In the April 2024 edition of our blog series, we delve into the intersection of real estate and taxation in Poland. For further insights into particular topics, refer to the original articles linked below [in Polish, paywall]
WHT to alternative investment funds
WHT implications for payments to Alternative Investment Funds
Withholding Tax (WHT) regulations have been a topic of contention due to their ambiguity and the lack of clear guidelines for implementation. Challenges persist regarding the restrictive interpretation of WHT provisions, particularly concerning preferential treatments like the participation exemption.
Despite ongoing discussions, definitive guidance from tax authorities is still awaited, with the Ministry of Finance indicating plans for working groups to address these issues.
Preferential WHT treatment for holding companies – facilitation or pitfall?
Foreign holding companies have faced challenges in obtaining opinions on WHT preferential treatment, creating uncertainties for both Polish payers and foreign holding entities.
The application of preferential WHT treatment depends on various factors, including the type of fund and its compliance with specific criteria outlined in the Corporate Income Tax (CIT) Act. Recent court rulings have provided some clarity on the interpretation of WHT regulations, emphasizing the importance of meeting substantive business activity requirements.
Real business activity
Regardless of the specific WHT provisions applied, certain conditions for preferential treatment remain consistent, such as documenting the foreign fund’s residency status and demonstrating its genuine business activities.
Verification of the recipient’s genuine business activity is essential, requiring documentation of key operational aspects and decision-making processes. The role of the fund manager, compliance with regulatory requirements, and the allocation of costs are crucial factors in assessing the legitimacy of preferential WHT treatment.
Conclusion
Despite ongoing debates and legal interpretations, several uncertainties persist regarding the application of WHT regulations to foreign alternative investment funds.
The need for comprehensive guidelines and clarifications from tax authorities is evident to address the complexities surrounding WHT implications.
As discussions continue, it’s essential for stakeholders to stay informed and engage in dialogue to ensure clarity and consistency in real estate taxation practices.
Lowering the nominal value of shares is CIT neutral
Overview
Lowering the nominal value of company shares without compensation to shareholders is deemed neutral under the Corporate Income Tax (CIT) Act – confirms the tax administration.
Key details
The case involved a Polish limited liability company (LLC) formed through the transformation of a civil partnership, with two individual Polish tax residents as equal shareholders. The company considered reducing its share capital by lowering the nominal value of all shares according to Article 263 of the Commercial Companies Code. Shareholders would not receive any compensation as part of this reduction. The intention is to maintain the same number of shares for each shareholder, only adjusting their nominal value, thus reducing the company’s share capital. The amount resulting from the reduction of the share capital due to the decrease in the nominal value of shares would be allocated to cover losses from previous years.
This action does not generate income for the company under the CIT Act. Reducing the value of shares somewhat resembles the cancellation of shares. Thus, should be tax-neutral. The National Tax Administration Director agreed with this stance.
WHT preferences for holding companies – facilitation or pitfall?
Overview
Holding companies, particularly foreign ones, face challenges in obtaining opinions on the application of withholding tax (WHT) preferences due to the approach of the Lublin Tax Office. This situation poses difficulties for both Polish payers making such payments and the foreign holding companies themselves.
Key details
Since January 1, 2019, the Corporate Income Tax (CIT) Act introduced the institution of opinions on the application of the exemption from flat-rate withholding tax (WHT). However, due to the postponement of the mandatory WHT mechanism application, both Polish and foreign taxpayers initially showed little interest in obtaining these opinions.
Interest in this institution increased in 2022 when the mechanism began to apply to dividends, interest, and license fees to foreign related entities. Holding companies, especially those investing in Polish companies, often face challenges in obtaining opinions due to the tax authority’s lack of understanding of their business realities and purposes.
The tax authority often denies issuing opinions based on doubts about the company’s real ownership or its genuine economic activity presence in its home country.
Tax authority’s approach
The tax authority often denies opinions, citing doubts about the beneficial ownership or the lack of genuine economic activity.
They often overlook the unique characteristics of holding companies, simplifying their activities and automatically assuming tax avoidance motives.
The tax authority tends to view holding companies’ financing from shareholders as evidence of inadequate resources for independent economic activities.
Critique and practical implications
The tax authority’s criteria for evaluating holding companies’ economic activities are often misaligned with their actual business models.
Holding companies’ investment-focused activities differ significantly from typical service or production businesses, leading to misconceptions by tax authorities.
The tax authority’s stringent approach hinders holding companies’ ability to obtain WHT preferences, discouraging foreign investment in Polish companies
Conclusion
Holding companies face practical challenges in obtaining opinions on WHT preferences due to the tax authority’s lack of understanding of their business realities.
Until this approach changes, holding companies must weigh the practicality of seeking opinions against the option of immediate WHT deduction and subsequent refund requests
Disputes over the property tax could drag on for years
Overview
The Ministry of Finance is working on changes to the property tax, especially regarding the definition of buildings used in business activities. The motivation for these changes stems from a ruling by the Constitutional Tribunal in July 2023, which deemed the current definition ambiguous, leading to disputes.
Key details
The new regulations are expected to come into force in 2025, but they are already being considered by administrative courts. These changes may only temporarily solve issues, with a long-term suggested solution being the taxation of all properties based on their value, potentially reducing disputes.
Suggestions include centralizing the issuance of interpretations and introducing binding classification opinions to reduce interpretational discrepancies between municipalities.
Additionally, creating a unified database of tax rates for all municipalities could lower the cost of data updates for companies with properties in different locations.
The proposal also involves establishing a separate tax office for taxpayers subject to property taxation.
Polish companies to face Global Minimum Tax
In 2024, significant changes are expected in Poland’s tax system, with the government planning to enact a law implementing the provisions of EU Council Directive 2022/2523 on the global minimum tax.
Key details
In October 2021, over 135 countries adopted a two-pillar agreement to reform the international tax system, known as the BEPS 2.0 project. One pillar, called Pillar 2, allows for the introduction of a global minimum tax, ensuring that multinational corporations pay a minimum level of tax.
Multinational groups subject to the global minimum tax will calculate their income and taxes on a jurisdictional basis, consolidating financial data across all subsidiaries operating in a particular country.
If the effective tax rate in a jurisdiction falls below 15%, the group will be required to pay a top-up tax to reach the minimum threshold.
Polish companies, both domestic and subsidiaries of foreign multinational groups, need to consider mechanisms to mitigate the impact of the global minimum tax, such as compensation mechanisms, adjustments for asset-based activities, and safe harbors.
These mechanisms aim to balance the tax burden and provide relief for companies engaged in certain types of activities or facing specific tax challenges.
Conclusions
The implementation of the global minimum tax represents a significant and complex reform in the international tax landscape. Polish companies should proactively assess their tax strategies and engage in discussions to ensure compliance with the new regulations.
Our support
Stay tuned for next month’s edition as we continue to explore the dynamic landscape of real estate taxation in Poland.
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