The European Union’s Economic and Financial Affairs Council has added the Russian Federation to its blacklist of tax havens. For taxpayers this means obligations in the areas of transfer pricing, reporting of tax schemes, as well as withholding tax.
Following the Council’s latest decision, the list of havens totals 16 countries, and in addition to Russia, they have been joined by the British Virgin Islands, Costa Rica and the Marshall Islands. The recognition of Russia as a tax haven may result in the inclusion of Russia also in the list of havens published by the Polish Ministry of Finance. In this article we describe the most important tax implications of such decision.
The first implication may be the obligation to prepare transfer pricing documentation. In the case of a transaction with a haven entity or a foreign permanent establishment located in a tax haven, the documentation threshold is:
- PLN 2,500,000 – in the case of a financial transaction,
- PLN 500,000 – in the case of a non-financial transaction.
If the taxpayer during the year made a transaction with a tax haven entity more than the above thresholds, it will be required to:
- prepare local file with a comparative analysis,
- show the transaction in the information (TP-R) – this form should be sent electronically to the head of the relevant tax office.
Importantly, as part of the TPR information, the taxpayer declares the preparation of local transfer pricing documentation and the market nature of the prices used in the transactions in question.
Mandatory Disclosure Rules
In accordance with the provisions of the Tax Ordinance, an obligation to report such a scheme may arise in the case of payments to a related party that are deductible if the recipient of the payment is an entity with a residence, seat or management in a country that applies harmful tax competition.
The provisions of the Tax Ordinance refer directly to Polish income tax laws and the aforementioned EU list.
It is a noteworthy fact that the deadlines for reporting cross-border schemes have not been suspended, and the obligations in this regard should be carried out in compliance with the deadlines under the Tax Ordinance.
Controlled Foreign Company
One of the consequences of the title decision is that all Russian subsidiaries held by Polish entities can be considered a controlled foreign company (CFC). This gives rise to obligations in the form of payment by the Polish taxpayer of a 19% tax on the income of the CFC (with the possibility of making certain deductions), keeping a register, recording events occurring in the foreign entity and filing a return on the amount of its income.
Assuming that Russia would not be on the list of tax havens, the possible necessity of such taxation would depend on the conditions under the CIT and PIT regulations.
Withholding taxes and due diligence
The important consequences of the decision also arise in withholding tax. According to the regulations, “it is not possible to exclude the payer’s liability for failure to withhold tax through the fault of the taxpayer, if the payer or taxpayer was an entity with tax residence, place of registration, seat or management in a country or territory applying harmful tax competition.”
Technically, this means that the taxpayer should keep increased vigilance and conscientiousness when making payments to Russia, which is considered a tax haven. It also has to do with performing so-called due diligence when verifying compliance with qualification for the withholding tax preference – i.e. a lower rate or tax exemption. In the case of payments to entities belonging to tax havens, it is necessary to exercise higher due diligence, i.e., take more detailed steps than in the case of payments to other jurisdictions.
Loss of entitlement to state aid
Polish entities with relations with Russian entities and those with Russian subsidiaries may be excluded from public financial support.
Since 2020, the European Commission’s recommendations have been in effect, in which it recommended that member countries not provide financial support to companies with ties to countries that have been added to the EU’s list of non-cooperative tax states. Russia’s inclusion on the list means that links between Polish entrepreneurs and Russian entities could bring legal consequences for receiving state aid.
The Commission’s guidelines are not binding but are subject to actual application.
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