You are a Polish tax resident and have a company elsewhere? You may not know, but since 2022, if you pay low taxes on your foreign controlled company abroad, you are almost certainly required to pay the CFC tax in Poland. Moreover, you must declare the amount of this tax yourself. If you do not do this, you may commit an offense or a tax crime! In this article, you will learn what a foreign controlled company is and when to pay the CFC tax in Poland.
What is a foreign entity in Polish CFC regulations?
Before you pay the CFC tax, check whether your company is a foreign entity. Foreign entities include, among others, legal persons, foundations and trusts, fiduciary agreements, tax capital groups, and partnerships that are CIT taxpayers. Such a company may not be a foreign entity if it has, for example, registration or management headquarters in Poland. Another important condition is the taxpayer’s participation in such an entity. This may be a share in the capital, the right to control, or even actual control.
Tax havens – definition of a company from a tax haven
What are companies from tax havens? In practice, these are companies from countries with which Poland has not signed agreements on the exchange of tax information and agreements to avoid double taxation. If a foreign entity is from a tax haven – it will always be a foreign controlled entity.
If a foreign company is not from a tax haven, we check whether taxpayers from Poland control it. At this stage, we check whether a Polish resident together with other Polish residents has more than 50% of the share in the capital, voting rights in controlling bodies, or actually manages the company. If so, the control criterion is met, and if the foreign tax is lower – the CFC may occur.
Polish tax on a foreign controlled company
To determine that the CFC tax occurs, it is still necessary to compare tax burdens in Poland and abroad.
Actually paid tax
The tax actually paid abroad must be 25% lower than the one the company would have paid in Poland if it had been a taxpayer here. What does it mean? To know whether there will be a CFC, you need to know the company’s revenues and costs in a given tax year. Additionally, you must have them properly sorted – to know, for example, that they are passive income to classify your company in the appropriate category. Then you must keep accounting according to Polish rules to calculate the hypothetical tax in Poland. Finally – see how much tax you paid outside Poland.
Holding companies without income and CFC tax in Poland
So the CFC, until 2022, mainly concerned passive income earned by foreign companies. Since 2022, it also applies to companies that earn income from intangible services. What are intangible services? These include advertising, consulting, market research services. Currently, the CFC also includes income from rent. However, the most significant change is in the added paragraphs, which provide for a tax on so-called shell companies. What is a shell company? In short, it is about companies that have large assets but small incomes, as well as companies with large incomes and small assets. This means that if you have a foreign holding company or one that owns, for example, real estate, you will pay tax in Poland. And not just any tax – 19% CIT or PIT on 8% of the market value of the assets. If, on the other hand, the company’s income exceeds 1/5 of its annual employee costs, asset values, and depreciation allowances, you will also pay 19% CIT or PIT tax in Poland.
When will you pay CIT and when PIT on the income of your foreign corporation in Poland?
If you are the controller, shareholder, or entitled to profit, then you will pay PIT on the income of your foreign companies. If a company is involved – your company. This is another reason why it is worth controlling foreign companies through companies.
Real economic activity and CFC tax in Poland
If your foreign company is registered in the European Union, you can avoid tax on a foreign company (CFC) if you conduct real economic activity in the country of registration. What does this mean?
It is worth verifying whether the foreign entity’s activity meets the requirement of significance. For example, whether the income value is too large in relation to the entity’s real activity. In practice, a company may have a small staff, a small office, and millions in turnover. Is it conducting real business activity in such a case? It is best to include an assessment of such a situation in a defense file in case of an audit – it is worth preparing in advance.
Types of foreign controlled companies
In summary: foreign controlled companies are companies from tax havens, companies with passive income, or shell companies. Companies from tax havens are nothing more than companies from countries with which Poland has not signed a double taxation avoidance agreement or tax information exchange agreement. Companies with passive income are those that earn income from license fees, dividends, interest, etc. Additionally, this category includes companies generating income from certain intangible services. Together, these incomes must account for at least 33% of the company’s total income. In this case, the CFC tax requirement is met. Shell companies are companies with certain assets and low income or, alternatively, with high income but small assets.
Not only the register of controlled companies is the taxpayer’s basic obligation. Not to mention the annual declaration (by the end of September) – PIT or CIT CFC.
The key obligation is the need to maintain double accounting – one probably in the country of the company’s headquarters, and the other – in accordance with the Polish Accounting Act. Why is this? Well, every taxpayer must calculate the hypothetical tax to be paid by the foreign company if it were a Polish taxpayer and compare it with the tax actually paid. We must do it ourselves – if we do not fulfill this obligation, we have a simple way to estimation.
Don’t delay – entrust your affairs to specialists. Check if you can avoid CFC or commission a tax review of your structure.