The new regime is intended to incentivise holding companies to locate in Poland and create a competitive tax environment encouraging Polish businesses to return from foreign jurisdictions. These themes resound from the explanatory memorandum to the bill introducing the “Polish Deal.” But do the proposed provisions actually reflect these ideals? Will the new regime be attractive to any group of taxpayers?
The pillars of the proposed regime
According to the presented draft, the new preferential tax regime for holding companies will be based on two pillars:
- Exemption from corporate income tax of 95% of dividends received by the holding company from its subsidiaries
- Full exemption from CIT of profits from the sale of shares in subsidiaries.
A holding company under the scheme could be a limited-liability company or a joint-stock company, and a Polish tax resident, whereas subsidiaries could be either domestic or foreign companies—all provided that a number of requirements are met.
Dividends: new model versus existing model
The current dividend exemption from the CIT Act (resulting from implementation of the EU’s Parent-Subsidiary Directive) is full (100%) and may be applied to entities from the European Union or the European Economic Area. The company receiving the dividend must directly hold not less than 10% of the shares in the company paying the dividend. Moreover, it may not benefit from an exemption from income tax on its entire income, regardless of the source from which it is derived.
Although incomplete (95%), the proposed new dividend exemption covers a wider range of entities. A Polish holding company would also be able to apply it in the case of receiving dividends from companies outside the EU or the EEA. As under the current exemption, a holding company would have to directly own at least 10% of the shares in the subsidiary. Beyond that, the situation seems to get more complicated, as a number of further requirements arise, including:
- The holding company and the subsidiary cannot participate in a tax capital group or benefit from exemptions from the CIT Act within a special economic zone or the Polish Investment Zone
- The holding company must not have shareholders (direct or indirect) from tax havens or non-cooperative jurisdictions for tax purposes, or with which there is no legal basis for exchanging tax information
- A subsidiary may not hold more than 5% of the shares in another company
- A subsidiary may not hold participation titles in, among others, investment funds, or all rights and obligations in a partnership that is not a legal person, or other enumerated property rights.
In principle, the proposed new exemption would not apply at all to dividends paid by a foreign subsidiary where that company meets certain conditions referred to in the provisions on controlled foreign companies (CFCs) in the tax year in which the dividend is paid or any of the preceding five tax years. The exemption would also not apply to the extent that the dividend paid in any form is recognised as a deductible cost or a deduction from income, the tax base, or tax by a foreign subsidiary.
Additionally, the holding company would be able to deduct the income tax paid by the dividend-paying company in its country of tax residence, but that would be limited to the amount of tax attributable to 5% of the amount of dividends paid.
Period of share ownership
Additionally, to apply the new dividend exemption, the holding company would have to hold at least 10% of the shares in the subsidiary (paying the dividend) for at least one year without interruption (currently, it is necessary to hold the shares for at least two years without interruption). The proponents emphasise the superiority of this solution over the solution resulting from the Parent-Subsidiary Directive as currently implemented in Poland, which in their opinion would make the new regime attractive from the investors’ perspective.
However, while the current period of required holding of shares is admittedly longer, there is also a provision under which the exemption can be applied even if the two-year period expires after receipt of the dividend. A similar provision is not found in the new bill.
This means that today, a company receiving dividends from a subsidiary whose shares it has owned for, say, 10 months, may apply the full dividend exemption (provided that it holds at least 10% of the shares for at least two years). Under the new regime, in such a situation, the exemption would be excluded due to failure to meet the one-year shareholding requirement. As an advantage of the new regime, it should be noted that if a holding company sells shares in a subsidiary after one year but within two years, it would retain the right to the exemption in the new system, while currently it would be obliged to pay the tax (19%) together with interest for late payment.
Not all shares are created equal
At the same time, the bill provides for introduction of a full income tax exemption for income earned by a holding company from the paid disposal of shares in a domestic or foreign subsidiary to an unrelated entity. In principle, this should be seen as a positive solution.
For this purpose, a holding company and a subsidiary should be understood as companies meeting the requirements described in the section on dividend exemptions, meaning that to benefit from the full exemption on the disposal of shares, many other conditions would also have to be met. However, the exemption does not apply to the disposal of shares in a domestic or foreign real estate subsidiary (i.e. a company in which at least 50% of the value of the assets, directly or indirectly, consists of real estate located in Poland or rights to such real estate). In the proponents’ opinion, the exclusion of the exemption in this respect results from the tax policy assuming taxation in Poland of the sale of real estate located in Poland and companies owning such real estate.
To apply this exemption, the holding company would have to submit to the head of the relevant tax office, at least five days before the date of disposal, a declaration on the intention to apply the exemption. At the same time, taxpayers claiming this exemption would have to disclose in their declarations the amount of income covered by the exemption.
Here, the legislation contains some inaccuracies. The explanatory memorandum refers to a 30-day period for submitting the declaration, not a five-day period as provided for in the bill. There is also no indication in which declaration the above data should be disclosed (the explanatory memorandum only indicates the “relevant” declaration, which is not very precise).
However, more important is the question of why a taxpayer would make a statement of intent to apply the exemption if it must disclose application of the exemption (rather than the mere intent to use it) in the “relevant” declaration anyway. There is no answer to this in the explanatory memorandum.
One or the other
If the proposed regulations come into force, a taxpayer that is a holding company will be able to take advantage of either the exemptions currently in force (resulting from the Parent-Subsidiary Directive) or the exemptions under the proposed holding regime, i.e. the exemption for dividends from a given subsidiary and the exemption of the income from the sale of shares in the subsidiary. With regard to a given subsidiary, it is not foreseen that these exemptions could be combined. Thus, if a holding company applied the applicable exemption to income from a given subsidiary, it would thereby be excluded from the group of entities entitled to apply the exemption to the disposal of shares in that subsidiary, even if it met all the statutory requirements.
In this respect, the proposed provisions should be assessed negatively. A taxpayer that meets the statutory requirements should be able to apply the proposed exemption on the disposal of the shares in a subsidiary regardless of whether it applied the new or existing exemption to the dividend. Since the exemption currently in force is provided for by law, its application is fully permissible and should not foreclose the taxpayer from taking advantage of other, equally advantageous and legally permissible solutions with regard to other categories of income.
So who will ultimately benefit from the new regime?
It is unclear what the proponents were guided by in introducing certain restrictions on the application of the holding-company regime. For example, why can’t the subsidiaries have the legal form of a limited partnership or joint-stock limited partnership? Why can’t a subsidiary own its own subsidiaries? And why are entities enjoying a dividend exemption under the rules implementing the Parent-Subsidiary Directive excluded from the new regime?
Generally, however, the direction of the proposed changes is favourable, and they should theoretically encourage investors to consider Poland as a country where they can pursue holding activities. It seems that in terms of the dividend exemption, the new tax regime could potentially be attractive to holding companies owning subsidiaries in countries outside the EU or the EEA. Moreover, both the dividend exemption and the exemption on the transfer of shares could also benefit holding companies that own a number of subsidiaries in their investment portfolio from which they obtain dividends within two years of acquiring the shares, and then sell the shares to unrelated parties.
Based on the example of the so-called “Estonian CIT,” which was introduced in Poland in a form not resembling the original solution (as the taxpayer must meet a number of requirements to take advantage of it, although these requirements are to be relaxed under an amendment currently being drafted), a certain disturbing tendency may be observed. It consists in introducing new regulations with a number of (unnecessary) requirements, and then withdrawing them so taxpayers can begin to benefit more widely from the new solutions. Although the new regulations can be assessed positively, especially in terms of new exemptions improving the Polish tax environment for businesses, this approach raises many objections and does not seem appropriate in terms of either legislative technique or application of the law.
Sandra Derdoń, tax adviser, Michał Nowacki, legal adviser, tax adviser, Tax practice, Wardyński & Partners