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New rules for collecting withholding tax in Poland – again partly deferred

Posted on by Tomasz Piejak

The amendment to the provisions of the Polish Personal and Corporate Income Tax Acts has brought a number of obligations imposed on entities making payments such as, among others, dividends, interest, royalties and fees for certain intangible services. These responsibilities include verification if a given payment qualifies for the exemption or application of preferential withholding tax rates. In the case of tax remitters affected by the provisions of the Corporate Income Tax Act, the entry into force of some provisions has been postponed once again – this time until January 1, 2020.

 

How has it been so far?

 

Until now, entities making payments to foreign recipients, including dividends, interest, royalties and remuneration for certain intangible services, acting as tax remitters, could not have collected withholding tax in connection with exemption under domestic law or double tax treaties or collect tax at preferential rates resulting therefrom only after obtaining from recipients valid tax residency certificates. These are certificates of the place of a taxpayer’s place of residence or registered office for tax purposes issued by a competent tax administration authority.

 

New rules – payments up to PLN 2m in a given year

 

The new rules change the rules of the game. If receivables qualifying to the categories giving rise to the withholding tax obligation, paid to the same recipient, do not exceed an amount of PLN 2m in a given year, a tax remitter will be obliged to collect withholding tax at a rate provided for in the Polish regulations (currently 20 or 19 percent in the case of dividends), bypassing e.g. provisions of double tax treaties in force, even if these treaties provide for more favorable tax rates or indicate that receivables are not subject to tax in Poland. However, a tax remitter may not withhold tax or apply a more favorable rate if they receive a tax residency certificate from a recipient and at least a statement on the status of beneficial owner, ergo receiving a payment for their own benefit and deciding on its intended use, not functioning e.g. as an intermediary or trustee and conducting real economic activity.

 

On the other hand, if receivables paid to the same entity exceed an amount of PLN 2m in a given year, a tax remitter will have two options. According to the first of these, they will have to collect (and pay to a tax office’s account) withholding tax on the surplus over an amount of PLN 2m on the terms provided for in Polish law. The second option allows a tax remitter to act as in the case of payments not exceeding PLN 2m in a given year, provided that an additional statement is submitted. This statement should include a declaration that a tax remitter has documents required by law not to collect tax (in particular a tax residency certificate) and after verification with due diligence they have no knowledge justifying the supposition that there are circumstances excluding the possibility of not collecting tax or applying a more favorable rate resulting from double tax treaties.

 

Such statement by a tax remitter is optional. In the absence of it, they will be required to collect withholding tax on the excess over PLN 2m bypassing provisions of domestic law or double tax treaties. However, this does not exclude the possibility of obtaining later a tax refund at the request of a recipient (taxpayer) or tax remitter, if the latter paid tax from their own funds and incurred the economic burden thereof. The tax refund will be preceded by verification by the tax authority of the legitimacy of applying the exemption or a more favorable tax rate.

 

In the case of improper collection or lack of payment of withholding tax on a tax office’s account, a tax remitter is responsible for this tax with all their property and in the event of irregularities, they are obliged to pay a correct amount of tax together with interest for delay. Moreover, if a declaration made by a tax remitter turns out to be untrue, an additional 10 or 20 percent tax liability may be imposed on them, calculated on an amount due for which tax remitter has not collected tax or applied a more favorable rate. Submission of a false statement may also result in a fine of up to 720 daily rates, imprisonment or both, together, and in cases of minor importance, the fine itself for a tax offense.

 

In addition, if an amount of PLN 2m is exceeded in a given year, a tax remitter may apply withholding tax exemptions resulting from domestic regulations implementing the so-called Parent-Subsidiary Directive and the Interest and Royalty Payments Directive (payments of, among others, dividends, interest and royalties between entities meeting additional participation requirements) only upon receipt of a valid opinion on the application of the exemption by the tax authority.

 

Deferral of some provisions

 

In the case of tax remitters who are natural persons conducting business activity, the new rules are fully applicable from July 1, 2019. However, in relation to tax remitters covered by the provisions of the Polish Corporate Income Tax Act, the application of some provisions –  in the scope of the obligation to collect tax bypassing provisions set forth in double tax treaties or other special provisions – has been postponed again. The originally deferred provisions were to apply from July 1, 2019. This time the rules are supposed to enter into force on January 1, 2020.

 

Notwithstanding the foregoing, from January 1, 2019, all tax remitters are required to carry out verifications with due diligence when determining if a given payment qualifies for not collecting withholding tax, in accordance with the provisions of domestic law or double tax treaties, or for collecting tax at a more favorable rate. Due diligence procedures require verification of a recipient’s status in terms of whether they meet the conditions allowing to recognize them as a beneficial owner.

 

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

Does a holding company run a (real) economic activity?

Posted on by Tomasz Piejak

So far, the issue of holding companies conducting real economic activity has not been subject of lively discussions in Poland. Nevertheless, the provisions introduced by the legislator as a weapon to fight tax avoidance, in particular the provisions on controlled foreign companies (CFC) and the new rules for collecting withholding tax, require dotting the i’s and cross the t’s in this respect. The conclusion should be simple. Holding companies cannot be excluded from the group of entities conducting actual economic activity. However, they must have a sufficient material and personal substrate, or the so-called economic substance.

 

The essence of the problem

 

The regulations on controlled foreign companies (CFC), which have been in force in Poland since January 1, 2015, have introduced legal and tax fiction, according to which a Polish taxpayer should include in his tax base income of a foreign entity being a separate income taxpayer, at a rate of 19 percent, in the part corresponding to the possessed rights to participate in the profits of that entity.

 

The regulations on CFC have undergone numerous modifications over the years, including the exclusion of their application. In the current legal status of these provisions – except for the obligation to keep a register of controlled foreign companies – does not apply if a controlled foreign company, subject to taxation on its entire income in an EU Member State or belonging to the EEA, carries out significant real economic activity in that country.

 

Subsequently, the provisions indicate a sample catalogue of criteria that should be taken into account when assessing whether an entity conducts actual economic activity. In brief, they come down to the requirement for a material and personal substrate (premises, equipment and staff) allowing third parties to objectively determine the physical presence of an entity in a given country. It must be commensurate with the activity carried out, and at the same time the activity must have an economic justification and must not be clearly in conflict with the general economic interests of an entity.

 

Regarding the provisions on withholding tax collection, the entry into force of which has been partially deferred until January 1, 2020, these provisions extend the scope of tax remitters’ obligations in verifying the legitimacy of using exemptions and preferential withholding tax rates in connection with the payment of e.g. dividends, interest and remunerations for certain intangible services. The settlement of tax in connection with such payments is the responsibility of a tax remitter, i.e. a person or entity that makes them – if they are a legal person, an organizational unit without legal personality or a natural person who is an entrepreneur.

 

Without entering into details, a tax remitter is required – from January 1, 2019 as part of due diligence procedures – to verify that a recipient of a claim is its beneficial owner within the meaning of the Polish Income Tax Acts. However, after the entry into force of temporarily deferred provisions, the fact that a recipient of receivables has the status of their beneficial owner will be a condition for a tax remitter’s option not to collect or apply preferential withholding tax rates.

 

The problem is that one of the structural elements of the definition of beneficial owner is the requirement for a recipient to conduct the real economic activity. At the same time, the legislator clearly indicates that when assessing whether an entity conducts actual economic activity, one should rely on the same criteria that apply to CFC.

 

Holding as a form of conducting (real) economic activity

 

Holding is a form of capital concentration and simplification of the corporate structure. Its essence is managing by one entity (in principle a company) other entities, coordinating their activities and strategic or organizational planning thanks to capital or personal dependencies.

 

It is difficult to find reasons why holding companies should be excluded from the group of entities conducting the economic activity. The Polish Corporate Income Tax Act – unlike the Personal Income Tax Act – does not contain a definition of economic activity. However, it is included in the Tax Ordinance and it seems that this definition should apply to the conduct of economic activity by legal persons and other entities subject to corporate income tax. It has a wide scope, broader than the definition provided for in the Polish Law of Entrepreneurs.

 

The Ordinance indicates that economic activity should be understood as any gainful activity carried out on one’s own behalf and on one’s or someone else’s own, even if other Acts do not classify this activity as economic activity. As a result, the risk of not including some of the economic activity manifestations in the definition has been reduced.

 

Of course, the activity of a holding company – in order to be considered as an economic activity – cannot be limited to only passively benefiting from ownership rights (e.g. receiving dividends). The company should actively participate in the management of subsidiaries.

Another issue is whether a holding company’s activities are real. Here, the criteria mentioned earlier are at stake, which in essence boils down to determining whether there is a sufficient material and personal substrate that actually helps the entity in conducting holding activities.

 

By its very nature, such activities generally require a large capital commitment with relatively low personal involvement. Therefore, it should be assumed that a company’s premises, equipment and personnel should commensurate with the scale of its operations, i.e. that it can manage subsidiaries in an efficient and independent manner.

 

What does the legislator say?

 

Currently applicable regulations do not provide an unambiguous answer to whether holding companies can be treated as conducting economic activity. However, there are signals indicating that the Ministry of Finance recognizes a holding activity as an economic activity. Such a signal is a draft of explanations regarding the rules for collecting withholding tax. In these explanations we read that in practice there will be different premises for conducting actual economic activity by production/ commercial and service companies as well as companies dealing with broadly understood financial activities – e.g. investment or holding activities.

 

This issue cannot be considered in isolation from the broadly understood European acquis. The Code of Conduct Group (Business Taxation) issued guidelines stating that the establishment of a holding company, like any other entity, may have legitimate business reasons. It cannot be ruled out that such a company does not conduct (real) economic activity. However, it must meet the criterion of real economic activity, which means objective elements such as premises, staff and equipment, and the criterion of substantial economic presence, which refers to the proportionality of assets held to type and scale of activity, i.e. whether the resources held are quantitatively and qualitatively adequate to the services rendered. Similar conclusions follow from the case law of the ECJ and the courts of EU Member States.

 

How will it finally be?

 

The Polish rules undoubtedly lack an unequivocal answer to the question of whether a holding company can be considered as conducting economic activity. The first signals in the form of a draft explanation from the Ministry of Finance give some indication in what direction the Polish legislator will be heading. This direction seems right, taking into account existing European models. Unfortunately, holding companies will still have to wait for dotting the i’s and cross the t’s in this respect.

 

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

Will a Polish company pay income tax on liquidation assets passed on to its shareholder?

Posted on by Tomasz Piejak

Once Article 14a of the Polish Corporate Income Tax Act went into force, it was uncertain whether this provision applied to situations where a company under liquidation passes on its assets to a shareholder in non-monetary form. Administrative courts were not in agreement either. However, the latest rulings of Polish Supreme Administrative Court seem to settle this issue in favor of taxpayers. Therefore, a  company under liquidation should not pay tax on assets transferred to its shareholder as part of the liquidation process.

 

By way of introduction

 

Article 14a of the Polish Corporate Income Tax Act entered into force on January 1, 2015. According to its wording, if the taxpayer settles in whole or in part a liability, including a liability under a loan (credit) incurred, dividend, redemption or disposal for redemption of shares, by providing a non-cash consideration, revenue of such a taxpayer is the amount of the liability settled as a result of such a consideration. However, if the market value of the non-cash consideration is higher than the amount of the liability settled with it, revenue should be defined as the market value of the non-cash consideration.

 

No clear courts’ position

 

Until now, Polish tax authorities and some administrative courts, including Supreme Administrative Court, held that along with the liquidation arises an obligation of a company towards its shareholder to transfer liquidation assets, if any. If such an obligation is performed by providing a non-cash consideration (e.g. by way of transfer of real property or movable asset), then a company under liquidation should recognize revenue in accordance with Article 14a of the Polish Corporate Income Tax Act. Such revenue, less tax deductible expenses, essentially should be subject tax at a rate of 19 percent.

 

At the same time, however, there were courts presenting a different position. According to them, the transfer of liquidation assets to a shareholder does not generate any revenue for a company under Article 14a of the Polish Corporate Income Tax Act. The transfer of liquidation assets by a company is a purely technical act that forms part of the liquidation process. By doing it a company does not settle any liability towards its shareholder. What is more, a company receives nothing in return. It is the last act preceding the end of existence of such a company.

 

Supreme Administrative Court’s rulings in favor of a taxpayer

 

In 2018 and 2019, Supreme Administrative Court had a change of heart when it comes generating revenue on the side of a company transferring liquidation assets to its shareholder in non-monetary form. In court’s opinion, the assumption that the transfer of liquidation assets generates taxable revenue for a company under liquidation would constitute the unlawful broadening interpretation of Article 14a. At the same time, the court stressed that the application of the said Article is allowed only if there is a legal relationship based on mutual performances as a result of which one party is obliged to pay the other a certain amount of money but at the end of the day settles this liability by providing a non-cash consideration. The transfer of liquidation assets, the court follows, does not result from such a legal relationship. It is just a technical act that forms part of the liquidation process. If it generated taxable revenue, a company would have to create additional cash reserves which would delay the liquidation.

 

More precision as a de lege ferenda postulate 

 

The new rulings of Supreme Administrative Court may be the announcement of unification of case law which – from the point of view of legal certainty – is a desirable thing. Once again, however, the question must be asked why new tax regulations are subject to doubt and, worse, divergences in case law. At this point, nothing else remains but to appeal to the legislator to create more precise provisions that leave no room for tax authorities and courts to interpret them in an arbitrary or expanding way.

 

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

What do you need to know before exporting a work of art located in Poland?

Posted on by Tomasz Piejak

Export of a work of art, either temporarily or permanently, requires a special permit, provided that certain criteria are met. Failure to receive such permit before exporting is considered a criminal offence and the perpetrator may be subjected to criminal liability.

 

A work of art, cultural object, monument

 

The Polish Act on protection and care of monuments regulates the legal protection of monuments and works of art located in Poland. According to the Act the term “monument” is to be understood in a broad sense. It may be any object either created by humans or connected to their activity, which may be regarded as a testimony of the past or a particular historic event, the preservation of which should be pursued due to its historical, artistic or scientific value.

 

It encompasses all sorts of cultural and historic objects, paintings, sculptures, graphic material, archeological findings or any other similar works of art. The Act introduces various forms of protection. In particular, entry into various registers and lists of items of exceptional historical value. If a given work of art has been entered into such register, then rights of disposal and ownership – particularly with regards to export – are substantially limited. It is though possible to obtain a permit to export a work of art – for instance for the purposes of the exhibition in a foreign museum. Temporary export is in general less problematic.

 

Important thresholds

 

What is crucial, some works of art, which do not appear in any special protection register, are also subjected to restrictions limiting an owner’s right of disposal. Whether a given piece is affected by these restrictions depends on joint fulfillment of two criteria: age and value. In case of most work of art and monument categories the age threshold is between 50 and 150 years and the value threshold usually does not exceed tens of thousands PLN. For instance, a permit to export a painting is required if it is over 50 years old and its value exceeds PLN 40 000 (approx. € 9 000). If a given artwork fulfills only one of the two criteria, the restrictions do not apply and no special permit is required.

 

How to obtain a permit?

 

Permits for works of art are issued by Minister of Culture and National Heritage. An application must be submitted through a regional monument conservator. It should contain personal data of an applicant, data and photographs of the work of art as well as a short statement why one needs a permit. In some cases an additional owner’s or holder’s statement regarding legal issues and responsibility may be required.

 

Before one’s application is accepted, the regional monument conservator or the director of the National Library delegates a commission to examine the work of art. The Act on Protection of Monuments provides grounds to deny granting a permit in case that a given work of art is of exceptional value to the cultural heritage. If a permit has been issued, it is valid for 12 months following the issuance.

 

Border and customs inspection – what should you keep in mind?

 

In some cases it is difficult to determine whether a given work of art fulfills the legal criteria and requires a special permit. During a border inspection a Border Patrol or Customs Officer is obliged to examine a transported work of art with regards to its  age and value. In case of doubt the officer may demand special documentation which enables them to identify the object and specifies how much the work of art is worth.

 

This is why one needs to take care of such documentation before exporting a work of art. Pursuant to the regulations the supporting documentation may consist of:

  • estimation of the work of art’s age made by specialized culture institution or a professional private entity;
  • evaluation of the work of art’s value;
  • invoice providing exact information on the work of art;
  • confirmation of entry on the Polish territory;
  • permit issued by a foreign authority.

 

Criminal liability for illegal transportation of works of art

 

Failure to comply with the regulations on transportation of works of art abroad is penalized. It is subject to imprisonment from 3 months to 5 years. If the perpetrator acted unintentionally they may be given either a fine or a penalty of restriction of liberty or imprisonment up to 2 years.

 

Restitution of National Culture Goods

 

In the context of works of art protection the issue of Culture Goods Restitution must be addressed. It may be of importance in the case of unlawful export. The Act on Restitution of National Cultural Goods, introduced to Polish law in 2017, implements the EU Directive 2014/60/EU on the return of cultural objects unlawfully removed from the territory of a Member State. Its main goal is to create an effective restitution system of cultural goods and to protect the national heritage from theft and illegal exportation.

 

The Act introduces many instruments to serve this cause. Among others it regulates basic mechanisms of proceedings concerning restitution of goods in cooperation with other countries. Moreover, the Act introduces regulations limiting legal implications of criminal activity. For instance the possibility of acquiring a work of art in good faith by a third party. It implements also a range of penal regulations concerning actions aimed at hindering the restitution proceedings.

 

What it all comes down to is that works of art, which are considered unlawfully exported abroad, may be subjected to restitution back to Poland. Settling legal issues carefully before the journey is thus of utmost importance to a work of art’s owner.

 

Summary

 

The most important thing in the context of export of works of art is to be aware of the legal restrictions imposed on owners and holders of cultural goods. One may need to have either a special permit to export a work of art or documentation confirming that there is no need to have it. An attempt of illegal export may be subjected to criminal liability. Even if a work of art is successfully exported, it may be subject to international restitution proceedings anyway. It is therefore advisable to get duly prepared before one decides to transport it outside Poland.

 

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

Succession under English law – what rights do people excluded from succession have?

Posted on by Tomasz Krzywański

Pursuant to the regulations of the English law, a person, who has been excluded from testate or intestate succession, has a right to apply to a court for a reasonable financial provision. The applicant might be not only a disinherited family member or a current or former spouse but also a cohabitee as well as another person who was financially dependent on the deceased directly before their death.

 

A short introduction

 

Contrary to civil (continental) law, which encompasses also Polish law, English law does not provide legal institution of the so called reserved portion. Thus, a person omitted in the testament cannot apply to a court for part of the estate by way of a claim on account of the reserved portion. Instead, English regulations provide for a slightly different institution, which in principle is similar to the reserved portion. Inheritance (Provision for Family and Dependents) Act of 1975 regulates this institution and this is why the claim based thereon is commonly referred to as the Inheritance Act claim. The aforementioned regulations allows people who are the closest to the decedent to demand a court to grant them part of the estate in case where they are excluded from succession. The closest person is to be understood as a current or former family member, such as:

  • spouse or civil partner of the deceased;
  • child of the deceased;
  • stepson or stepdaughter.

 

Persons close to the decedent, though formally not family members, are also affected. The Act mentions:

  • cohabitee who lived in the same household as the deceased for the period of 2 years immediately before the death of the deceased;
  • any other person who immediately before the death of the deceased was maintained, either wholly or partly, by the deceased.

 

The regulations of the Inheritance Act apply only if the decedent was domiciled in England and Wales. The legislator provides also a deadline for potential applicants – the application must be submitted no later than 6 months after a Grant of Probate was issued.

 

What matters in regards to the submitted application?

 

When determining whether the disposition of the deceased’s will or that of law related to intestacy will be affected by the applicant’s claim, and to what extent, a court must take into account all important matters and facts of a given case. This includes the size and nature of the estate. A court should also take into account obligations and responsibilities which the deceased had towards any applicant, financial resources and financial needs of the applicant, other applicants or testamentary heirs  have or are likely to have in the foreseeable future.  Relations between the decedent and their family as well as between the deceased and the testamentary  beneficiaries are also relevant.

 

The scope of a court’s powers

 

A court, when making orders as to the decedent’s estate, follows the rule of reasonable financial provision. The reasonable financial provision is to be understood as such provision which is in a given case justified and the form and size of which are individually determined. A judge may decide on their own as to the form of the provision. According to the Inheritance Act admissible forms are among others:

  • periodical payments made to the applicant out of the net estate of the deceased;
  • lump sum paid to the applicant out of the net estate;
  • transfer of property comprised in the estate.

 

Ilott vs. Mitson case

 

Inheritance Act does not generate many court cases. There reason for this is that people tend to negotiate outside a court. This is why there are few precedents and cases which attract much attention. Ilott vs. Mitson case is a good example. It concerned the inheritance of the deceased Melinda Jackson, who appointed as her only heirs three non-profit organizations active in the field of animal protection. Jackson was not involved in the activity of any of them. The woman deliberately omitted her only daughter in her testament, Heather Ilott. Jackson has not kept in touch with the daughter for years. After the death of her mother Heather Ilott applied to a court for a financial provision. She was in a dire financial situation and had to provide for 5 children. The case was finally decided upon in 2017 when the Supreme Court ruled in favor of the testament beneficiaries reinstating the initial provision that Ms. Ilott was granted by the District Court in 2007 – a lump sum amount of £50 000. The court stated that the provision should be limited to resources necessary to meet day-to-day needs and should not be a source of capital to the applicant.

 

Summary

 

Inheritance Act is supposed to be of help in cases similar to that of Ms. Ilott’s. A courts takes into account the rule of equity and grant justified provisions to the applicants which are supposed to aid them and their family. The Act does not serve for the disinherited to seek enrichment. It allows, however, courts to grant a justified provision to people who were close to the deceased and concurrently excluded from the succession in the case where they are in need due to their difficult financial standing.

 

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

Polish tax on revenue from fixed assets encompasses hotels, conference centers and sports facilities

Posted on by Tomasz Piejak

Starting from January 1, 2019 an amendment of Corporate and Personal Income Tax Acts went into force with regards to the so-called tax on commercial real estate. It was then renamed tax on revenue from fixed assets. Until December 31, 2018 it encompassed only owners of commercial and office buildings located in Poland. A group of potential taxpayers has now been extended to owners of other types of buildings which make part of assets related to economic activity and have been released for use on the basis of a leasing or rent contract or another contract of a similar nature. The recent tax rulings indicate that the tax encompasses also hotels, conference centers and sports facilities.

 

A short introduction

 

Tax on revenue from fixed assets is relatively new as it was introduced to Polish law on January 1, 2018. According to the provisions in force from January 1, 2019 tax is calculated at a rate of 0.035 percent. It is payable by the 20th day of the month following the month for which the tax is paid. The tax base is the sum of initial value of all taxable fixed asset of a given taxpayer. It is reduced once by an amount of PLN 10 m (approx. € 2,5 m).

 

Where a building has been released for use in part, the taxable base is determined proportionately to the share of the usable area released for use in the total usable area of that building. If, however, the total share of a building’s usable area released for use does not exceed 5 percent of the total usable area there is no need to include this building in the taxable base.

 

Taxpayers can deduct the amount of tax on revenue from buildings paid for a given month from a tax advance that entrepreneurs conducting economic activity in Poland are obliged to calculate. It may also be deducted from a final yearly tax settlement. Amounts which have not been deducted can be refunded upon a taxpayer’s application.

 

Old tax, new taxpayers…

 

The most important change in force since January 1, 2019 is the extension of the scope of immovable properties affected by tax and consequently also a group of potential taxpayers. Until December 31, 2018 only commercial and office spaces were subjected to taxation. Currently, tax encompasses all buildings, being fixed assets, that meet jointly the following criteria:

  • they are owned or co-owned by a taxpayer;
  • they have been released for use in full or in part on the basis of a leasing or rent contract or another contract of a similar nature;
  • they are located in Poland.

 

… and the new rules of determining the taxable base

 

According to the provisions in force before January 1, 2019 tax was calculated on income generated only by a building of value exceeding PLN 10 m. The initial value of each building had to exceed this threshold in order for it to be affected by tax. If a taxpayer owned numerous buildings but the initial value of none of them exceeded PLN 10 m, a tax obligation would not arise at all. Starting from January 1, 2019 the taxable base is the sum of all a taxpayer’s taxable fixed assets, reduced once by an amount of PLN 10 m. As a consequence, if a taxpayer’s assets are dispersed among numerous buildings and the initial value of each does not exceed PLN 10 m, a tax obligation arises anyway, provided that the total value of all taxable buildings exceeds PLN 10 m.

 

Tax authorities always pro fisco

 

The amendment, which is unfavorable to immovable property owners, has been followed by even less favorable tax rulings. It turns out that in the Polish tax authorities’ opinion tax also encompasses hotels, conference centers and sports facilities. Arguments are that a hotel service is to be regarded as similar to lease since it shares some of its characteristics and as a consequence a building used to provide hotel services should be subjected to tax on revenue from fixed assets.

 

A service, in order for a building to be encompassed by tax, should consist primarily of letting someone use this building for some time. Other services (for instance organization  or facilitation of conferences and workshops) are to be regarded, in principle, as related to lease. It means that hotels and conference centers hosting conferences and workshops are also affected by tax. Similar arguments have been brought up in the context of sports facilities.

 

Anti-avoidance clause

 

On January 1, 2019 the legislator introduced also the anti-avoidance clause. The clause provides that the regulations on tax on revenue from fixed assets apply also if a taxpayer transferred, for no justified economic reasons, in whole or in part the ownership or co-ownership of a building or released this building for use on the basis of a leasing agreement in order to evade payment of tax. In other words, the clause provides for the legal fiction that  for purposes of calculation of tax the transfer has never taken place.

 

There is no way out

 

The amendment to the Income Tax Acts leaves little room for the avoidance of tax. The most recent tax rulings show that every time a building – being a taxpayer’s fixed asset – is released for use by a third party, a taxpayer should be alarmed and stay vigilant. Tax on revenue from fixed assets is likely to be due…

 

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

 

Italy – new tax reliefs attract foreigners

Posted on by Lexplorers

New Italian tax law introduced in June 2019 invites workers, entrepreneurs, sports stars, retirees and researchers to move their residency to Italy. Italian government offers potential residents sun, fabulous food, beautiful views and more importantly – low taxes.

 

New tax reliefs

 

Italians focus on human capital. That is why the government decided to introduce a tax solution which aims to attract foreigners, such as:

  • workers and entrepreneurs;
  • professors and researchers;
  • high-net-worth individuals and their families;
  • retired individuals moving to the South of Italy;
  • professional sportspersons.

 

70 percent exemption for workers and self-employed

 

Italy wants to draw attention of entrepreneurial, hardworking and talented people. From 2020 it offers a 70 percent exemption of their taxable basis on income to those foreigners who come to work to Italy. This means that they will have to pay only 30 percent of their taxable basis on income resulting from the activity performed in Italy.

 

The exemption can be even 90 percent of the taxable basis of income, if the foreigner decides to move his residency to one of the southern regions of Italy

  • Abruzzo;
  • Molise;
  • Campania;
  • Puglia;
  • Basilicata;
  • Calabria;
  • Sardinia;
  • Sicily.

 

The tax benefits will last for the first 5 years of the residency, however they may be extended by the Italian tax authorities to a period of 10 years upon a request of a tax payer. The exemption will affect workers, entrepreneurs, freelancers, self-employed and researchers. To benefit from this tax regime the following conditions must be met:

  • move tax residency to Italy (as a general rule live in Italy for a minimum of 183 days a year or make Italy a habitual center of interests);
  • be a resident outside of Italy during 2 previous year;
  • commit to reside in Italy for at least 2 years;
  • perform work mainly on the Italian territory.

 

Res non-dom regime

As for the high-net-worth individuals the Italian tax system welcomes them with open arms and offers a res non-dom regime. It allows the taxpayers to apply for the payment of a yearly flat tax of € 100.000.

A very attractive offer for those who have high earnings, for example from dividends from foreign companies, as the payments stays the same regardless of the size of income.

 

There is one condition – the taxpayer cannot be a resident for at least 9 out of 10 last years before the first year in which they change their residency. If this requirement is met  the taxpayer can gain a 15 year tax emption on the foreign earned income.

 

The Italian system also does not forget about the family members of the wealthy taxpayer. It offers them € 25.000 substantive tax on the income from abroad.

 

Cherry picking

 

In the res non-dom regime the taxpayers can opt which country or countries income to tax with the flat tax, this principle is known as the “cherry picking”. Income sourced in the “non-chosen countries” will be excluded from the res non-dom regime and will be subject to ordinary Italian taxation. However they will be able to benefit from possible tax reliefs on taxes paid abroad. Also double taxation agreements will apply.

 

Taxpayers who pick this regime have guaranteed confidentiality regarding their assets set abroad. Italian tax authorities will not investigate the origin and the amount of the assets. Furthermore, the taxpayers will be able to benefit from foreign companies without the risk of falling under the Italian CFC (Controlled Foreign Company) regulation.

 

Retired individuals

 

Italy has prepared a tax incentive also for those who are looking for a warm and comfortable place for a deserved retirement. According to the new regulation retirees, who will have income from abroad, will be granted a 7 percent flat tax rate.

 

To apply for this system, a retired individual must meet the following requirements:

  • receive pension income and other remunerations outside of Italy;
  • transfer tax residency to Italy;
  • not be an Italian tax resident for 5 years before the transfer;
  • transfer tax residency in one of southern regions: Abruzzo, Molise, Campania, Puglia, Basilicata, Calabria, Sardinia, Sicily and the location cannot be exceeding 20.000 inhabitants.

 

Additional requirement is the existence of international tax co-operation agreement between the country origin of the retiree and Italy.

 

Summary

 

The cradle of the Renaissance delights and invites. It seems that there is no need to encourage anyone to Italy. The transfer of tax residency should be planned wisely, though. It is advisable to prepare for the transition in a way that will eliminate the possibility to doubt the tax residency transfer by the Italian tax authorities. Furthermore, it is recommended to investigate the structure for legal and tax consequences of the transfer. It is also recommended to apply for a tax ruling in the matter of benefitting from the preferential tax system.

 

Katarzyna Wojsiat, lawyer, and Tomasz Krzywański, attorney-at-law, Private Client Practice, GWW

Capital gains realized from the disposal of stocks in a Polish joint-stock company are taxable only in a transferor’s state of residence

Posted on by Tomasz Piejak

Albert Einstein once said that a question pertaining to taxes is too difficult for a mathematician. It should be asked of a philosopher. Unfortunately, the world famous physicist did not take into account that practicing philosophy with reference to this field of law can very easily lead to the omission of a very important principle of constitutional rank. Namely, that the imposition of taxes is by means of statute. Meanwhile, unfortunately, when an opportunity to enrich the budget appears on the horizon, the Polish tax authorities relatively often forget about the aforesaid principle.

 

The authorities are of the opinion that foreign investors must tax in Poland capital gains from the disposal of stocks in Polish listed companies. Also when there is a double tax treaty in force between Poland and the state in which the transferor has a place of residence for tax purposes. Fortunately, this position is not prevalent and seems to evolve in the direction of more pro tributario practice.  

 

Rules concerning foreign shareholders

 

Foreign shareholders of Polish joint-stock companies admitted to the public trading in Poland as part of a regulated exchange market must face certain tax consequences once they decide to sell their stocks. Their tax situation depends on whether there is a double tax treaty with the state in which they reside for tax purposes, or not.

 

If such treaty has not been concluded, the transferor of stocks will have to pay capital gains tax in Poland being 19 percent of income, i.e. generally a sale price less expenses incurred to take up the stocks. Polish tax regulations clearly indicate that natural persons, if they do not have their place of residence in Poland, are liable to pay tax only on income earned in Poland which include among others income from the disposal of securities (stocks in listed companies are treated as securities in Poland) admitted to public trading in Poland as part of the regulated stock exchange market.

 

… when there is a double tax treaty

 

The situation changes in the case of a shareholder whose place of residence is the state with which Poland has entered into a double tax treaty. In such case Polish provisions apply taking into account the treaty.

 

In principle, treaties to which Poland is a party allow taxation of capital gains on the disposal of stocks only in the state in which the transferor has a place of residence for tax purposes. In other words, if a shareholder, who lives on a daily basis for example in Italy, sells stocks in a Polish listed company, then their gain, if any, may be taxed only in Italy, although whether it will actually be taxed depends on Italian domestic tax regulations. The exception are treaties providing for the so-called property clause, according to which gains from the disposal of stocks in a company whose assets consist of at least 50 percent of immovable property located in Poland will also be taxed in Poland – of course, with the application of appropriate methods for the avoidance of double taxation.

 

What is the tax authorities’ stand?

 

It would seem that the above principles do not raise any doubts. Unfortunately, this is just a theory. In practice, the Polish tax authorities have attempted to create a rule according to which if the disposal of stocks takes place on the regulated stock exchange market in Poland, then a foreign investor will have to tax their gains on it in Poland, at the same time bypassing provisions of double tax treaties to which Poland is a party.

 

Fortunately, the position of the authorities is evolving in the direction favorable to foreign investors. More recent tax ruling give to double tax treaties legitimate priority over Polish statutory law. It has ceased to be controversial that gains from the disposal of stocks in Polish listed companies by an investor who resides abroad for tax purposes, when there is a respective double tax treaty in force, is not taxable in Poland and may only be taxable in the state where a transferor resides for tax purposes.

 

The evolution of the tax authorities’ stand must, of course, be positively assessed. It is a pity, though, that such evolution had to take place at all. When analyzing tax rulings that are negative to foreign investors it is impossible not to get the impression that the authorities have forgotten the fundamental principle of legal certainty. Arguments therein presented are in fact contra legem and in clear a contradiction with the literal wording of Polish tax regulations.

 

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

Central Register of Beneficial Owners in Poland – private foundation is in question

Posted on by Lexplorers

Foreign private foundations are becoming more and more popular among Poles as an instrument of inheritance planning and private assets protection. Polish Act on Counteracting Money Laundering and Terrorist Financing (“AML Act”) obliges Polish commercial law companies to report information about their beneficial owners to the Central Register of Beneficial Owners (as we discuss in more detail in the article “Echo of the Panama Papers – Central Register of Beneficial Owners soon launches in Poland“). What if a private foundation appears in the structure?

 

As a reminder, in case of international structures, it may happen that a Polish company – in order to determine who is the beneficial owner – will have to analyze the organizational structure of institutions unknown to Polish law. These institutions include, among others, trusts and private foundations. The Polish legislator by defining the term “beneficial owner” provided detailed criteria to help determine who is considered a beneficial owner but only in relation to a trust. What about the foreign private foundation?

 

What is a private foundation?

 

From time to time in the media in connection with financial affairs we hear terms such as “beneficiaries” or “foreign private foundation”. Private foundations become the centre of financial scandals due to the confidentiality of the institution and the potential ease to hide assets. However, it should be remembered that the institution was established with the aim of efficient estate and succession planning for companies and in this role serves best.

 

But… what is this private foundation? Basically, a private foundation is a legal entity founded by the founder and equipped by him with assets that are managed independently from the founder for a specific purpose or for certain persons called beneficiaries.

 

… and who is a beneficial owner?

 

It must be assumed that the criteria on trusts will apply accordingly to private foundations. Such appropriate application is imposed by the EU directive underlying the implementation of the provisions on Central Register of Beneficial Owners to the Polish legal system. According to this directive, in case of legal entities such as foundations and legal arrangements similar to trusts, as a beneficial owner is considered a natural person holding a position equivalent to positions listed in relation to trusts.

 

Therefore, the following natural persons should always be considered as beneficial owners of a private foundation:

 

  • founder;
  • supervisor (protector);
  • beneficiaries;
  • other persons who control a foundation

 

Wording of the provision suggest that a founder, supervisors (protectors) and beneficiaries must be recognized as beneficial owners even if they do not exercise actual control over a foundation.

 

The Directive provides, although it has not been included in the AML Act, that if the beneficiaries of the foundation have not yet been specified by name and surname, then the category of persons in whose main interest a given entity was established should be indicated. These can be, for example, children, spouse or individuals connected to a founder by blood ties.

 

However, it should be assumed that such solution will not apply in relation to reporting to the Central Register of Beneficial Owners, as the reported data must identify a specified natural person. As a consequence, if in a foundation’s documents beneficiaries are not identified, the obligation to report beneficiaries to the Register should only be updated when a specified natural person is established as a beneficiary, or at the time of the first distribution of a foundation’s assets to such person.

 

Precision worth its weight in gold

 

Given that foreign private foundations as an instrument of estate planning and asset protection continue to be more popular, one would expect the Polish legislator to indicate, de lege ferenda, precised criteria allowing Polish companies to determine their beneficial owners when such foundations appear in their ownership structure.

 

At stake are financial penalties, civil liability for damage resulting from submitting to the Register persons who are not actually beneficial owners as well as criminal liability for making a false statement.

 

Katarzyna Wojsiat, lawyer, Private Client Practice, GWW

Echo of the Panama Papers – Central Register of Beneficial Owners soon launches in Poland

Posted on by Lexplorers

Pursuant to the Act on Counteracting Money Laundering and Terrorist Financing  (“AML Act”), on October 13th, 2019 this year Poland will launch the Central Register of Beneficial Owners (“UBO Register”). This involves introduction of new obligations to commercial  companies in respect of providing information to the UBO Register. The AML Act, implementing the Directive of the European Parliament and the Council 2015/849 (“4th AML Directive”) is a consequence of a loud international affair from 2015, known as the Panama Papers.

 

What is the purpose of the UBO Register?

 

According to the 4th AML Directive, all EU Member States are required to set up registers of beneficial owners, which will obtain and hold information on beneficial owners of commercial  companies established under the law of a given country. Registers are one of many changes introduced by the 4th AML Directive, which aim to be a remedy for lack of transparency in the financial sector.

 

In Poland, the UBO Register will set off on October 13th, 2019. The obligation to submit information to the UBO Register will apply to the majority of commercial law companies, i.e. general partnerships, limited partnerships, limited joint-stock partnerships, limited liability companies and joint-stock companies.

 

The purpose of the UBO Registry is to disclose data of natural persons actually controlling a company. It is irrelevant how many legal entities are  shareholders or partners in the structure. Beneficial owner whose data is to be disclosed is always a natural person. It does not matter if the natural person at the very top of the structure is a resident of Poland or has Polish citizenship.

 

The UBO Register will be free of charge and more importantly – public.

 

Old definition, new worries

 

For many years the obligation to verify natural persons, that actually control companies, remained on banks and other financial institutions. The necessity to disclose data of natural persons who, although formally rarely appear as direct or indirect shareholders of a company, yet exercise real control over its functioning, is not a novelty. However, all these sensitive data were not public and available to anyone regardless of their legal interest.

 

Pursuant to the AML Act definition, a beneficial owner is a natural person or natural persons controlling directly or indirectly a company through their rights which arise from legal or factual circumstances and enable them to exert decisive influence over the actions or activities undertaken by the company.

 

In the case of legal persons a beneficial owner is:

  • a natural person who is a shareholder or stockholder, entitled to an ownership of more than 25% of the total number of shares or stocks of a legal person;
  • a natural person with more than 25% of the total number of votes in the company’s decision-making body, also as a pledgee or a user or on the basis of agreements with other persons entitled to vote;
  • a natural person exercising control over a legal person or legal persons who jointly have the right of ownership of more than 25% of the total number of shares in the company, or jointly holding more than 25% of the total number of votes in the company’s body, also as a pledgee or a user, or on the basis of agreements with other persons entitled to vote;
  • a natural person exercising control over the entity through a dominant position, in the meaning of the Accounting Act, in relation to that legal person.

 

Who will have to deliver information?

 

The AML Act obliges the following entities to report:

  • general partnerships;
  • limited partnerships;
  • limited joint-stock partnerships;
  • limited liability companies;
  • joint-stock companies.

 

The exception will be public companies within the meaning of the Act of July 29th, 2005 on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organized Trading, and Public Companies.

 

Information about a beneficial owner that will be disclosed include:

  • name and surname;
  • citizenship;
  • country of residence;
  • Universal Electronic System for Civil Registration Number (PESEL) or date of birth;
  • size and nature of the participation or on the rights of the beneficial owner.

 

The information will have to be submitted by a person authorized to represent the obliged entity via the UBO Register’s website.

 

The statement will be submitted under pain of criminal liability for making a false statement.

 

Deadline to report

 

Two deadlines have been introduced to report information to the UBO Register. The term depends on the time of entry of a given company into the National Court Register.

 

Companies already entered into the National Court Register at the time of launching the UBO Register, will have to submit the information by April 13th, 2020. New companies will have 7 days, from the date of entry into the National Court Register, to submit information. In addition, any changes to the submitted information should be reported within 7 days from that change to the UBO Register.

 

Failure to comply with the obligation to report the information to the UBO Register by the obliged entities within the time limit will be subject to a financial penalty up to PLN 1m (approximately € 250.000).

 

Access to information

 

Work on creating an ICT system, that will process the UBO Registry data, is currently in progress. It is not certain if the UBO Register will be launched within the date provided by the AML Act. Nonetheless, the obliged companies should prepare and start obtaining the necessary data about their beneficial owners.

 

Submitted information about beneficial owners will be available via the UBO Register’s website. Reporting as well as updating information will be also carried out via the ICT system.

 

Echo of the Panama Papers

 

Media scandal which took place in 2015 after disclosure of the Panama Papers drew attention to the aspect of transparency of legal entities. At that time the manner of abuse of corporate structures and offshore tax havens to carry out questionable transactions went public.

 

Introduction of the UBO Registry in Poland is an echo of the Panama Papers. Public access to data of natural persons actually controlling a given entity intends to increase the transparency of transactions and reveal the persons behind the complex structure veil. The idea of reporting beneficial owners seems to be right. However, there are doubts whether the transparency of the financial sector is not pursued at the expense of the privacy of natural persons. Such a regulation seems to be surprising, especially in GPDR era when personal data is highly protected and worth its weight in gold.

 

Katarzyna Wojsiat, lawyer, Private Client Practice, GWW