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MLI Convention

Posted on by AdminGWW

As of January 2022, the provisions of the MLI (The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting) Convention entered into force in relation to the agreements concluded between Poland, Chile, Pakistan, Estonia, Croatia, Hungary, Greece and Spain.

What does this mean in practice?

The main modification is the change of the method of avoiding double taxation from the exemption method with progression to the method of proportional credit (so-called tax credit). This method is less favourable for taxpayers. In practice, from 2022 it will cover income earned by Polish tax residents from sources in Jordan, Pakistan and Greece, and from 2023 from Estonia and Spain.

The exclusion method (which has been used until now) is that foreign income is not taxed in Poland. However, it is taken into account when calculating the so-called effective tax rate, which is used to calculate tax on Polish income. The effective tax rate is determined by adding together foreign and Polish income and determining what percentage of the income would be taxed if all income were taxed in Poland ,in practical terms, where between 12% (lower rate) and 32% (higher rate) will be the tax rate.

This also means that if the taxpayer does not earn income from Polish sources, such income is not taxed in Poland.

The tax credit method involves calculating Polish tax on the total income and tax paid abroad, but only up to the amount of tax due on that income in Poland. This means that a taxpayer who receives income taxed at a lower tax rate (in amount) will have to pay additional tax in Poland, up to the amount that would be due on the whole income in Poland.

In practice, this also results in the taxpayer having to pay advance payments on such income in Poland, and may be exempt from such payments on the basis of a decision of the tax office if they demonstrate that their foreign income will be taxed at a higher rate than in Poland.

The entry into force of the MLI Convention also affects income from dividends and the sale of shares in real estate companies (companies of which at least 50% of the assets are real estate located in its country of domicile).

The agreement introduces a requirement to hold shares for at least 365 days in order to apply the profit exemption. Poland does not apply this condition to contracts that already have such a condition (but usually for a longer period).

The convention triggers taxation in the country of residence of the real estate company of the proceeds from the disposal of its shares by a foreign tax resident.

AML obligations

Posted on by Tomasz Piejak

As a result of the amendment of the Anti-Money Laundering and Countering the Financing of Terrorism (AML) Act of 1 March 2018, the Register of Activities for the benefit of Companies or Trusts has been in place in the Polish AML system since 31 October 2021. Entities providing services that qualify as services for the benefit of companies or trusts have been required to obtain an entry in the Register.

Who is affected by the obligation to register?

The obligation to register with the register is incumbent on entrepreneurs who provide services consisting in:

  • creation of a legal person or an organisational unit without legal personality;
  • acting as a member of the board of directors or enabling another person to exercise that function or a similar function in a legal person or unincorporated entity;
  • the provision of a registered office, business or correspondence address and other related services to a legal person or unincorporated entity;
  • acting or enabling another person to act as trustee of a trust created by a legal transaction;
  • acting or enabling another person to act as a person exercising rights over shares for an entity other than a company listed on a regulated market subject to disclosure requirements under European Union law or subject to equivalent international standards.

In practice, special attention must be paid by entrepreneurs who provide (e.g., under a lease agreement) real estate to legal persons or unincorporated organisational entities as their registered office address or as the address at which these entities will conduct their activity or have their correspondence address. Such an activity qualifies as an activity requiring registration.

 

What is the deadline for obtaining an entry in the register?

Entrepreneurs who plan to commence the activities covered by the registration requirement on or after 31 October 2021 should obtain the registration of the Registry before actually carrying out such activities.

In contrast, entrepreneurs trading as companies or trusts before 31 October 2021 had until 30 April 2022 to make an entry.

How to make an entry

Entry into the Register is made on the basis of an application submitted electronically via the ePUAP platform to the Director of the Tax Administration Chamber in Katowice.

The application to the Register must include.

  • name or business name;
  • the number in the Register of Entrepreneurs in the National Court Register, if such a number has been assigned, and the tax identification number (TIN);
  • indication of services provided to companies or trusts;
  • a qualified electronic signature, a trusted signature or the personal signature of the applicant.

A statement of awareness of the criminal liability for making false statements will be included in the application.

Additional requirements imposed on providers of services to companies or trusts

The Act introduces the requirement that the partners, members of the board of directors, persons managing activities in the entity for the benefit of companies or trusts and tangible beneficiaries of the entity providing services to companies or trusts have not been duly convicted of an intentional offence against the activities of state institutions and local self-government, against the administration of justice against the credibility of documents, against property, against economic turnover and interests in civil law transactions, against money and securities, a terrorist offence, an offence committed for financial or personal gain or an intentional fiscal offence.

In addition, the aforementioned persons must have knowledge or experience relating to activities for companies or trusts, which is deemed to be fulfilled in the case of:

  • Completion of a training or course covering legal or practical issues relating to activities for companies or trusts;
  • the performance, for a period of at least one year, of activities relating to companies or trusts, evidenced by appropriate documents.

… what are the penalties for non-entry?

An entrepreneur who carries out activities for the benefit of companies or trusts without obtaining an entry in the register of activities for the benefit of companies or trusts is subject to a fine of up to PLN 100,000.

COVID-19 and the construction industry – force majeure in FIDIC contracts

Posted on by Marta Lipińska

COVID-19 is undoubtedly adversely affecting the construction industry. Investors and contractors are wondering if the pandemic may constitute a force majeure event and how to protect against the adverse effects of the existing situation. In the article below, we will take a closer look at how FIDIC Conditions of Contract govern the issue of force majeure.

 

 

Force majeure as defined by FIDIC

Sub-Clause 19.1 of the FIDIC Yellow Book and Red Book mentions the grounds for classifying specific circumstances to be force majeure. It specifies that force majeure should be understood as an exceptional event or circumstance:

“(a) which is beyond a Party’s control,

(b) which such Party could not reasonably have provided against before entering into the Contract,

(c) which, having arisen, such Party could not reasonably have avoided or overcome, and

(d) which is not substantially attributable to the other Party.”

Several significant conclusions can be drawn on the basis of the foregoing for entities implementing contracts based on FIDIC. First of all, it should be pointed out that force majeure cannot be invoked if the event causing it occurred prior to the contract conclusion and the party invoking such circumstance could have provided against it. This is especially important during the global SARS-CoV-2 virus pandemic. It should be noted that many companies will be submitting bids and concluding contracts despite the pandemic. However, can it be considered that they will be able to invoke force majeure if the pandemic lasts longer than experts suppose? In the light of the provisions of the FIDIC Conditions of Contract referred to above, an answer to this question seems to be negative. Unless specific provisions regarding release from liability, suspending or termination condition or other safeguards are introduced in the contract, contracting authorities will be able to require its implementation despite the virus pandemic. What will be important is that at the time of concluding such contract, the parties were aware of the pandemic. However, this will not apply if the virus-related restrictions result directly from a change in law. In this case, contractors will be able to file respective claims under Sub-Clause 13.7 FIDIC.

An event that a party could have avoided or overcome cannot be considered as force majeure. This condition can be applied, among other things, to the introduction of regulations on remote work, owing to which at least some adverse effects of the pandemic can be avoided. It is obvious that work performed directly at the construction site cannot be made remotely. But what about the design stage, which is part of the obligations of a contractor implementing the contract on the basis of Yellow FIDIC? It seems that in this case it cannot be clearly determined whether the infrastructure design could be developed as part of remote work or not. Therefore, each situation will require a separate, detailed analysis. Also an investor must each time verify whether performance of specific contractual obligations, e.g. handing over a construction site, take-overs of works to be covered, acceptance of subcontracts or final take-overs, could take place despite the SARS-CoV-2 pandemic.

 

Pandemic as Force Majeure

In the light of FIDIC Conditions, however, another issue is worrying. Further part of the Sub-Clause referred to above also includes the following list of situation, which may constitute a Force Majeure:

“(i) war, hostilities (whether war be declared or not), invasion, act of foreign enemies,

(ii) rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war,

(iii) riot, commotion, disorder, strike or lockout by persons other than the Contractor’s Personnel and other employees of the Contractor and Subcontractors,

(iv) munitions of war, explosive materials, ionising radiation or contamination by radio-activity, except as may be attributable to the Contractor’s use of such munitions, explosives, radiation or radio-activity, and

(v) natural catastrophes such as earthquake, hurricane, typhoon or volcanic activity.”

Detailed analysis of these examples leads to the conclusion that the SARS-CoV-2 pandemic situation is not a force majeure event. None of the listed circumstances refers directly to the occurrence of an epidemic, pandemic or change in the legal status associated with the occurrence thereof. However, in order to determine whether an epidemic or pandemic can be considered a force majeure under these conditions at all, one should look at the above mentioned list while taking into account a certain reservation. Namely, this list is only exemplary, which does not mean that another event or circumstance cannot be considered a force majeure, provided, of course, that they meet the definition of “Force Majeure” provided in Sub-Clause 19.1. Therefore, in the light of the FIDIC Conditions discussed, it seems reasonable to consider that the SARS-CoV-2 pandemic may constitute a force majeure, provided that the party invoking it demonstrated that it could not have reasonably secured itself against it before the conclusion of the contract and which it could not have avoided or overcome. The demonstration of the other two circumstances, i.e. the parties’ lack of influence on the SARS-CoV-2 virus, seems obvious.

 

Important time limits

In order to invoke force majeure, the parties to the contract should remember that Sub-Clause 19.2 FIDIC provides that circumstances or events constituting force majeure should be notified to the other party to the contract within 14 days of their occurrence. However, each case should be reviewed individually. What should be in particular verified is whether a given situation is not a manifestation of circumstances other than the occurrence of force majeure. This could then lead to the determination that the contractor has the time limit specified in Sub-Clause 20.1 for the submission thereof, namely 28 days from the date of the event giving rise to the claim.

Looking for examples of dates from which force majeure or another event resulting in a claim could be considered, we may point out to, for example:

  • 2 March 2020 – circumstances specified in the Act on special solutions related to preventing, counteracting and combating of COVID-19, other infectious diseases and crisis situations caused by them;
  • 11 March 2020 – WHO announces a global pandemic;
  • 13 March 2020 – circumstances specified in the Regulation of the Ministry of Health regarding the announcement of an epidemic crisis situation in the territory of the Republic of Poland;
  • 20 March 2020 – circumstances specified in the Regulation of the Ministry of Health regarding the announcement of an epidemic crisis situation in the territory of the Republic of Poland.

Contractors and investors should therefore remember that force majeure does not automatically suspend contract performance. A party invoking force majeure should specify which obligations it is not able to perform or performance of which may be hindered due to force majeure. It cannot be ruled out that these will be all contractual obligations. After specifying such obligations, the party will be exempted from their performance for the duration of force majeure. The second paragraph of Sub-Clause 19.2 FIDIC states explicitly: “The Party shall, having given notice, be excused performance of such obligations for so long as such Force Majeure prevents it from performing them.”

In the context of the foregoing, reference should be made to the regulation provided for in Sub-Clause 19.3 FIDIC. It states that the parties are obliged to make all “reasonable efforts” to minimize any delay resulting from force majeure in the performance of the contract. Therefore, invoking force majeure is not a sufficient argument for suspending works. Despite its occurrence, the parties should perform the contract to the extent that the existence of force majeure does not prevent it. Invoking force majeure itself is not enough. The party invoking it must be able to demonstrate that the existence of force majeure had an impact on the performance of its obligation. The sole announcement of the epidemic is therefore not enough in this case.

 

Force majeure does not suspend payment obligations

Force majeure may not affect the financial obligations of the parties to the contract implemented on the basis of FIDIC. The last sentence of Sub-Clause 19.2 FIDIC provides that force majeure will not apply to the obligations of either party to make payments to the other. Thus, an investor cannot invoke the occurrence of force majeure in relation to the delay in payment of remuneration and the contractor in payment of e.g. contractual penalties. Force majeure will not constitute grounds for suspending the running of payment deadlines specified in the contract.

 

FIDIC vs national legislation in times of crisis

These considerations are based only on provisions of the FIDIC Conditions of Contract, they do not take into account planned changes to generally applicable laws. Parties to the contract should also remember strict limits of time resulting from civil law, which cannot be suspended on the grounds of force majeure within the meaning of the FIDIC Conditions of Contract. As an example of such a time limit, we may consider, inter alia, an objection to subcontracting, which must be submitted within 30 days in a written form to be valid.

 

The article has been written by Marta Lipińska, trainee attorney-at-law at GWW.

 

Tax credit for donors – zero VAT rate for entities providing personal protective equipment

Posted on by Olga Sulewska

The exceptional circumstances which we are facing in connection with the SARS-CoV-2 epidemic result in a multitude of new legislative solutions. These solutions are primarily aimed at facilitating and accelerating implementation of activities aimed at stopping the development of the epidemic. They include tax solutions targeted at those companies who have decided to fight the epidemic by donating various types of measures to contain it, such as personal protective equipment – a basic weapon in the fight against the disease.

 

 

Zero VAT rate on medical devices

The Ministry of Finance announced on Thursday, 12 March 2020, a draft regulation which is to introduce a reduced – zero VAT rate on medical devices within the meaning of the Act on Medical Devices, as well as laboratory glassware, laboratory apparatus, medicinal products, and active substances within the meaning of the Act on Pharmaceutical Law. The new rate will also apply to biocidal products and personal protective equipment.

The reduced rate will only be used for the supply of goods intended for the purposes of combating infection, preventing the spread of, counteracting and combating the effects of the infectious disease caused by the SARS CoV-2 virus. Products subject to the reduced VAT rate include masks, coveralls, shoe protectors, caps and gloves, disinfectants, specialized diagnostic tests for analyzing and detecting pathogens in water, air and soil. They are necessary to fight the epidemic.

 

Limited group of recipients

The authors of the draft specify in the justification that “in the event of a threat to people’s health or even lives, economic entities engage in the donation of goods to public entities whose task is to maintain reserves of goods gathered in the event of a threat to, inter alia, public security, order and health, or occurrence of a natural disaster or crisis. These entities are an essential link in the distribution of products needed by people in the event of these threats.” Such tasks are carried out by:

  1. Material Reserves Agency, which maintains and shares strategic reserves (including medical reserves),
  2. Central Sanitary and Anti-Epidemic Reserve Base, which maintains a permanent reserve and is responsible for the distribution of specific health-related goods intended for healthcare organization in the event of an epidemic crisis situation.

Therefore, donations of the abovementioned products can be made to these two entities. In order to benefit from the preferential tax rate, the donor will have to enter into a written donation agreement with the recipient.

 

What about the donations made before the regulation entered into force?

The reduced tax rate will apply from the date of entry into force of the Regulation until 31 August 2020. The draft regulation, however, provides for the possibility of applying it to donations that were made before the entry into force of these laws, however not earlier than on 1 February 2020. The initial date of the possibility of applying the preference rate correlates with the first warnings of the Chief Sanitary Inspector about the possibility of occurrence and effects of the SARS CoV-2 virus on the territory of Poland.

With regard to the donation made from 01 February 2020 to the date of entry into force of the Regulation, in order to benefit from the preferential rate it will be necessary to conclude an appropriate donation agreement, which in this case may also be replaced by a written confirmation of the donation of specific goods by the donor and the recipient.

 

 

The article written by Olga Sulewska, a 4th year student of Law, assistant lawyer at GWW.

Alcohol for disinfection as the tax-deductible cost

Posted on by Monika Lewińska

In the existing situation associated with the emergence of the SARS-CoV-2 coronavirus threat, many companies equip their offices with alcohol (spirit) for disinfection. This is primarily due to non-availability of other disinfectants. In the context of the foregoing, a question may be asked: can the taxpayer treat such expenses as tax deductible costs?

 

Safety in the workplace is crucial

Regulations of the Labor Code (in particular Article 207 § 2 and Article 304 § 1) provide that employers are obliged to protect health and life of employees and ensure safe and hygienic working conditions. Purchase of alcohol (spirit) for the purpose of disinfecting hands or office space in order to limit the spread of SARS-CoV-2 coronavirus undoubtedly meets these conditions. Expenses made for this purpose mean in fact compliance with basic obligations of the employer in terms of protecting employees against coronavirus infection and its spread in the workplace. Thus, just like the purchase of hygiene products (soaps, towels), a company may charge the purchase of alcohol (spirit) to tax deductible costs.

 

Purchase of alcohol is not always for representative purposes

A claim that the purchase of alcohol for disinfection cannot constitute a tax-deductible cost will not be justified in this case. It is true that expenses for the purchase of alcohol are excluded from tax-deductible costs, however only in the context of performing a representative function. Pursuant to Article 16 (1) (28) of the CIT Act, representation costs, in particular incurred for catering services, the purchase of food and beverages, including alcoholic beverages, shall not be included in tax-deductible costs. However, it is difficult to talk about a cost for representative purposes when buying alcohol, the function of which is to disinfect hands by employees or to disinfect office space in the era of SARS-CoV-2. Therefore, justifiability of expenses incurred for the purchase of alcohol for disinfection purposes (just like other hygienic measures) should not raise objections in the event of any tax audit.

Expenses incurred for the purchase of alcohol for disinfection purposes should be charged to costs other than directly related to revenues. In consequence, they will be deductible at the moment of incurring them (indirect costs). Importantly, the taxpayer (company) will also be able to deduct VAT on such purchase and a respective invoice will be the basis for the deduction.

 

The situation of a single-person business is quite different

The situation is different in the case of a single-person business, i.e. an entity who does not employ employees and conducts business, say, in his or her own flat. Such person will not be allowed to charge expenses incurred for the purchase of alcohol for disinfection purposes (as well as other hygiene products) to tax-deductible costs.

This is due to the fact that tax authorities do not accept charging personal expenses to tax-deductible costs. Personal expenses mean expenses incurred for own needs of a businessperson and not related to the conducted business activity. The easiest way to explain this is that the purchase of hygiene products by a single-person business means fulfillment of his or her personal needs related to health protection and he or she would have also made the same purchase without being a businessperson (as a natural person). For this reason, expenses incurred for the purchase of hygiene products by a single-person business will not be charged to tax-deductible costs. Therefore, the single-person business will not deduct VAT on such purchase.

 

Unusual circumstances, unusual approach

We have all found ourselves in undoubtedly incomparable circumstances. Currently, special obligations are imposed on employers who are obliged to ensure safety of their employees. In such a situation, even the tax authorities, which until now did not allow charging of alcohol purchases to tax-deductible costs, must change their approach. Unusual circumstances require unusual solutions.

 

 

 

Monika Lewińska, a lawyer at GWW, is the author of the article.

Tax residency during lockdown

Posted on by Aldona Leszczynska-Mikulska

Based on our experience and solutions introduced by some EU countries, the following provides details of the impact that COVID-19 has on the tax residency status of affected individuals. We will devote a separate post addressing the issue of corporate tax residence throughout this extraordinary situation.

 

 

Tax residence of individuals

The number of days that we spend in one country during a tax year is one of the most important factors taken into account when determining the place of residence of a natural person for tax purposes, i.e. tax residence. Due to movement restrictions, for example, closing of borders and suspension or limitation of air traffic, many people are currently in a country where they do not have – or did not plan to have in 2020 – tax residence. Inability or reluctance to move can cause at least two types of complications. First of all, it may turn out that during a tax year a person stays too long in a country, for example, Poland, where they did not plan to be resident under normal circumstances. The second, potentially problematic situation is the inability to demonstrate a sufficient relationship or a sufficient number of days of stay in the country in which, before the COVID lockdown, a person was trying to obtain tax residence.

 

The situation is extraordinary, but…

Tax residence is more a matter of fact than of law. National law and international tax avoidance agreements only set out certain norms to be assessed, mainly based on establishing a person’s relationship with the country where he lives. To put it simply, tax residence is determined by all the circumstances that make up the so-called centre of vital interests, for example, the family home, place of residence of the partner or children, economic relationships, place of regular use of medical care, health insurance or belonging to organizations and clubs.

Due to global reports about the rapid spread of the COVID-19 pandemic, some decided to return to countries where they did not declare tax residence before the crisis, but with which they still remained closely associated due to family, their own home or the right to use public health care. Others stayed where they were when the borders closed, but they did not necessarily plan to stay there permanently.

As a result, after the first weeks of the restrictions, the probability that persons who oscillate between two jurisdictions on a regular basis will necessarily exceed the time limits imposed in this respect by national law and we cannot be certain that such restrictions will end anytime soon.

 

OECD residency conflict settlement rules

Most of the double taxation agreements concluded by Poland are based on the OECD Model Convention on income and wealth tax. Article 4 of the Convention indicates that a natural person domiciled in a Contracting State is a person who, under the law of that State, is taxed there because of his place of residence, permanent residence or other criterion of a similar nature. However, this term does not include persons who are liable to tax in that country only in respect of income from sources in that country or from property situated in that country.

 

What does it mean?

The provision sets out the criteria for liability for tax in a given jurisdiction as certain facts. The definition aims to take into account various forms of personal ties with the state, which in its own legislation sets the basis for unlimited tax liability.

The key to resolving disputes arising in the course of determining the appropriate tax residence are the so-called tie break rules. These are conclusive norms determining how to consider the tax residence of a natural person, who may potentially be domiciled in two contracting countries. More on individual tie break rules: https://read.oecd-ilibrary.org/taxation/model-tax-convention-on-income-and-on-capital-condensed-version-2017_mtc_cond-2017-en#page32

 

No emergency solutions in the event of “force majeure”

It should be emphasized that neither the provisions of the OECD Model Convention applied in Polish tax avoidance agreements, nor the so-called The MLI Convention of 2016 provide for emergency solutions in the event of events caused by “force majeure” that could hold taxpayers in a given country regardless of their plans or intentions.

The breath of optimism is the OECD’s position on the interpretation of the aforementioned tie break rules, in a situation where a given individual through an unplanned, extended stay would admit the conditions of being a tax resident of a given country, however, it would need to be caused by restrictions on free movement.

First of all, if the stay in a given country was for short-term purposes , such as holidays or business trips, and then extended due to the crisis caused by the COVID-19 pandemic, one should not attribute to such a place of stay the attribute of a “permanent home” of a given person. However, if a given natural person has close relationships to both countries and their tax residence is determined on the basis of an assessment of the premise for staying in these countries, then the OECD recommends that the competent authorities take into account the extraordinary circumstances and appropriately extend the period which usually compares the length of stay of a person in individual countries.

 

What’s next?

The OECD recommendations are only guidelines without binding force on the authorities of individual countries. Moreover, they only concern situations in which an agreement on the avoidance of double taxation has been signed between states, and preferably in a form similar to that proposed under the OECD Model Convention.

Some countries, for example, Great Britain, Ireland and Australia have already decided to issue guidelines for natural persons according to which a certain length of stay in a given country, caused by known extraordinary circumstances, will not be taken into account when determining that person’s tax residence. As the lockdown is extended, evidence must be gathered by all available means that directly or indirectly confirms the intention to maintain permanent residence in a particular place. For example, the appointment of a representative who will deal with matters relating to property in the country of residence and through him maintain constant contact with tax authorities, persons, institutions in that country.

 

 

 

 

 

Aldona Leszczyńska-Mikulska, attorney-at-law, partner managing the Private Client team at GWW

Jan Wnorowski trainee attorney-at-law, member of the Private Client team at GWW

Relief for residential purposes in Poland – how does it work from January 1, 2019?

Posted on by Tomasz Piejak

From January 1, 2019, changes regarding the so-called residential relief, i.e. the provisions of the Polish Personal Income Tax Act, related to tax exemption on income from the gainful disposal (exchange) of real estate, entered into force. The new regulations make it easier to obtain an exemption.

 

How did the residential relief work before the amendment?

 

The tax obligation on the sale or exchange of real estate arises when the sale (exchange) of real estate or property rights is not made as part of business operations and takes place before the expiry of five years from the end of the calendar year in which the real estate was acquired or constructed. If the sale (exchange) occurs after this date, it is tax neutral when it comes to income tax. However, if it occurs before the expiry of the said period, the gain resulting thereof will be taxable. In such cases it is possible, though, to benefit from the so-called residential relief.

 

As a result, income from the gainful disposal (exchange) of real estate in the amount that corresponds to the product of the income and the share of expenses incurred for own residential purposes in the revenue from the gainful disposal (exchange) of real estate and property rights if, beginning on the day of gainful disposal, no later than within three years (until the end of 2018 it was two years) following the end of a tax year in which the gainful disposal occurred, the revenue earned from the disposal (exchange) of real estate or property right was disbursed on own residential purposes.

 

The achievement of own residential purposes should be understood as providing oneself with a “roof over one’s head” necessary for life purposes and constituting a kind of center of vital interests. In practice, the allocation of the entire income obtained from the sale (exchange) of real estate for own residential causes that all income will be exempt from tax.

 

What’s new from January 1, 2019?

 

A major change in favor of taxpayers is the extension of the deadline for earmarking the proceeds from the sale (exchange) of real estate for own residential purposes from two to three years from the end of the tax year in which the sale (exchange) took place. On the other hand, the provisions clarify that within this period the right to real estate or a specific property right should be acquired, so that the expenses incurred for own residential purposes are included in the relief.

 

In addition, taxpayers were granted the right to count expenses for the reconstruction or renovation of real estate that were incurred before the acquisition of real estate as expenses for their own residential purposes. The condition is that the taxpayer becomes the owner of the real estate within three years from the end of the tax year, in which the sale (exchange) of the previous real estate took place.

 

It should be remembered that even if, due to the relief, the taxpayer reaches 100 percent income tax exemption, it is still necessary to file a tax return indicating the amount of relief for residential purposes. If after three years it will turn out that the revenue from the sale (exchange) has not been spent on residential purposes, it will be necessary to correct the tax return and pay tax due together with interest on tax arrears.

 

Tomasz Piejak, trainee attorney-at-law, and Wojciech Jaranowski, Private Client Practice, GWW

 

Tax benefits resulting from operating in a Special Economic Zone in Poland

Posted on by Tomasz Piejak

Special Economic Zones (SEZ) offer a number of facilities and tax preferences for enterprises operating in their area. What tax benefits can the companies operating within them count on?

 

What are SEZ?

 

The concept of SEZ was introduced by the Polish Act of October 20, 1994 on special economic zones. These are areas administratively separated in which business activity is carried out on preferential terms. There are currently 14 such zones in Poland. They were established to support the development of specific areas of economic activity, create new technologies, promote exports and create new jobs. Both Polish and foreign entrepreneurs can operate on them.

 

For an enterprise to operate in the SEZ, it must first obtain a permit issued by the zone manager acting on behalf of the minister competent for the economy. The permit specifies, inter alia, the subject of activity, the minimum level of employment and the minimum level of investment expenditure. The permit may be issued on the basis of e.g. an investment project planned for implementation in the zone. Obtaining the exemption is also connected with the need to meet certain additional requirements regarding the minimum investment value (€ 100,000) and the duration of the investment (3 years).

 

Benefits in income taxes

 

The regulations provide for an exemption from income tax in relation to the income generated from economic activity conducted in the zone.

 

The amount of income subject to the exemption depends on the investment expenditure incurred in the zone, the location of this zone, the size of the enterprise, as well as the number of new employees. The limit is calculated by multiplying two elements:

  • eligible expenditures

   and

  • the aid intensity indicator

 

Eligible expenses may be either investment expenditure (e.g. purchase of fixed assets or intangible assets) or two-year labor costs of newly hired employees, i.e. employed after obtaining a dismissal, but no later than 3 years after the end of the investment. In turn, the aid intensity indicator is a fixed percentage assigned to a given region of Poland on the basis of the criterion of investment attractiveness. It ranges between 10 and 50 percent.

 

Real estate tax exemption

 

Activities in the SEZ also allow the use of property tax exemption. The exemption is granted to entrepreneurs who have received a permit to operate in the SEZ. It applies to land, constructions and buildings which are occupied for conducting business activities within the zone during the period of validity of the said permit.

 

Tomasz Piejak, trainee attorney-at-law, and Wojciech Jaranowski, Private Client Practice, GWW

Polish taxation rules for virtual currency exchange

Posted on by Tomasz Piejak

The development of virtual currencies and an increase in the number of transactions related to them can be observed in recent years. Unfortunately, Polish tax law has not kept pace with the development in this field so far, which was expressed by the lack of regulations taking into account the specificity of transactions using cryptocurrencies. Ergo, there is a lot of doubts about the way tax provisions should be interpreted. Starting from January 1, 2019, the legislator put an end to these doubts when it comes to income taxes. Currently, work is underway to finalize the issue of taxation on the sale or exchange of cryptocurrencies with tax on civil law transactions.

 

Changes since 2019 – income taxes

 

Since January 1, 2019, amendments were introduced into the Polish Income Tax Acts to dispel doubts regarding the taxation of profits obtained from trading cryptocurrencies. Revenues from trading in virtual currencies are revenues from capital gains, which are taxed at a rate of 19%. In relation to natural persons, this also applies when the taxpayer obtains these revenues as part of business activities, so it is not possible to choose taxation on general principles at the rate of 18% and 32%.  The exception is natural persons conducting business activity, consisting in the provision of services, inter alia, in the field of exchange between virtual currencies and means of payment, and exchange between virtual currencies. Revenues of such taxpayers still do constitute revenues from economic activity taxed, according to the choice, on general principles or at a 19% flat rate.

 

Revenues from cryptocurrency trading include, among others, revenues from their sale, i.e. exchange into legal tender. Payment with such currencies for a good, service or property right that is not a virtual currency and settlement of other obligations is treated as a sale of virtual currencies. The taxable base is income, i.e. revenue less tax deductible costs. Documented expenses incurred for the purchase of cryptocurrency, as well as costs related to its sale are considered to be these.

 

What about tax on goods and services (VAT)?

 

Professional – and therefore having the features of a certain organization and continuity – trading in cryptocurrencies is in the light of the Act on Goods and Services Tax, the provision of services as a part of business operations. Therefore, it is subject to tax on goods and services (VAT). At the same time, however, it is an activity exempt from this tax. Consequently, the taxpayer is not able to deduct input tax in the case of the purchase of goods and services related to the business of mining and selling cryptocurrencies.

 

Tax on civil law transactions

 

The sale or exchange of cryptocurrencies outside of professional trading – not subject to goods and services tax (or exempt from it) – should in principle result in the obligation in tax on civil law transactions at a rate of 1%. However, at present, the Ministry of Finance, pursuant to the Regulation, ordered to suspend the collection of tax from taxpayers purchasing cryptocurrencies through a sale or exchange contract in cases where the contracts underlying the transaction are concluded between July 13, 2018 and December 31, 2019. Until then, it is planned to introduce clear statutory exemption of the sale or exchange of cryptocurrencies from tax on civil law transactions. The amendment is to enter into force from January 1, 2020, which will ensure continuity in tax-free transactions related to cryptocurrency after the expiry of the abovementioned Regulation by the Ministry of Finance.

 

Tomasz Piejak, trainee attorney-at-law, and Wojciech Jaranowski, Private Client Practice, GWW

Consequences of failure to submit information to the Central Register of Beneficial Owners in Poland

Posted on by Tomasz Piejak

Starting from October 13, 2019, the provisions introducing the Central Register of Beneficial Owners will enter into force in Poland, in response to the implementation of the EU Directive on preventing the use of the financial system for money laundering or terrorist financing. Polish commercial law companies entered into the Register of Entrepreneurs of the National Court Register before this date have time to submit information about their beneficial owners by April 13, 2020. Companies entered into the Register of Entrepreneurs after the said date must do this within 7 days of entry in the Register of Entrepreneurs. It cannot be excluded that the majority of entities obliged to report information will face the problem of correct identification of their beneficial owners Late or incorrect submissions may have legal consequences.

 

Administrative fines

 

Pursuant to the new provisions, commercial law companies that have not complied with the obligation to report information about their beneficial owners in a timely manner are subject to a fine of up to PLN 1m (approx. € 250k). In other words, if the information is not reported to the Register by April 13, 2020 – in the case of entities entered in the Register of Entrepreneurs before October 13, 2019 – or 7 days from the entry of a given company in the Register of Entrepreneurs (if the entry is made on October 13, 2019 or later), a large fine may be imposed on the company.

 

Given that this penalty is an administrative penalty, it should be expected that the body imposing it, although acting within the framework of administrative discretion, will be guided by the directives indicated in the Code of Administrative Procedure. Certainly the amount of the penalty should be adequate to the gravity and circumstances of the violation. One of the circumstances that should affect the penalty is that the company is a subsidiary in the international capital structure. In practice, persons representing such a company may have troubles in obtaining information about a natural person at the top of the structure and exercising ultimate control over it. In such situations, one should rather expect the authority to impose a small penalty, of course, provided that the company proves that it is unable to obtain information despite all due diligence. It cannot be ruled out that the authority will refrain from imposing a penalty if the company notifies the Minister of Finances about the violation of law and that it is unable to remove it within the prescribed period.

 

Criminal responsibility

 

In addition to imposing a financial penalty, persons representing the company may incur criminal liability for submitting a false statement in connection with submitting information to the Register. The associated prison sentence may be from 6 months to 8 years. However, the court may (although it does not have to) apply extraordinary mitigation of punishment, and even withdraw from it, if the perpetrator voluntarily corrects a false statement before settling the case. The minimum condition for committing a crime is the knowing or anticipating by the perpetrator of false or incomplete submission of information about beneficial owners and at the same time accepting this state. Therefore, persons reporting information to the Register should refrain from this in case of doubts as to the veracity of the data.

 

Civil liability

 

In addition, persons submitting information on beneficial owners and their updates bear civil liability for damage – also through unintentional fault as a result of negligence – caused by submitting false data to the Register, as well as failure to report data and changes of data covered by the entry in the Register within the statutory period, unless the damage occurred due to force majeure or exclusively through the fault of the injured party or a third party for which the person making the notification is not responsible. It is a matter of damage in the broad sense of the word, and therefore damage to both material and non-material nature. The manifestation of damage may be the inclusion in the Register – which is currently public – of the data of a person who is not in fact the real beneficial owner of a given company.

 

It is worth to be well prepared

 

The list of consequences of untimely or unreliable reporting of information to the Registry should now prompt persons representing Polish commercial law companies to verify and obtain the required information about beneficial owners of these companies. Although entities already registered in the Register of Entrepreneurs of the National Court Register have time to submit information by April 2020, it is better now to protect themselves against possible sanctions. It may turn out that obtaining true and complete information will not be as easy as it seems.

 

Tomasz Piejak, trainee attorney-at-law, and Piotr Trzebicki, Private Client Practice, GWW