Amendments to Poland’s Corporate Income Tax (CIT) Act and Personal Income Tax (PIT) Act went into force at the beginning of 2015. One of the key changes is taxation of income earned by controlled foreign companies (CFC, in Polish: zagraniczne spółki kontrolowane).
With the entry into force of the amendments to the CIT Act and the PIT Act, there is a 19% tax on CFC’s income that goes to a Polish tax resident.
Who is affected?
The term “foreign company” covers a:
- Legal person
- Limited-liability company or joint-stock company in organisation (in Polish: sp. z o.o. w organizacji, S.A. w organizacji)
- Tax-transparent partnership, if under foreign law it is treated as a legal entity and in that foreign country is subject to tax on its income regardless of where the income is earned, or
- Organisational unit without legal personality other than a partnership
whose registered office or management are not in Poland and in which a Polish tax resident holds share capital, voting rights in controlling or constitutive bodies, or a right to participate in the profit.
There are three sets of situations when a “foreign company” may qualify as a “controlled foreign company.” This may happen when:
- The foreign company has its registered office or management in a so called tax haven, i.e. a country or territory listed in the regulation of the Minister of Finance specifying countries and territories applying harmful CIT rules, or
- The foreign company has its registered office or management in a country which is not a tax haven but there is no treaty in force between the country and Poland on avoidance of double taxation or no treaty in force between the country and Poland or the European Union on exchange of tax information, or
- The foreign company jointly meets the following conditions:
- A Polish tax resident holds, directly or indirectly, 25% or more of the share capital, voting rights in the controlling or constituting bodies, or rights to participate in profit for a minimum period of 30 days
- At least 50% of the revenue of the company in the tax year is so called passive revenue, such as dividends, interest, income from intellectual property rights, capital gains, or income from sale or exercise of financial instruments, and
- At least one of the types of passive revenue is subject to tax at a rate at least 25% below the CIT rate in Poland or is exempt or excluded from taxation, unless the income is exempt from tax under the EU Parent-Subsidiary Directive.
The CFC provisions also apply to a permanent establishment of a Polish tax resident situated outside of Poland.
In principle, the tax is imposed on the income earned by a CFC in proportion to the number of shares held in it by the Polish tax resident and also in proportion to the period of possession of the shares during the fiscal year. This rule does not apply to CFCs in a tax haven.
Who is not affected?
A foreign company is not covered by the CFC rules if:
- Its entire income is subject to taxation in a member state of the European Union or the European Economic Area, provided that it actually conducts business activity, or
- Its annual revenue does not exceed EUR 250,000, or
- It actually conducts business activity in a country that is not a member state of the EU or EEA and:
- It is subject to taxation on its entire income in that state, and
- Its income does not exceed 10% of the entire revenue resulting from conducting business activity in that state, and
- There is a legal basis for exchange of tax information under a double-taxation treaty, tax information exchange treaty or other ratified international agreement to which Poland is a party as well as any other international agreement to which the European Union is a party.
Business activity requirement
The CIT and PIT provisions do not address precisely what is meant by the term “actual business activity.” However, it should be considered in particular whether:
- The company possesses an organised set of tangible and intangible assets intended to carry out business activity
- It has local, qualified staff and equipment used in its business activities
- Its actual premises as well as its personnel and equipment correspond to the scope of its business, and
- It carries out its commercial functions independently, using its own resources, including managers who are present locally.
The amendment imposes additional reporting obligations on Polish tax residents consisting of keeping separate records of a CFC unless the CFC conducts actual business activity in an EU or EEA member state and its entire income is subject to taxation in such a country.
Aldona Leszczyńska-Mikulska, Tomasz Piejak, Tax Practice and Private Client Practice, Wardyński & Partners