Controlled Foreign Corporation (hereinafter: CFC) legislation that entered into force at the beginning 2015 provide that the income of subsidiaries shall also be taxable in the country of residence of their direct or indirect shareholders, regardless of their taxation in the jurisdiction of the national subsidiary. Importantly, taxation occurs regardless of whether the foreign subsidiary pays the generated profits to the Polish shareholder.
The CFC rules cover the taxable person referred to in Article 3(1) Act of 15 February 1992 on corporate income tax (Journal of Laws of 2014, item 851, hereinafter: the CIT Act, i.e. the taxpayer if established or managed in the territory of the Republic of Poland.
The foreign company as amended is:
- • legal person,
- • capital company in the organisation,
- • an organisational unit having no legal personality other than a company having no legal personality,
- a company not having the legal personality referred to in Article 1(3)(2). The CIT Act established or managed in another country if, in accordance with the tax laws of that other country, it is treated as a legal person and subject to taxation in that country on all its income, irrespective of where it is achieved.
The legal definition of a foreign controlled company is contained in the Regulation of the Minister of Finance of the date 23 April 2015 on the identification of countries and territories applying injurious corporate tax competition (Journal of Laws of 2015, item 600, hereinafter: MF Regulation) according to which it is a company which:
- • is established in a country recognised as a tax haven or a country applying harmful tax competition,
- • registered in a country with which the Republic has not concluded an international agreement (in particular a double taxation agreement),
In addition, according to the CFC rules, the foreign controlled company will be a company that meets the total three conditions:
- in that company, the Polish tax resident has directly or indirectly at least 25% shares in capital or 25% voting rights in the control bodies/deputies or 25% shares related to the right to participate in profits continuously for a period not less than 30 days,
- at least 50% the revenues of this company achieved in its tax year come from dividends and other revenues from the participation of legal persons, revenues from the sale of shares, receivables, interest and benefits on all types of loans, guarantees and guarantees as well as revenues from copyrights, industrial property rights and the sale and implementation of rights from financial instruments,
- at least one the type of revenue referred to above obtained by that company shall be subject in its country of establishment or to its tax administration at a rate of income tax lower by at least 25% on the Polish rate (which in practice includes foreign income tax rates to 14.25%) or income tax exemption or exemption.
It should be made clear that the provisions on CFCs will not apply to foreign controlled companies which will be subject to taxation on all of their income in an EU country or in an EEA State if they carry out real business in that country and those entities whose income does not exceed the equivalent in the tax year. 250,000 EUR according to the average NBP rate of the last day of the previous tax year of the controlled company or they conduct actual economic activities outside the EU and the EEA, where they are taxed on their total income and their income does not exceed 10% revenue generated by this activity (provided that Polish tax authorities are able to obtain tax information from these countries).
Additional obligations for taxable persons with foreign controlled companies are to keep a register of them the taxpayer must provide it to the tax authority within the 7 days after receiving such a request. If he does not do so, the Authority will have the right to determine the income by estimation).
In addition, taxpayers are required to provide a CIT-CFC/PIT-CFC statement of the amount of foreign income of the controlled company achieved in a given tax year until the end of the tax year. 9. one month after the end of the year and pay the tax within that period.
The main objective of the CFC legislation was to combat structures that were designed to avoid, postpone or reduce the tax obligation. However, the rules do not cover issues concerning the use of trust institutions or private foundations which are still widely used by some taxpayers.