Welcome to our appreciated page reader, today, in This blog we’re gonna discuss CFC relations with Poland. I’m gonna give you a short description What is Controlled Foreign Corporation -CFC at the beginning of blog. Afterwards, you will find out What CFC new rules apply exactly, which entities can be qualified as CFC, What is CFC tax base in Poland, obligations and implications with so many other interesting things. if you would like to find out more about Taxation system in Poland, you are welcome!
What is Controlled Foreign Corporation - CFC?
Let’s start with giving definition What Ais controlled foreign corporation (CFC) and how does it work. It is a corporate entity that is registered and operates a business under another jurisdiction or country rather than the residence of the controlling owners. The control of a foreign company is determined in the United States by the percentage of shares owned by US citizens.
The laws of controlled foreign corporations – CFC apply in conjunction with tax treaties to determine how taxpayers claim their foreign income. CFCs are advantageous for companies when the cost of setting up a business, foreign branch, or partnership in a foreign country is low after the tax impact, or in the development of a global-affected business.
CFC & Poland - New Taxation Rules
Let’s carry on with this news that renewable energy groups operating in Poland again should take into consider the tax efficiency of the structure of their operations in Poland after important changes in the Polish corporate tax system.
The changes are meant to be at “closing the remaining gaps” in the Polish tax system and reflect Poland’s commitment to stop tax base erosion and profit on shifts and comply with OECD recommendations. The changes include stricter rules for stricter capitalization and an obligation to prepare transfer price documentation for partners, partnership agreements, joint venture agreements or other similar agreements. In terms of international tax planning and optimization, the most important change is the introduction of the rules of controlled foreign companies (CFCs) in Poland, which can now use renewable energy groups.
The CFC rules, which came into force in early 2015, impose a 19% corporate income tax (CIT) on revenue generated by CFCs in Poland. When deciding whether to comply with CFC rules in Poland, it is important to determine whether a Polish tax resident has a unit that qualifies as a CFC.
Which entities becames as CFCs?
In order to be qualified as a CFC:
- Firstly, 50% or more of the revenue should be from passive revenue in any given tax year, e.g. Dividends, stock management or royalties.
- The second is that a Polish parent company must have at least 25% of the shares directly or indirectly for at least 30 days.
- And finally, At least one type of passive income is taxed at a low rate of 14.25%, or exempt from tax (exceptions provided for in parent and subsidiary directives) e.g. Dividend from Malta’s subsidiary, Cyprus Parents, owned by the Polish parent company.
- Capital companies in organisation
- Legal entities
- Transparent Tax Partnership, if (under foreign law) it is considered a legal entity and in that foreign country is subject to a tax on its income, regardless of where the income is received.
- An organizational unit, without a legal entity, other than a partnership whose registered office or management is not in Poland and in which the Polish tax resident owns shares, voting rights in supervisory or constituent bodies, or the right to participate in profits.
What is CFC tax base in Poland?
19% of the CIT is determined by the income received by the CFC in proportion to the number of shares in it by the Polish Taxpayer, as well as in proportion to the period of ownership of the shares during that CFC fiscal year. Stricter rules apply to CFC tax shelters, as the Polish taxpayer is considered to have a 100% right to participate in the profit, the CFC tax shelter throughout the fiscal year.
A Polish taxpayer can reduce the CFC tax base by the amount of dividend received from the CFC and the price received for managing shares in the CFC.CFC revenue is the revenue generated by the CFC tax year (its costs) and should be calculated in accordance with Polish tax rules. It may be expected that CFC’s revenue calculation will create a lot of problems in practice in accordance with Polish tax rules.
Exceptions to CFC taxation in Poland
Certain exceptions to the CFC tax have also been introduced. A foreign EU / EEA company is not covered by CFC rules if all of its revenue is subject to taxation in an EU or EEA member state, provided that it is in fact doing business.
Companies beyond the EU / EEA are not covered by the CFC if the following conditions are met:
- CFC’s annual revenue does not exceed € 250,000; Or
- The CFC actually operates in a country that is not a member of the European Union / EEA and:
- It is subject to taxation on the entire income of that country;
- Its income does not exceed 10% of his total income as a result of doing business in this country;
- There are grounds for the exchange of tax information between Poland and the CFC country of origin
Polish tax law does not provide for a legal definition of the term “actual business activity”. However, some guidelines have been developed in this regard. In particular, the following indicators of “actual business activity” should be taken into account:
- CFC registration is related to the existence of a business organization that actually carries out business activities, ie the company has the building, qualified staff and equipment used in the business activities;
- CFC does not create a structure away from economic reality;
- there is a correlation between the scale of CFC’s activities and the building, staff and equipment owned by that company;
- The agreements signed correspond to the economic reality, are economically justified and clearly do not contradict the interests of the CFC; And
- CFC independently performs key economic functions using its own resources and management staff present in the CFC building
Reporting obligations & implications for global businesses
Additional reporting obligations are included, including separate CFC records, if the CFC does not carry out actual activities in the EU / EEA country and all of its revenue is subject to taxation in such a country.
Recent changes in Polish tax law have led to the many cross-border structures used by renewable energy companies in Poland that are ineffective in terms of Polish taxation. Eversheds works closely with Polish commercial customers to avoid the negative consequences of CFC rules on their business. The introduction of CFC rules has made it more difficult, but not impossible, to plan and optimize taxes in Poland.