POLAND | Draft Legislation of CFC Rules

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According to the Polish Ministry of Finance, they have drafted legislation which aims to tackle tax avoidance in the transfer of income from Polish companies to companies established abroad which have a lower tax rate.

The Ministry of Finance has declared that the draft legislation does not contravene any of the provisions of the double tax treaties to which Poland is a party to. The new legislation is expected to come into force on 1st January 2014.

As per the draft legislation, if a company which is established/administered in a country with a lower tax burden earns more than half its revenue as either; dividends; income from intellectual property; capital gains on the sale of shares; interest income or other passive income, then it will be considered a controlled foreign corporation (“CFC”). In such cases the Polish company would be subject to 19% tax on all of the CFC’s income (including both active and passive income).

The draft legislation stipulates that in order for the CFC rules to be applicable all of the following criteria must be present:

  1. Polish taxpayer(s) own at least 25% of the shares for a period of at least 30 days or have 25% of the voting rights in the company; and
  2. at least 50% of the income is comprised of “passive income”; and
  3. at least one type of the passive income is not subject to taxation, or is subject to taxation at a rate of at least 25% lower than the current income tax rate in Poland.

Therefore, jurisdictions used in Polish tax planning structures and which have a corporate income tax rate of 14.25% (i.e. 25% less than the 19% corporate tax rate) or less, may be impacted by the CFC legislation (although in actuality the scope of the CFC rules will be much wider when one considers the provisions of point three above).

In light of the recent announcement issued by the Ministry of Finance on the proposed CFC legislation, some financial centres, such as Malta, have been haste in declaring that they are not impacted by the proposed CFC legislation. The arguments which have been stated by Maltese providers are that they have a corporate tax rate of 35% which is higher than the minimum 14.25% imposed by the draft legislation, and are therefore not subject to its terms. It is then important to highlight that the scope of the CFC rules virtually encompasses all other financial centres (e.g. UK and Malta) which are commonly used in Polish tax planning structures, as point 3 above clearly states that the CFC legislation would be applicable if one type of income (i.e. dividends, interest) is exempt from taxation. Most financial centres exempt dividend income hence would be subject to the CFC legislation proposed by the Polish authorities.

Furthermore, there are pending important clarifications from the Polish Ministry of Finance on whether they will be considering the actual rate or the effective tax rate. In Malta for example, the current tax CIT rate is 35%, yet the effective tax rate is in fact 5% for most international business companies, thus subjecting Maltese companies to the proposed CFC rules if effective tax rate will be used.

The draft legislation also includes provisions that exempt any company registered/administered in the EU which is engaging in genuine economic activities to be subject to the CFC legislation. We at Savva & Associates continue to highlight to our clients the key importance of substance and ensuring commercial justification in line with each company’s activities.