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.

Transfer pricing

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.

Jakub Czerski

Senior Tax Manager | Accace Poland

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August 25, 2022 was the 183rd day of the ongoing war on Ukraine. This will thus be the 183rd day for refugees, who started arriving in Poland on the very first day of the current conflict. From that point onwards, PIT implications for Ukrainian refugees staying in Poland are arising, as a person residing in a country is subject to absolute tax liability in the country of residence. This follows from international double taxation treaties, including the convention between Poland and Ukraine.

Refugee as a Polish tax resident

According to the Polish PIT Act, a polish tax resident is a person who:

1. Has a centre of personal or economic interest (centre of vital interests) in the territory of the Republic of Poland or
2. Stays in the territory of the Republic of Poland for more than 183 days in a tax year.

In order to have an obligation to settle all one’s income with the Polish tax authorities, it is sufficient to fulfil one of the above-mentioned conditions. For some refugees, the first one concerning the centre of vital interests could be fulfilled already on the first day of their stay in Poland. Namely, according to the wording of the PIT Act, which was added to the Act by the Act on Assistance to Citizens of Ukraine, refugees may submit written declarations that they are moving their centre of life interests to Poland. Formally, this could be done from April 15 2022, however, the new provision is retroactive from the first day of the war, i.e. February 24 2022.

It should be noted that if an eligible person has not submitted the aforementioned declaration to date, then the person must pay Polish income tax for the first time by the 20th day of the month following the month in which 183 days were exceeded. Assuming a stay in Poland of more than 183 days, the PIT advance on income earned since the beginning of the year should be paid by September 20, 2022.

The tax implications will vary depending on the type of employment

When a refugee is employed by a Polish employer, a simple mechanism is in place. Advance payments of Polish PIT are levied on their wages. Ukrainians who, while residing in Poland, still work remotely for employers who are based in Ukraine or in another country and whose remuneration is not borne by the permanent establishment of the employer in Poland are in a different position. After exceeding 183 days of stay, they will be obliged to pay income tax in Poland. All remuneration received for work performed from the territory of the Republic of Poland will be taxed. The situation is complicated by the fact that Ukrainian employers settle advance income tax for such persons in Ukraine. If they continue to do so while their employees are in Poland, in practice such individuals may pay tax twice, in both countries. There is no certainty, given the specific circumstances, that such persons will be able to count on a refund of the tax paid to the Ukrainian tax authorities (this possibility arises from the content of the Polish-Ukrainian double taxation treaty).

183 days conclusive on taxation in Poland

Irrespective of whether a person working remotely for a foreign employer declares having a centre of life (e.g. spouse, home) on the territory of Ukraine and a plan to return to the homeland after the war, the fact of staying on the territory of the Republic of Poland for more than 183 days in a tax year becomes crucial. This is directly determined by Article 15 of the Polish-Ukrainian DTT. The conditions that must be fulfilled cumulatively in order for a person who is resident in Ukraine and receives remuneration from paid employment performed in Poland to be able to tax his/her income only in Ukraine are as follows:

1. The recipient resides in Poland for a period or periods not exceeding a total of 183 days during a given calendar year, and
2. The wages are paid by or on behalf of an employer who is not domiciled in Poland, and
3. Salaries are not borne by the permanent establishment of the employer in Poland.

The coming weeks will be a time of increased expert analysis of the income taxation of those who have settled in Poland following the start of the war in Ukraine. We will keep you informed about possible legislative developments in this area, including the facilities under consideration for Ukrainians remaining outside their homeland.

Jakub Czerski

Senior Tax Manager | Accace Poland

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A draft amendment to the CIT Law has been published, which is a modification of the regulations effective from January 2022. Below we present the most important assumptions of the planned changes to the Polish Deal 2.0.

Modification and postponement of the entry into force of the minimum income tax rules

The proposed amendments provide that the minimum income tax rules will be suspended for one year (i.e. from 1 January 2022 to 31 December 2022). They would consequently only start to apply from 2023. In addition, the legislator foresees changes in the construction of the tax itself, in particular:

1. The profitability index will be increased from 1% to 2% and at the same time the methodology for its calculation will be changed. There will not be taken into account:

• tax deductible costs being the payment under a fixed asset lease agreement
• revenues being the value of trade receivables sold to entities in the factoring industry, and
• excise duty.

2. The calculation of the minimum income tax will change. Currently, the levy is 10% of an amount equivalent to 4% of the value of income other than capital gains and passive expenses (concerning i.a. debt financing and intangible services). The draft does not change the tax rate – still 10%. However, there will be two alternative methods from which the taxpayer can choose the more favourable one. The basis, depending on the taxpayer’s preference, will be either 4% of the value of revenues or 2% of revenues plus passive costs.
3. Among others, municipal companies, medical entities, small taxpayers, entities in bankruptcy or liquidation and those whose profitability in one of the last 3 tax years was above 2% will not be subject to minimum CIT at all.

Amendment of the regulations on foreign controlled entities (CFC)

The modifications to the CFC are based on 3 pillars:

• Eliminating double or multiple taxation of CFC when cascading dividends in holding structures
• Clarification of the rationale for the high profitability of a foreign entity relative to the assets held in case of potential disposal of assets during the year
• Clarification of the definition of a subsidiary.

Amendments to the rules on taxation of flipped income

The aim of the proposed solutions is to eliminate the doubts raised by the business community by i.a.:

• To include in the scope of the tax on flipped income only costs that are deductible
• Clarification that the related entity for which the costs are incurred does not have its registered office or central administration in the territory of the Republic of Poland
• Clarification of the condition concerning 50% of the revenue generated by a related entity and the condition concerning the transfer of revenue to another entity (at least 10%)
• Simplification of the condition relating to preferential taxation in the country of residence, management, registration or location of the related party.

Changes to withholding tax (WHT)

The new rules aim to ease the WHT mechanism in force from 1 January 2019 by:

• Exclusion of the application of certain obligations of broadly understood payers with regard to withholding tax on interest and discount on treasury securities (treasury bills and treasury bonds) by extending the material scope of the non-resident taxpayer exemption from income tax to include also treasury bills and bonds offered in the domestic market
• In addition, the validity of a declaration by the board of directors that, in the exercise of due diligence, the payer was not aware of circumstances preventing the application of a lower withholding tax rate or tax exemption (provided for in an international double tax treaty) is to be extended. Such a statement is to be valid for seven months instead of only three months as at present.

Amendment of the rules on debt financing costs

As regards tax treatment of debt financing costs, the Ministry intends to eliminate interpretation doubts reported by taxpayers. This includes a clear indication that the amount of PLN 3 million or 30% of EBITDA – whichever is higher – will be excluded from tax costs. In addition, the provisions on debt financing costs will not apply:

• Where the financier of the equity transaction is a bank or cooperative savings and credit union established in an EU or EEA country
• In the case of debt financing granted to acquire or take up shares or all rights and obligations in entities unrelated to the taxpayer.

Modifications to the polish holding company (PSH)

The changes are also to apply to holding companies – a new institution, effective from 2022:

• The right to exempt 100%, and not as at present 95%, of the dividend income received from subsidiaries. In parallel, the holding company will be able to take advantage of the dividend exemption under EU Directive 2011/96/EU (Parent Subsidiary Directive) – this is not currently possible
• It will be possible to benefit from both types of preferences, even if domestic subsidiaries benefit from an exemption from income from activities carried out in a special economic zone or under a support decision. Obecnie takiego prawa nie mają ani one, ani spółka holdingowa. Currently, neither they nor the holding company have such a right
• Introduction of a new definition of domestic subsidiary and foreign subsidiary.

The aim of all these changes is to allow more entities than before to benefit from holding exemptions.

Amendments to the rules on flat-rate taxation of company profits

Changes are also envisaged in the provisions on flat-rate corporate income, commonly known as Estonian CIT. The legislator plans to:

• Introduce modifications to the way income from non-business expenses is determined when assets (e.g. cars) are used for business and other non-business purposes
• Amend the deadline for filing a notice of election to tax companies’ income on a flat rate basis (ZAW-RD). This will be done by the end of the first tax year in which the taxpayer wishes to apply this method of taxation
• Clarify the condition for extinguishing a tax liability for a preliminary adjustment, i.e. a temporary difference between tax and accounting results, Once the changes have been implemented, it will be clear that the obligation will lapse in full after at least one full flat tax period, i.e. four tax years
• Modify the deadline for payment of the tax due on the income from the transformation (unambiguous indication that if the tax on the income from the transformation is paid in full, the taxpayer is obliged to pay the tax by the deadline for submission of the CIT-8 return for the tax year preceding the first year of flat-rate taxation)
• Modify the deadline for the payment of a flat rate on distributed profit income and income from profit to cover losses (also applies to advances on anticipated dividends) and a flat rate on distributed net profit income.

Amendment of the rule on the procedure for the refund of tax on income from buildings

From June 2022, commercial property owners will pay building revenue tax again. This is a result of the abolition of the epidemic status from 16 May 2022.

The procedure for refunding tax on income from buildings will be changed. The legislator plans to specify that the tax will be refunded without the need for a decision when the amount of the refund is not in doubt.

Amendment of the rules on the documentation obligation in respect of “haven transactions”

The amendments are to address the rules on direct and indirect haven transactions:

1. Elimination of presumption of residency of beneficial owner in tax haven
2. New reporting limits for indirect tax haven transactions:
   • PLN 2,500,000 – goods
   • PLN 2,500,000 – financial
   • PLN 500,000 – other (“basic threshold”)
3. Further emphasis on the role of the statement as “sufficient to verify the documentation obligation”

Having regard to the above regulations, which are planned to be introduced by the Ministry of Finance, it should be unequivocally stated that taxpayers will have to face further radical changes, which will significantly affect business operations. We will keep you informed about the stage of legislative work on the bill amending the CIT Act and about the presentation of further detailed solutions in this respect.

Starting from 2022 the taxpayers will have to deal with further changes in the area of transfer pricing. Documentations prepared for 2021 will have to include not only transactions tax havens in Poland with related parties and settlements made directly with entities from tax havens (as before), but also a large part of transactions with unrelated parties.

What is new in the transfer pricing regulations

Starting from 2022 (so for transactions realized in 2021) taxpayers will be obliged to prepare local transfer pricing documentation:

• performing transactions with an unrelated entity with a place of residence, registered office or management in a territory or country applying harmful tax competition, if the value of this transaction exceeds PLN 100,000 during a tax year,
• performing transactions with a related or unrelated entity, if the actual owner of the receivables has a place of residence, registered office or management in a territory or country applying harmful tax competition and the value of the transaction exceeds PLN 500,000 during a tax year.

The above means that each settlement of our contracting party with the tax haven entity may be treated as a tax haven transaction. It means any transaction – e.g. purchase of electronic equipment – realized by our counterparty with one of the countries recognized as tax haven – e.g. Hong Kong (list of tax havens is presented at the bottom of the material). Then, if our settlements with the contractor exceed PLN 500 thousand in a given tax year, the taxpayer is obliged to prepare transfer pricing documentation.

Presumption concerning tax haven entity

What is important, the legislator has introduced a presumption that the beneficial owner has a place of residence, registered office or management in the so called tax haven in a situation when our counterparty makes settlements with an entity having its registered office in the tax haven. It means that any settlements of the contracting party with an entity from the tax haven are sufficient to apply the presumption that this entity is a real owner in this case.

The presumption is applied in a situation where it is confirmed that the other party to the transaction exceeding the value of PLN 500,000 (our contractor) makes settlements with the tax haven entity directly.

In determining these circumstances, the legislator requires taxpayers to exercise due diligence.

How to exercise due diligence while verifying settlements of a counterparty?

In order to exercise due diligence it will be necessary to obtain a statement from the counterparty confirming that it does not make any settlements with the tax haven entity in a given tax year.

In the case of transactions with related parties, due diligence means, in addition to obtaining the aforementioned statement, verification of information available in connection with the relationship, i.e. transfer pricing documentation, financial statements, ownership structure.

The statement should be obtained ex post, i.e. after the end of the taxpayer’s fiscal year. We suggest that the parties undertake to mutually submit the statements in question as part of their agreements with counterparties.

Scope of documentation and deadlines

In case of detection of tax haven transactions performed with unrelated entities, taxpayers will be exempt from the obligation to prepare benchmarking studies. At the same time, apart from the necessity to verify the beneficial owner, the taxpayer will be obliged to prepare local file documentation and submit a TPR report.

The new regulations will apply to documentation covering the year 2021. According to the amendments resulting from the so-called Polish Deal, the deadline for preparation of documentation for 2021, which includes e.g. tax haven transactions, falls at the end of the 10th month after the end of the tax year (for taxpayers with tax year coinciding with the calendar year it will be the end of October 2022).

Accace strongly recommends analyzing your business activity to see if the new rules could potentially affect your settlements and, therefore, how to determine due diligence process for verifying contractors.

If you need more information on changes in transfer pricing regulations and their impact on your business, please contact us.

Jakub Czerski

Senior Tax Manager | Accace Poland

Book a meeting with Jakub

Jakub Czerski

Senior Tax Manager | Accace Poland

Book a meeting with Jakub

Taxpayers in Poland are expected to take part in the creation of a new register for tax purposes. Poland introduces the Central Register of Beneficial Owners (or CRBR in short) as a result of the implementation of the EU Directive on preventing the use of the financial system for money laundering or terrorist financing.

Beneficial owner

The already existing registers, like the recently launched whitelist of taxpayers, will be followed by another publicly available register, this time containing information about the ownership structure of companies. This data on beneficial owners of Polish companies will be publicly available. Under the Act on Counteracting Money Laundering and Terrorist Financing, beneficial owners are natural persons or natural persons exercising direct or indirect control through their rights resulting from legal or factual circumstances, enabling them to have decisive influence over actions or activities undertaken by the company.

The beneficial owner may also be the natural person(s) on whose behalf the business relationship is established, or the occasional transaction is carried out. In the further part of the definition, the Polish Act on Counteracting Money Laundering and Terrorist Financing provides specific situations to which this definition will apply.

Which information needs to be provided?

The following information should be provided as part of the notification to the register:

1. Identification of the company:

• Name (company),
• Type of organization,
• Registered office,
• National Court Register (KRS) number,
• Taxpayer identification number (NIP).

2. Identification of the beneficial owner and the member of the governing body or partner authorized to represent the company:

• Name and surname,
• Citizenship,
• Country of residence,
• Universal Electronic System for Civil Registration Number (PESEL) or date of birth,
• Scope and nature of the participation or on the rights of the beneficial owner.

Who shall submit the notification?

Companies required to report information on the CRBR are the following:

• General partnerships,
• Limited partnerships,
• Limited joint-stock partnerships,
• Limited liability companies,
• Joint-stock companies (excluding public companies).

The information will have to be submitted by a person authorized to represent the obliged entity via the Register’s website. Applications will be submitted under penalty of criminal liability.

Deadlines

Companies registered in the National Court Register before the effective date of the regulations concerning the CRBR (i.e. before October 13, 2019) are obliged to report information on beneficial owners by 13 April 2020.

On the other hand, entities who were registered in the National Court Register after October 13, 2019 are obliged to notify the data no later than within 7 days from the date of entry into the National Court Register.

In the case of updating the information provided in the CRBR, the deadline for submitting updates will be 7 days from the date of their change.

Jakub Czerski

Senior Tax Manager | Accace Poland

Book a meeting with Jakub