Letterbox Companies Poland's Next Target in Fighting Avoidance

By Jan Stojaspal

Snapshot

Both corporate income taxpayers, wealthy individuals targeted
Transactions dating to 2011 face scrutiny

The Polish finance ministry has warned that it will take a closer look at corporate income taxpayers with business operations abroad to assess whether profits from these operations should be taxed in Poland using rules regarding effective place of management.

Foreign subsidiaries will be of special interest, particularly those with the appearance of a letterbox or conduit company, tax practitioners said.

And while the June 12 guidance primarily targets domestic taxpayers using special purpose vehicles (SPVs) abroad, it could also apply to Polish subsidiaries of foreign multinationals on the rare occasion they, for example, serve as headquarters for regional operations, Michal Maj, a senior manager in the mergers and acquisitions tax team of PwC Poland, told Bloomberg BNA in a June 15 interview.

“This should be, first of all, a concern to Polish companies with subsidiaries abroad,” he said. “In the case of multinationals, the question is whether they have a subsidiary in Poland that can be considered an effective place of management for companies in other jurisdictions.”

"Based on my experience, this is actually a rare situation," he added. "Nevertheless, I have come across such situations. For example, Poland, in some cases, is treated as headquarters" for all central and Eastern European operations, "and in such a case certain decisions are taken here in Poland for whole CEE."

And if that is the case, companies need to be prepared to provide tax authorities with "as much evidence as possible to demonstrate the business purpose of inserting certain companies into the global corporate structure," he said.

Three Warnings Since May

The guidance, the finance ministry's third warning since May to highlight different forms of aggressive tax-planning practices, is also intended for wealthy individuals, but taxpayers need to keep in mind that Poland's five-year statute of limitations allows the tax authorities to probe as far back as 2011, the tax practitioners said.

In the first of the three warnings—dated May 8—the finance ministry singled out a closed-end mutual fund trying to avoid paying tax on income from a tax-transparent partnership by way of a bond issue, which made it possible to shift the fund's stake

in the partnership to a special purpose vehicle and to declare the vehicle's revenue as bond income, which is tax-exempt.

In the second warning, issued May 22, the ministry cautioned against using enterprise transformations for aggressive tax planning, highlighting the specific scenario of two companies using an intermediary company to create a reduction in income taxes, also known as a tax shield, via company goodwill.

The latest warning takes aim at both individuals and legal persons "enticed by promises of tax savings by purportedly moving their operations to another country," the finance ministry wrote. In addition, situations where Polish taxpayers register a company in a neighboring country to save on value-added tax while purchasing, for example, a sports car will also come under scrutiny.

According to the finance ministry, the typical scenario covered by the warning is a Polish taxpayer with an SPV in a lower-tax jurisdiction—a so-called conduit or letterbox company—and using it to optimize its tax burden in Poland by pretending the SPV is the actual seat of management and therefore subject to local taxes.

To determine whether a corporate income taxpayer falls within the scope of the warning, one of two factors must be met: a registered office or place of management in Poland, according to the finance ministry.

Determining whether a company has a registered office in Poland is easy enough, but conclusively establishing a place of management could be difficult, as it's subject to interpretation, the tax practitioners said. And it's made all the more difficult by the finance ministry pushing for an interpretation that is as broad as possible, they added.

"Determining the place of management is not only a formal process," the finance ministry wrote in the warning. "An evaluation to determine the place of management ... should not be restricted to claiming, for example, that a document or resolution of the managing body was signed outside Poland. A document marked as having been signed in a foreign country can be assessed as to whether the circumstances connected with drawing up such document indicate that the decision-making process actually took place abroad."

According to the guidance, signs that an SPV's seat is actually not the place of management include:

having no documentation of tasks performed by SPV's management board,
lacking local contact information for SPV's management board,
having no accounting, corporate or legal documents kept at the SPV's office,
performance by the SPV's management board members of similar functions as services for other clients,
the signing of the SPV's decisions, agreements and minutes from meetings mainly via intermediaries, or
outsourcing by the SPV of the majority of its core functions, as implied for example by the broad use of domiciliation services.

Individual Entrepreneurs, Small Businesses

The warning "primarily concerns individual entrepreneurs and small businesses from Poland," Piotr Wyrwa, a tax consultant with RSM Poland, told Bloomberg BNA in a June 19 interview. "It is commonly known in Poland that we have a lot of advertisements suggesting to move your business to the Czech Republic and Slovakia, for example, and pay lower taxes."

"The typical scenario when a foreign multinational wants to start doing business in Poland is that it sets up a new capital company in Poland, and all revenues obtained by this company should be taxed in Poland," he added. "There is no place to assess additional incomes from other companies from other countries. I don't think big business should worry a lot about this warning, unless they followed such tax optimization scheme in the past."

Maria Kukawska, a Warsaw-based tax adviser and partner at Stone & Feather Tax Advisory, agreed.

"I wouldn't say that this one is actually the scariest thing that could happen to a multinational in Poland," she told Bloomberg BNA in a June 16 interview. "I believe the ministry will concentrate on the companies set up by Polish individuals rather than MNEs, as only in this case they will be able to prove that the effective decisionmaking took place in Poland. MNEs, of course, also use such foreign entities, but as there is no effective place of management in Poland, there's no gain for the Polish finance ministry in reclassifying such an entity."

Still, the warning is significant, as a reminder of the ministry's continued pursuit of aggressive tax-planning schemes, Kukawska added. "I would say that all those warnings just show that any tax optimization rules are very high on the agenda of the Ministry of Finance, and that anything that concerns optimization now requires opinions of lawyers before any steps are made," she said.

To contact the reporter on this story: Jan Stojaspal in Prague at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com