During Tuesday's 13th Transfer Pricing Forum, a representative of the Ministry of Finance announced that the provisions on the so-called "hidden dividend" would enter not as originally assumed from the beginning 2022, but one year later, from 1 January 2023
The reason for this decision is the need to refine the proposed provisions, to further analyse the actual effects of the changes, also in the context of their relationship with other provisions of the Income Tax Act.
Doubts of taxpayers
The draft amendments raised many doubts on the part of small taxpayers, in particular in view of the wide range of accounts to be applied to the limitations and to the largest taxpayers, including the State Treasury companies, which would also become the addressees of the restrictions if the provisions entered into force in the current design. The MF representative pointed out that it would take additional time to refine the rules in such a way that they actually serve the objective pursued, rather than constituting an excessive restriction on the current company accounts.
It appears that it is unnecessary to make the application of the hidden dividend rules dependent on the fulfilment of the market conditions for payments made
Draft amendments
According to the reasons for the draft amendment, the new rules are intended to prevent the payment of profits from the company in the form of a so-called hidden dividend. In the case of dividend payment, the taxpayer is not able to recognise the cost of obtaining revenue.
Consequently, the distribution of profits to shareholders is made in such a way as to reduce the taxpayer's income by crediting it to the cost of obtaining income. It comes to an economic distribution of profit, which, however, is not formally a dividend.
The hidden dividend may take different forms: – non-business-related payments, – non-market transactions, – over-indebtedness of the taxpayer from different titles to entities affiliated to the capital group, – the use by the taxpayer of assets belonging to the shareholder or associated entities that originally belonged to the taxpayer.
If it is found that the benefit paid is a hidden dividend, the value of the benefit will not be at the expense of obtaining income for the taxpayer.
These assumptions would be achieved by adding corporate income tax to the law Article 16(1)(15b), according to which it will not be possible to include in the cost of obtaining revenue, the costs incurred by the taxable person who is a company in connection with the provision made by the entity associated with that company or with the shareholder if the incurred cost constitutes a hidden dividend.
Not all benefits made by a shareholder or by a related entity to the taxpayer will constitute a hidden dividend. The definition of hidden dividend has been introduced in Article 16(1d), on the basis of this, we can determine that the costs constitute a hidden dividend if:
- the amount of those costs or the time limit for their payment depends on the taxable person's gain or amount of that profit; or
- where certain costs would not have been incurred by a reasonable taxpayer or the taxpayer could have incurred lower costs in the event of a comparable benefit being made by an unrelated entity (use transfer pricing rules) or
- These costs include remuneration for the right to use assets which were owned or co-owned by a shareholder or an entity associated with a shareholder (shareholder) prior to the formation of the taxpayer;
Reasons for considering costs as a hidden dividend as set out in point 1 and 2 have been reduced by introducing Article 16(1e) the exclusion of them where the sum of the costs incurred in the tax year by the taxable person constituting the hidden dividend under those provisions is less than the amount of gross profit within the meaning of the accounting provisions obtained in the financial year in which those costs were taken into account by the financial result of the taxable person.
Changes in company structures
This regulation calls for changes in the business structures of companies which distribute to a large part the revenues of the company to shareholders through contracts concluded with them, e.g. leases, leases and services.
The current wording of the amending act, although it is already improved against first the version is still characterised by a wide range of impacts and enters into relations with many other regulations, including transfer pricing.
There are also voices that it is unnecessary to make the application of the hidden dividend rules dependent on the fulfilment of the conditions of marketability in the case of payments made, as the transfer pricing rules provide a complete solution in this respect, which allows tax authorities to both verify and make appropriate adjustments and estimate the tax base.
The postponement at the time of entry into force of the hidden dividend rules will allow for further analysis on the part of the legislator and on the part of taxpayers increases the predictability of tax rules in the year 2022.
However, when planning the settlement of transactions between shareholders and companies, or the principles of cooperation in structures where such dependencies occur, the planned changes should already be taken into account.
It is to be expected that, in reality, at the earliest mid-year 2022 we will know the confirmed details of the new regulations, and then, in order to eliminate possible risks, additional verification of the accounting rules that may be covered by these rules may be necessary.