The bill to implement the “Polish Deal” programme would introduce the separate institution of a VAT group, previously unknown in the Polish tax system, enabling consolidation of the tax result within a capital group.
The proposed tax changes provide for introduction of the possibility of joint settlement of VAT by related entities within a VAT group. The possibility of implementing this approach is provided for in the EU’s VAT Directive.
The VAT group would become the VAT payer in place of the entities that are members of the group, and purchase or sale of goods or services by members of the VAT group would be treated as transactions made by the VAT group.
Creation of a VAT group would generate the following benefits for members of the group:
- No VAT on intragroup transactions, meaning supplies of goods and services between entities within the VAT group would be tax-neutral for VAT purposes and not give rise to an obligation to document these activities through VAT invoices (although it would be necessary to maintain simplified records of intragroup transactions in electronic form for audit purposes). And despite not being subject to VAT, such transactions would also not be subject to the civil transaction tax (PCC), except for the sale or exchange of real estate or shares in a company or partnership.
- Collective settlement of VAT and preparation of a collective VAT SAF-T file (JPK_VAT) for the entire VAT group by the one entity from the group acting as the VAT group representative. This would allow for efficient management of cash flows arising from VAT settlements through consolidation of the VAT settlements of the individual members of the group at the level of the VAT group. (The VAT group allows for mutual setoff of VAT settlements within the VAT group, and consequently enables ongoing “recycling” of excess input VAT within the VAT group.)
- No obligation to apply the split-payment mechanism in intragroup transactions between members of the VAT group.
The entities eligible to form a VAT group would be entities with their registered office in Poland as well as entities registered outside of Poland insofar as they operate in Poland through a branch (branches of foreign entities in Poland). Any one entity could be a member of only VAT group, and a VAT group could not be a member of another VAT group. For the duration of the VAT group, its composition would remain unchanged (the number of members could not be increased or decreased).
A condition for establishment of a VAT group is the existence of financial, economic and organisational links between the entities making up the group. The conditions for the existence of each of the links would all have to be fulfilled without interruption for the duration of the operation of the VAT group.
- Financial links: one of the taxpayers who is a member of the VAT group directly holds over 50% of the shares in the other taxpayers making up the VAT group.
- Economic links:
- The principal business of the members of the VAT group is of the same nature, or
- The operations of the specific members of the VAT group are complementary and interdependent (e.g. goods or services produced by a member of the VAT group are essential for the activity of other members of the VAT group), or
- The members of the VAT group benefit wholly or in large part from the activity conducted by a given member of the VAT group.
These grounds are imprecise, which may raise doubts when assessing the existence of economic links.
- Organisational links:
- The entities making up the VAT group are under common management, legally or factually, indirectly or indirectly, or
- The entities making up the VAT group organise their activity wholly or partially in mutual agreement.
To form a VAT group, the related entities would have to conclude a written agreement on establishment of a VAT group. The VAT group would obtain the status of a VAT payer as of the date indicated in the agreement, but no earlier than the date when the VAT group is registered as a VAT payer by the tax authority. The agreement would have to specify the period of operation of the VAT group, no shorter than three years, and indicate the member of the group which will represent the VAT group with respect to its obligations, including tax obligations. The tax authority for taxation of the VAT group would be the head of the tax office for the VAT group representative.
The members of the VAT group would be jointly and severally liable for the group’s VAT obligations for the period of functioning of the VAT group. The joint and several liability of the members of the VAT group for tax obligations arising during the existence of the VAT group would remain in force after the VAT group itself ceased to function.
It should be stressed that the proposed regulations on VAT groups would have a major impact on VAT on services delivered between the principal establishment and branches.
As a rule, service transactions between the principal establishment and a branch are regarded as intra-establishment activities made within a single entity and are not subject to VAT.
There is an exception to this rule for situations where the principal establishment, a member of a VAT group, carries out service transactions with its foreign branch, or where the foreign branch, a member of a VAT group in the country in which it operates, carries out service transactions with the principal establishment. In that case, the service transactions between the principal establishment and the branch are subject to VAT, as they are deemed to be made between separate entities for VAT purposes. (It is not the principal establishment or the branch that is deemed to be a party to the transaction, but the VAT group of which the principal establishment or the branch is a member, as the case may be.)
This approach arises out of the case law of the Court of Justice of the European Union (e.g. C-7/13, Skandia America Corporation, and C-812/10, Danske Bank A/S), as well as the administrative courts in Poland (Supreme Administrative Court judgment of 18 March 2021, case no. I FSK 2386/18), and is reflected in the draft provisions on VAT groups in Poland.
Enabling the formation of VAT groups in Poland can be assessed as a favourable option for taxpayers, as it allows for reduction of administrative duties and improved liquidity associated with VAT settlements.
Mateusz Rowiński, Tax practice, Wardyński & Partners