Poland prepared new rules for Controlled Foreign Corporations

The Polish Ministry of Finance has prepared new draft legislation to combat tax avoidance involving the transfer of income by Polish companies to companies founded in countries with more favorable tax treatment than in Poland.

The draft has been submitted for inter-ministerial consultation. It will introduce into Polish tax legislation the principle of taxation in Poland of profits of controlled foreign companies, commonly called: CFC - Controlled Foreign Corporations. Such companies need not be founded in tax havens, but also in other countries with preferential tax regimes. Poland is one of the few EU member states not to have such legislation on the statute books.

According to the Ministry the draft aims to ensure that Polish companies will pay tax in Poland on income earned by a controlled company established or administered in a country with a lower tax burden. This additional income would be taxed in Poland at the standard rate of corporate income tax at the rate of 19 percent.

The foreign company would be considered a CFC if at least half of its revenues can be classified as passive income, e.g. from dividends, interest income, gains from the sale of shares, income from intellectual property. If this is the case the Polish company would pay 19 percent tax on all of the CFC’s income, active and passive.

The new rules would be applied if a foreign company is resident in a country or territory in which the statutory income tax rate at least 25 per cent less than Polish personal income tax rates (currently a maximum of 32 per cent) or the Polish corporate income tax rate (currently 19 per cent) or where foreign income - in this case from Poland- in general is not taxed. This means that states with a corporate income tax of 14.25% or below such as Ireland, Cyprus, Bulgaria and Hungary (except for Malta and UK), all of which are used for tax efficiencies by Polish companies, would be caught by the CFC rules.

Also the new regulations would address only those Polish companies, which have at least 25 percent of the shares, or 25 percent of the voting rights in the company's governing bodies (e.g., the board of directors), or 25 percent of those shares entitled to the right to participate in the profits.

The draft will be developed to include a solution that would avoid multiple taxation of the same income as well as the introduction of a minimum threshold below which the provisions of the controlled foreign company legislation in general would not be used.

According to the Polish Ministry of Finance the new rules on CFCs does not violate the provisions of international agreements on the avoidance of double taxation to which Poland is a party, so the ministry does not foresee the need to change them. The Ministry assumes that the new rules will come into effect at the beginning of 2014.

Based on https://www.premier.gov.pl/