CFC tax: When an anti-avoidance measure becomes a sanction
Imagine a case where a Polish taxpayer holds 1% of the rights to participate in the profit of a foreign company and the other 99% belong to other investors. Nonetheless, Polish law treats the taxpayer as if he held 100% of the rights for the entire year. Moreover, the taxpayer cannot present evidence showing that the facts are otherwise—solely because the foreign company is based in a tax haven. This controversial view was taken by the Province Administrative Court in Warsaw in its judgment of 7 May 2026 (case no. III SA/Wa 125/26).
The dispute in the case essentially boiled down to determining whether under EU law and the Polish Constitution, the Personal Income Tax Act can automatically impose on the taxpayer the obligation to pay tax on 100% of the profit of a controlled foreign corporation (CFC), without the ability to prove the taxpayer’s actual share in the company’s profit.
This ruling falls within a broader debate about where to draw the line between fighting tax avoidance and trampling on the taxpayer’s rights via anti-avoidance regulations. The case shows that applying the Polish CFC regulations without taking due account of the guidance from the Court of Justice of the European Union may lead to disproportionate or outright punitive taxation of income to which the taxpayer has no actual rights.
A 1% share, but tax on 100% of the income?
Under certain circumstances, the CFC regulations allow the income of a foreign company to be taxed in Poland regardless of whether the profit is distributed to a Polish shareholder. In this way, the parliament seeks to combat the deferral of tax in connection with leaving the profit in the foreign company instead of paying it out to the shareholders. This provision is also intended to combat the shifting of profits to low-tax jurisdictions. Thus the CFC tax should prevent taxpayers from benefitting from investing Polish capital in, among other places, countries applying harmful tax competition.
As a rule, the Polish PIT Act provides for taxation of the income of a CFC in the proportion corresponding to a Polish taxpayer’s share in the company’s profit. But with respect to certain categories of CFCs, the act employs a legal presumption of holding a 100% share of the profit for the entire tax year.
The taxpayer may rebut this presumption and prove that his share in the profit of the CFC was different. However, the act expressly provides for this possibility only with respect to companies established in countries with which Poland has not concluded a treaty providing grounds for the exchange of tax information. A taxpayer holding a share in the profit of a CFC established in a jurisdiction regarded as a tax haven has no such right.
This situation leads to economically unjustified consequences. The taxpayer is forced to pay tax on income that never augmented the taxpayer’s assets, and to which the taxpayer has no rights. This raises serious objections particularly in a situation where other mechanisms exist in relation to the taxpayer for preventing avoidance of tax on the investment made by the taxpayer.
What does the Court of Justice say?
The judgment of the Court of Justice of 26 February 2019 in C-135/17, X-GmbH v Finanzamt Stuttgart – Körperschaften, provides important guidelines on the limits within which national regulations on controlled foreign corporations can interfere with the taxpayer’s rights for the purpose of combatting tax avoidance.
That case involved Germany’s CFC regulations and investments in a third country. The Court of Justice held that as a rule, anti-avoidance provisions can restrict the free flow of capital. But these restrictions must be proportionate to the aim sought to be achieved.
The court held that the mere fact that a taxpayer is investing in a third country is insufficient to apply a general presumption of tax avoidance.
The court drew particular attention to the possibility for the tax administration to verify the information concerning the taxpayer’s foreign investment. If there is a legal framework in place between the countries enabling effective exchange of tax information, the taxpayer should be able to present evidence confirming the transparency and economic rationale for its investment.
But if such means of cooperation do not exist, and the authority is not in a position to verify the information provided by the taxpayer, further-reaching restrictions, including higher tax, may be warranted.
This also influences the interpretation of the Polish CFC provisions. In light of the guidance from the Court of Justice, these provisions must not automatically impose a tax on 100% of the CFC’s income solely because the company’s registered office is in a country on the list of tax havens. This applies in particular to a situation where there is an agreement on exchange of tax information in force between that country and Poland, thus ensuring the transparency of the taxpayer’s investment. That was true in the case decided by the administrative court in Warsaw, which involved a CFC based in the British Virgin Islands.
Can the location of the investment justify unequal treatment?
The defective construction of the Polish CFC provisions has far-reaching consequences, as it can result in unjustified disparate treatment of taxpayers investing capital in third countries.
Under the PIT Act, a taxpayer investing in a country with which Poland has no basis for exchange of tax information may prove his actual share in the CFC’s profit, and pay tax only on that portion.
However, a taxpayer investing in a jurisdiction on the list of tax havens is deprived of that opportunity, even if there is an effective mechanism in place between Poland and that jurisdiction for exchange of tax information.
Consequently, and paradoxically, taxpayers with respect to whom the Polish tax authority can verify the taxpayer’s actual share in the CFC’s income, the subject of the CFC’s business and the nature of its operations, are placed in a worse situation. In this case the scope of taxation is decided not by the real risk of tax avoidance, but solely by the location where the capital is invested. This differentiation does not further the aim of the anti-avoidance regulations, and leads to unequal treatment of taxpayers investing in certain countries.
EU law takes priority
In such situations, the Polish regulations must be applied taking into account the law of the European Union, and thus, among other things, in compliance with the principle of free flow of capital and the principle of proportionality, arising under the EU treaties and the case law of the Court of Justice.
In the event of a conflict between national law and EU law, the EU principle of precedence requires the national authority or court to first seek to interpret national law in a manner ensuring consistency with EU law. If a consistent interpretation is not possible, the national authority or court must refuse to apply the national regulation.
In the situation under consideration here, it would thus have to be found that the Polish taxpayer is subject to taxation on the CFC’s income solely in the portion corresponding to the taxpayer’s actual share in the company’s profit. Moreover, only such an interpretation of the Polish CFC regulations would comply with the standards of the Polish Constitution, particularly the principles of proportionality, equality, and protection of property rights.
What next?
The current structure of the CFC regulations and the defective practice of applying them may greatly limit investments in countries regarded as applying harmful tax competition—even when there is no justification.
This problem demands a response on two levels.
First, the regulations should be clarified so that a taxpayer is expressly guaranteed the right to prove his true share in the profits of a CFC also when the company is based in a country on the list of tax havens. This applies in particular to a situation where Poland has concluded a treaty with the other country for exchange of tax information.
Second, until the regulations are amended in this respect, the tax authorities and the courts should interpret the current regulations with due regard to the standards provided under EU law and the Polish Constitution.
If the approach taken by the Province Administrative Court in Warsaw is followed in other cases, the mere inclusion of a jurisdiction on the list of tax havens will be regarded as sufficient to impose tax on income which the taxpayer never attained. In this respect, the regulations and the practice must be corrected as soon as possible.
Katarzyna Ziomek, Tax practice, Wardyński & Partners
