As of January 1st 2015 some significant amendments to the Corporate Income Tax Act will come into force. Two of them are crucial and will apply to most of the tax payers – the CFC (Controlled Foreign Corporations) rules and changes in the thin capitalization regulations.
Controlled Foreign Corporations
The most significant change is undoubtedly the introduction of the concept of controlled foreign corporations and their taxation. Those affected by the new regulations will be companies established in:
- so-called tax havens (as defined in Regulation of Ministry of Finance) or,
- countries, with which neither Poland nor EU concluded an international agreement on exchange of tax information or,
- in any other country, if
- a Polish tax resident (legal or natural person), has continuously for at least 30 days, directly or indirectly, at least 25% of the share capital or voting rights in the control bodies of the company, and
- the CFC generates mostly (at least 50%) passive revenues (interests, royalties, dividends)
- and at least of such incomes is taxed (in the country of seat of CFC) with tax rate lower than 14,25%.
In above-mentioned cases, the profit of CFC attributable to the period in which Polish tax resident had shares in it, in proportion to the size of these shares, after deduction of dividends received from CFC, as well as the amount received in case of possible sale of such shares, will be subject to 19% tax rate in Poland.
As CFCs will be subject to Polish income tax, additional documentation obligations are imposed. Taxpayers are required to keep a register of CFCs and at the end of the tax year, are obliged to record/book all activities of CFC in a register. Such register needs to allow to determine the amount of income, the tax base and the tax due for the tax year. In fact, the taxpayer will have to make double accounting records in accordance with Polish tax law. The tax authority may request from the taxpayer the above-mentioned registers and records and taxpayer is obliged to provide them within 7 days. If such a requirement is not met, or if the documents provided will not allow to determine profit of the CFC, the tax authority may estimate such an income taking into consideration a scope of the CFC’s activities.
The new rules do not apply, if the CFC runs genuine business activities and is subject to income tax on all its income in the EU or EEA country. The legislator indicates what factors are taken into account when verifying a nature of business carried out by CFC (whether it is genuine or not) and these are as follows:
- independence in conducting the basic economic functions by using of CFC own resources, including the local management team,
- lack of established structures which operate in a manner that not reflect economic reality,
- existence of commensurability between the scope of activities conducted by CFC and actually owned by it premises, personnel or equipment.
The amendment of thin capitalization rules primarily extended a group of entities to which limitation will apply. From January 2015 a direct as well as an indirect share of a lender in the capital of a borrower will be taken into account. These provisions shall also apply if the min. 25% of the shares/stocks of a lender and a borrower will belong directly or indirectly to another single entity. Indirect participation will be determined in the same way as in the case of already existing regulations on related entities.
The value of the company's (borrower) debt will not be compared, as it was before, with the value of the share capital, but with the amount of own capital (equity) of the company with some reductions. A debt equity ratio of 1:3 used so far, will be replaced with a 1:1 proportion. Thus, only in case where the value of the debt exceeds the amount of equity, the amount of tax deductible interest will be reduced.
Lastly, a new alternative method for calculating of tax deductible interest was introduced. In accordance with amended provisions, in a given tax year as tax deductible the amount of interest on loans (received from both related and unrelated parties) may be recognized as tax deductible, but not exceeding the value resulting from the following formula:
(rate. % + 1,25 p.p.) x TV = TDI
rate. % + 1,25 p.p. - NBP reference rate valid at the last day of a year preceding the fiscal year increased by 1.25 points,
TV - a tax value of assets within the meaning of accounting regulations, including recognized in accordance with a nominal value the amounts of loans, with the exception of intangible assets as of the last day of the year,
TDI – amount of interest on the total amount of loans received, which sets up a limit of interest which can be recognized as tax deductible.
The amount of interest which can be recognized as tax deductible in a given tax year, cannot exceed the equivalent of 50% of the operating profit of the taxpayer, determined for the tax year in accordance with the regulation of Accounting Act.
It is also important that, as a rule, interest on loans not recognized as tax deductible in a given tax year may be recognized as such in subsequent, consecutive five fiscal years, in accordance with the rules and within the limits laid down in those provisions
If the taxpayer wishes to use of an alternative method of calculating tax deductible interest, it has to inform an appropriate tax office by the end of the first month of a given tax year and may resign from this method after three years of use. In case the alternative method for calculating interest increasing tax costs has been applied, the standard thin capitalization rules are not any longer in use.
There are transitional provisions concerning the thin capitalization. The amended regulations will not apply to loans where the principal has been transferred to the borrower till the end of 2014. However, the taxpayer will have a right to choose an above mentioned alternative method of calculating tax deductible interest even in relation to the loans, which were concluded before January 1st 2015.