Polish tax return prepared by a CIT taxpayer may violate the principle of freedom of establishment expressed in Article 43 of the Treaty establishing the European Community.

In accordance with agreements on the avoidance of double taxation, income of a foreign permanent tax establishment shall be taxed in the country where the establishment is located. It shall not be taken into account in the calculation of taxable income of the “headquarters” located in Poland (Article 7.3 of the CIT Act). In consequence, if a foreign branch has been liquidated, the taxpayer in Poland has no possibility to deduct a tax loss of that branch. The impossibility to deduct a loss of the branch from income of the company in the country where the latter was established creates  the adverse tax position of such taxpayer compared to another taxpayer having a branch in Poland, who may deduct losses of the branch from income of the “headquarters”. Hence there are a lot of doubts brought by taxpayers in this regard, followed by not univocal positions of tax authorities and administrative courts.   

Administrative courts agree with favourable interpretation of tax regulations, noting that tax losses are deductible in Poland if they cannot be deducted in another Member State. For example the Regional Administrative Court in Warsaw in its judgment of 21 May 2015, case ref. no. III SA/Wa 2913/14, notes that: “the factual circumstance of liquidation of a foreign branch of the company, which makes it impossible to deduct a specific loss in the tax  system of another EU Member State, pursuant to the principle of freedom of establishment (Article 43 TEC) and the proportionality test in accordance with the criteria indicated by the Court of Justice in its judgment in case M., leads to the origination of a right to deduct the loss in the Polish tax system. The interpretation of Article 7.5 of the CIT Act as indicated follows from the prohibition of discrimination based on nationality as well as the freedom of establishment and the equality of competition, proclaimed in Article 18 and Article 49 TFEU. (..)   In connection with liquidation of the branches in the Czech Republic and Romania, there are no circumstances which would justify the application of domestic regulations in the case, resulting in different taxation by exclusion, not favourable for the company, of the possibility to deduct the loss pursuant to Article 7.5 of the Act. Since the branches were to be liquidated, there is no danger connected  with selection of the country where the loss will be deducted, that loss may be deducted only once and only in accordance with the Polish law”.

Tax authorities have a contrary view in this regard, based on literal wording of the regulations. In accordance with the position dominating in issued binding rulings, no loss originating from revenue source from which income is not taxable with income tax or is exempted from income tax may be taken into account in the taxable income pursuant to Article 7.5 of the CIT Act, regardless where the income has been generated. Such position is expressed for example in the individual binding ruling issued on 28 November 2013 by the Director of the Fiscal Chamber in Warsaw, case ref. no. IPPB5/423-685/13-3/AS, or the individual binding ruling issued by the same authority on 4 July 2014, case ref. no.  IPPB5/423-347/14-2/AS.

As the position regarding deduction of losses of a liquidated foreign branch of a Polish taxpayer is not univocal, we cannot rule out a risk that deduction of a foreign loss will be challenged by the tax authorities. However, in view of the case law to the advantage of taxpayers, a court dispute, if any, may end with a solution which will be favourable for a taxpayer.