- Seizure of property during an epidemic
- Expenses on intangible assets as tax cost
- Qualification of a cash pooling agreement in the light of thin capitalization regulations
- Foreign branch and the obligation to collect withholding tax
- Subsidiary and fixed place of business in VAT
- Right to deduct input tax resulting from purchases made by a branch of a company in Poland
- So-called Estonian CIT from the year 2021
- Virtual cash registers in several industries from June 1
1. Seizure of property during an epidemic
The changes in tax regulations under the Anti-Crisis Shield are intended to help entrepreneurs survive in difficult times of the epidemic. However, will these changes help in further activities or should they be seen as another trouble for business?
It is worth analyzing one of the changes regarding Fiscal Penal Code: the possibility for financial authorities conducting preparatory proceedings (the head of the tax office, the head of the customs and tax office or the Head of the National Revenue Administration) to issue decisions to seize property in penal-fiscal proceedings – previously only the prosecutor had such powers. In addition, it should be noted that the seizure of assets is already carried out during the preparatory proceedings, and thus without the final settlement of the proceedings. One can make a complaint against this decision, but it does not suspend the seizure of assets. There is also no specification as to what kind of property can be seized (movable assets, cars or cash).
The Ministry of Finance explained that this change is intended to faster transfer, for example, of seized alcohol to medical entities, in order to produce liquid for disinfecting hands. However, these provisions give greater authorization for tax authorities, and do not protect entrepreneurs. Perhaps the intention of the introduced changes was correct, because the demand of medical for products such as alcohol for the production of liquid hand sanitizer during an epidemic is significant and acceleration of the procedure for the transfer of such products is appropriate. However, the regulations do not indicate that they are to be only such assets. In addition, when conducting seizure during the preparatory proceedings, it is not yet required to prove to the taxpayer that he committed a crime or tax offense. If it was not proven at all, the seized items should be returned, and what if they were already distributed. In this case, what remains is to pursue claims in civil proceedings, which can take up to several years and generate additional costs. Provisions in this regard have already entered into force since 18 April 2020.
2. Expenses on intangible assets as tax cost
In relation to Article 15e of the Corporate Income Tax Act (CIT Act) doubts occur whether the costs associated with intangible assets can be fully included in tax costs or only within a limit indicated therein.
In the CIT Act, Article 15e states that taxpayers are obliged to exclude from tax costs any kind of fees and charges for the use or right to exercise rights or values such as copyright or related property rights, licenses, industrial property rights and broadly understood know-how. By contrast, Article 15e paragraph 1 point 2 by definition refers to ‘use or the right to use’ in relation to related entities. What if there is a sale or acquisition of property rights?
The interpretation as to classification of expenses to purchase such assets changed only after the explanations of April 25, 2018, of the Ministry of Finance were published. Earlier interpretations were to the detriment of taxpayers.
For example, interpretation of June 7, 2019, reference number 0111-KDIB2-1.4010.150. 2019.1.AT, in which the costs of purchasing customer databases from an affiliated entity were analyzed: the Director of KIS admitted that such an expense is not a fee for use or the right to use known from Article 15e and may be a cost without restrictions.
3. Qualification of a cash pooling agreement in the light of thin capitalization regulations
If there are no loan agreements under civil law, this does not necessarily mean that the transaction will not be considered under thin capitalization. The service described in the ruling of the Supreme Administrative Court of November 5, 2019 (reference number II FSK 401/18) is aimed at optimal management of funds on the group’s accounts with additional financial benefit. The interest rate was set on the basis of the agreement with the bank and the entities. Interest on the negative/positive balance on each account belonging to the company was calculated by the bank separately, and the calculated interest amounts charged / credited directly to the account.
According to this structure, the applicant pays and receives interest for the possibility of using its cash to other participants. These circumstances give grounds for taking this structure as a loan agreement according to art. 16 section 7b of the CIT Act (currently repealed).
If the total value of indebtedness to related entities exceeds three times the value of its share capital, then restrictions from the so-called thin capitalization shall apply. A cash pooling agreement as an agreement on managing liquidity consisting in balancing account balances within the group, with the purpose of this agreement to make funds available to group entities and to benefit from it, can be assumed as an agreement adopting similar conditions to the loan agreement.
In addition the court confirmed that if entities make transactions or contracts subject to art. 9a paragraph 1, and the statutory amounts will be exceeded, it will be necessary to prepare relevant tax documentation.
4. Foreign branch and the obligation to collect withholding tax
On April 15, 2020, the Minister of Finance issued a general interpretation regarding the obligation to collect withholding tax in the case of receivables paid to a non-resident by a foreign branch of a Polish enterprise.
Pursuant to the CIT Act and the PIT Act, in order to recognize that income has been generated in Poland, the condition of payment by the Polish entity must be met, regardless of where the contract is concluded or where the income is achieved.
A Polish tax resident is therefore obliged to withhold tax on certain transactions concluded with a non-resident (regarding dividends, interest, royalties, intangible services), because under tax laws they constitute revenue generated in the Republic of Poland. The tax rate is 20%, however, it is also possible to apply rates resulting from the provisions of the relevant double taxation agreement.
A question arises about receivables paid to non-residents by a foreign establishment of a Polish tax resident – whether in such a situation income is generated within the meaning of art. 3 clause 3 point 5 of the CIT Act or art. 3 clause 2b point 7 of the PIT Act, and thus, is there an obligation to collect withholding tax?
In the aforementioned interpretation, the Minister of Finance resolves this dilemma by referring to the OECD Model Convention and previous judgments by Supreme Administrative Court.
Article 7 clause 2 MC OECD ascribes profits to a foreign establishment if it could achieve them if it were to carry out the same or similar activity as an independent enterprise, and therefore also were to use its own assets and incur the risk associated with the transaction. Profits that can be attributed to a foreign establishment do not constitute revenue for the country in which the company’s registered office is located.
This conclusion was confirmed by the judgment of the Supreme Administrative Court of October 18, 2017, in which it was indicated that the relationship between the company’s headquarters and its foreign establishment should be treated as the relations of independent entities for tax purposes.
So if the foreign establishment:
• runs a business activity,
• incurs expenses in connection with business operations,
• incurs expenses from their own property and includes it in their tax costs,
no non-resident income within the meaning of art. 3 clause 3 point 5 of the CIT Act or art. 3 clause 2b point 7 of the PIT Act arises and there is no obligation to collect withholding tax on the side of a Polish resident or his establishment.
The Minister of Finance clarifies that in a situation in which the above conditions are not met, and the expenditure serves the purposes of the company being a Polish tax resident, the entity making the payment is obliged to collect withholding tax.
5. Subsidiary and fixed place of business in VAT
On 7th of May, 2020, the judgment of the Court of Justice of the European Union (CJEU) was announced, which concerned the Polish case with reference number: C-547/18 Dong Yang Electronics (Dong Yang). The judgment determines the possibility for a subsidiary of a foreign entity to create the so-called fixed place of business and defines the service provider’s obligation to investigate the existence of the local fixed place of business of his recipient.
In the present case, Dong Yang, based in Poland, provided assembly services to a Korean company belonging to a capital group unrelated to the taxpayer. Dong Yang treated the provision of services as subject to VAT taxation outside of Poland, and issued invoices not including Polish VAT. Tax authorities in Poland have undermined this approach and were of the opinion that Dong Yang provides services for the fixed place of business of the Korean contractor, which he created in Poland by cooperation and using the economic potential of the Polish subsidiary. According to CJEU, the service provider cannot derive the existence of a fixed place of business of an entity from a third country in the territory of an EU country simply by the fact that the entity has an EU subsidiary in that country and is not obliged to examine, in order to perform such an assessment, contractual relations connecting these two entities.
6. Right to deduct input tax resulting from purchases made by a branch of a company in Poland
The Supreme Administrative Court after trial on 12th of December, 2019 in the Finance Chamber, on a cassation complaint of the taxpayer seated in Belgium against the judgment of the Provincial Administrative Court in Warsaw of 13th of February, 2014, reference number act III SA/Wa 2032/13, over an individual interpretation of the Minister of Finance regarding tax on goods and services, stated that, in accordance with the case law of the CJEU, a branch registered in one Member State is entitled there to deduct VAT charged on acquired goods and services that have a direct close link with the implementation of taxed transactions, including transactions of a main establishment located in another Member State with which the branch this creates a single taxpayer, provided that the latter transactions also entitled to a deduction if they were made in the country of registration of that branch. This rule will also apply when the entitlement to deduct in a branch country results from the fact that the branch has chosen to tax exempt transactions. This means that the branch will deduct VAT from expenses related to the taxable activities of the main establishment, if in the country of its registration the branch would also be taxed, regardless of whether this would result from the compulsory or selected by the branch taxation of this transactions. In order to determine the deductible proportion applicable to the overheads of a branch registered in a Member State which are simultaneously used to carry out transactions carried out by that branch in that Member State and transactions carried out by its head office established in another Member State, general costs incurred by the branch and serving only the headquarters shall be settled with the proportion of the company’s head office, while the overheads incurred by the branch and serving both the headquarters and the branch, shall be settled with the sum of the company’s head office and branch proportion.
The Supreme Administrative Court considered that the CJEU judgment in case C-393/15, of 21st of June 2016, is of significant importance in the resolution of the present case. In this ruling, CJEU indicated that the deduction system set up in Directive 2006/112 aims to completely free the entrepreneur from the burden of VAT due or paid in the course of his business. The common VAT system is intended to ensure complete business neutrality in terms of taxation, irrespective of its purpose and results, provided that it itself is, as a rule, subject to VAT.
7. So-called Estonian CIT from the year 2021
The Minister of Finance confirmed the so-called Estonian CIT will be introduced to Polish law from the beginning of 2021. Initially, its implementation was planned for this summer, but due to the current situation this deadline has been postponed.
What is it? In simple terms, it is a solution for micro and small companies, which would only pay corporate income tax when the profit is distributed, for example, in the form of a dividend. Until the profit is earned in the company, it does not have to be taxed.
The Minister mentioned that works on this issue are at an advanced stage. This is positive information for micro and small companies, which could devote money to development, and not necessarily to paying income tax immediately. In Estonia alone, the solution has been working well for some time, which is why it is worth implementing it in Poland.
8. Virtual cash registers in several industries from June 1
The consultation stage on the draft ordinance of the Minister of Finance on the group of taxpayers or types of activities in relation to which it is possible to use cash registers in the form of software has ended. Exactly specified catalog in the regulation who are to be affected by the so-called software cash registers.
It is mainly the transport, hotel and catering industry. The possibility of using cash registers also by taxpayers selling coal, briquettes and similar solid fuels produced from coal, lignite, coke and semi-coke for heating purposes is also indicated.
In the justification we can read that this is to increase the efficiency of administration and to improve the process of registration and control of retail sales. It also aims to prevent unequal competition from businesses that build their advantage on tax evasion.
According to the draft, the ordinance will enter into force on June 1, 2020.