When planning an international investment, we should always check both, the business risks and the tax risks of future transactions. In the case of registration of a company or other foreign entity, we must take into account not only agreements on the avoidance of double taxation or foreign tax regulations, but also Polish PIT and CIT laws. One of the most important regulations at the moment is the taxation of Controlled Foreign Companies (CFC). The Personal Income Tax Act imposes many documentary and registration obligations on Polish residents related to a foreign controlled entity.
The purpose of the regulation is to combat tax competition from the so-called tax havens. Furthermore they counteract the implementation of mechanisms allowing tax avoidance. Those operate by shifting income to subsidiaries located in countries with preferential tax systems. CFC regulations have been introduced in many countries in relation to legal and natural persons. Importantly, Polish regulations do not only apply to companies, but also to organizational units without legal personality other than a company without legal personality, foundations, trusts or other entities. As you can see, the scope of entities that can fall under the foreign controlled entity is very wide. A company considered as falling under the CFC regulations, must meet three conditions jointly:
- Condition of equity participation (direct or indirect), voting rights, participation in profits or actual control;
- The condition of passive income (at least 33%) in the tax year, originating from:
– dividends and other income from participation in profits of legal persons,
– the sale of shares (stocks),
– interest and benefits on all types of loans,
– the interest part of the leasing instalments,
– sureties and guarantees,
– copyright or industrial property rights, including the sale of these rights,
– the sale and implementation of rights from financial instruments,
– insurance, banking or other financial activity,
– on transactions with related entities, where the entity does not generate value-added economic value in connection with these transactions or the value is negligible;
- The condition of the difference in income tax paid between the country of residence, management, registration or location and the tax potentially due if the company was a taxpayer in accordance with article 3 paragraph 1 of the CIT Act.
Analysis of condition no. 1 against article 30f par. 3 point 3 letter a; the PIT Act refers not only to the formal holding of shares, but also to the existing state of affairs in the company. An indirect shareholding test is related to the determination of the beneficial owner, i.e. the person actually owning them. Using the theoretical example:
A natural person X (Polish tax resident) is entitled to 40% of company profits. Person Y (Polish tax resident) up to 15% of profit. Between persons X and Y a loan agreement has been concluded (where person X is a lender). Under this agreement the person Y is to pay interest in amounts that may cover the value of profit from the company.
In this case, there is a risk of recognition of a natural person X as a person to whom the provisions on CFC will apply.
Condition of passive sources of income:
To recognize an entity as a controlled entity, revenues from passive sources must reach at least 33% in the tax year. The limit of 33% of revenues should be referred to all sources of income. That means that if the sum of one or several indicated sources of income exceeds at least 33%, the condition in article 30f par.3 point 3 letter b, will be met.
Tax difference condition:
Income taxes in various countries may be smaller than the fiscal burden in Poland. If, for example, we use offshore company which is subject to a 0% tax rate, the tax actually paid is lower than the difference between the CIT tax that would be payable to it in accordance with the Polish Income Tax Act, if that entity was the taxpayer referred to in art 3 par. 1 of the CIT Act.
Specialists from CGO Legal, thanks to many years of experience in international tax law, will analise existing structures in terms of CFC risk. They will also protect the taxpayer from the possibility of recognizing the entity as a foreign controlled entity. Moreover, the tax department experts will help in fulfilling the duties towards the Polish tax authority in the scope of documentation, records and tax returns related to CFC. We invite all interested parties to contact us.