Polish regulations (Article 24a CIT, 30f PIT) set out the rules for adding CFC income to the income of a Polish resident, imposing the obligation to keep a register of CFCs and records for calculating the income of CFCs.
Applying the status of the country where a CFC’s registered office or managing board is based, the Polish law graduates the degree and rules of the above-mentioned obligations – from entities based in tax havens or in countries that have not signed agreements providing a legal basis for obtaining tax information as well as CFCs in countries which signed such agreements to CFCs based in EU and EEA countries.
Except for CFCs based in tax havens, CFC regulations affect:
- entities in which a Polish taxpayer has, directly or indirectly, continuously and for a period not shorter than 30 days, at least 25 percent of shares in or rights to profits or 25 per cent of voting rights in supervisory or decision-making bodies,
- a CFC earning at least 50 per cent of revenues from assets generating passive revenues (laws include a list of assets of that type) and at least one type of revenue from those assets is subject to exclusion/exemption or to taxation in the CFC’s country of residence at a rate lower by at least 25 percent than the tax rate applied in Poland (with the 19 per cent tax rate currently applied in Poland, this means that the rate in the CFC’s country of residence must be lower than 14.25 percent).
Polish CFC regulations do not affect those foreign companies whose revenues do not exceed EUR 250,000 in a tax year. The laws do not introduce a mechanism preventing circumvention of the de minimis threshold for revenues by dividing them among several CFCs.
Also excluded are CFCs conducting business operations whose income does not exceed 10 percent of the revenues earned from the actual business. In the case of this exclusion, a legal basis for exchanging tax information with the CFC’s country is necessary. The regulations do not affect controlled companies from the EU and EEA, provided they conduct actual business operations in their countries (regardless of the income share in the revenues from those operations).
Polish taxpayers are obliged to maintain a register of companies in which they hold at least 25 percent of shares/voting rights and, under Polish tax law, records enabling calculation of income, tax base and tax due for a given CFC. These records also serve to establish if the conditions for the de minimis revenue threshold and for the income share in the revenues from actual business operations were met. The obligation to keep records does not apply to Polish taxpayers who own an EU or EEA-based CFC conducting actual business operations in those countries.
CFC income is calculated under Polish tax law. Debatinges are imposed on the whole CFC income (full inclusion), i.e. also on that income which is not passive. Income is not subject to deduction of losses generated by the CFC in the previous years. Polish taxpayers should add that part of income which represents their share in the CFC, taking account of the ownership period. A mechanism of reducing the share by a share held in the CFC by a subsidiary of the Polish taxpayer has also been provided for, if that share is large enough and the subsidiary taxes the income of the CFC based on the CFC rules applied in its country. Income is reduced by dividends paid by the CFC to its controlling company and by monies from a disposal of shares in the CFC for consideration. The income tax rate is 19 percent.
The income tax payable in Poland is reduced pro rata by the tax amount paid by the CFC. CFC income tax returns should be filed by the end of the ninth month of the following tax year and tax due should be paid by the same date.
The regulations largely restrict the use of a tax optimization tool such as a CFC. Changes in the corporate structures and asset structures of entities affiliated with Polish residents have been noticeable for some time now. One must wonder whether CFC rules in this form were also aimed at obtaining additional budget revenues. This is confirmed, for example, by the taxation in Poland of the whole income generated by a CFC (not only passive income) or by establishing the nominal tax rate (not effective) while determining differences between the tax rates in Poland and the CFC’s country. Setting a 25 percent threshold for the share ownership, right to profits and voting rights in decision-making or supervisory bodies in order for a company to be covered by the CFC regulations seems to serve this purpose as well.
Debatingation of CFC income changes things for residents of the country, and the details need to be looked at closely.