Poland - Taxation of cross-border mergers and acquisitions
Poland - Taxation of cross-border M&A
The Polish tax and legal systems have undergone substantial changes since the early 1990s, first to address the needs of a market economy and later to adjust to European Union (EU) law, as required by Poland’s accession to the EU on 1 May 2004
The Polish tax and legal systems have undergone substantial changes since the early 1990s, first to address the needs of a market economy and later to adjust to European Union (EU) law, as required by Poland’s accession to the EU on 1 May 2004.
Poland has fully incorporated the EU Parent- Subsidiary Directive [90/435/EC], Merger Directive [90/434/EC], and Interest and Royalties Directive [2003/49/EC], and the EU-Swiss Savings Agreement, as well as the main assumptions resulting from the EU Anti-Tax Avoidance Directive (ATAD) [2016/1164/ EC] and EU Directive as regards mandatory automatic exchange of information in the field of taxation [2014/107/EC]. Poland is also the third country to have ratified the Multilateral Instrument (MLI) to Modify Bilateral Tax Treaties.
Recent developments in the Polish tax law have substantially affected the tax environment and could have a major impact on mergers and acquisitions (M&A).
A general anti-abuse rule (GAAR) came into force in Polish tax law on 15 July 2016. The GAAR is intended to prevent artificial arrangements aimed solely or mainly at deriving unlawful tax advantages. In principle, under the GAAR, an activity/ arrangement undertaken with the intent of achieving a tax benefit that is contrary to the subject and aim of the relevant regulations in the tax legislation does not achieve the desired tax benefit if the activity or arrangement was artificial (for tax avoidance purposes). The GAAR should not apply:
- where the tax benefits do not exceed 100,000 Polish zloty (PLN) (in aggregate during the relevant settlement period or on a one-off basis, depending on the situation)
- to entities that have a protective opinion issued by the Minister of Finance (until it is changed or cancelled) or have applied for such an opinion that has not been issued on time (until the opinion is issued)
- where other tax regulations (i.e. special anti-abuse rules) already counteract the tax avoidance.
Therefore, any restructurings involving Polish entities that results in significant tax benefits should have a strong business justification.
Further, the Ministry of Finance started publishing official letters warning taxpayers that some widely used mechanisms may be seen as abusive and leading to tax avoidance. These include, among others, tax optimization schemes involving the use of intermediary EU holding companies for dividend exemption, certain management incentive plans and transactions with bonds within structures involving closed- ended investment funds.
As of 1 January 2017, the taxpayer’s taxable gain resulting from an in-kind contribution in a form other than a business or its organized part is determined to be the amount of such contribution specified in the statute, articles of association or other document (generally, market value), instead of the nominal value of shares acquired in exchange for an in-kind contribution under the former corporate income tax (CIT) provisions. As a result, hidden reserves disclosed on the above transactions are now subject to CIT.
As of 1 January 2017, to benefit from the preferential taxation for share-for-share exchange transactions, valid business reasons should exist. In addition, as of 2017, where a merger, demerger or a share-for share exchange was not carried out for valid business reasons, it would be deemed to have been executed with the main objective (or one of the main objectives) of avoiding or evading taxation.
In January 2017, a definition of ‘beneficial owner’ was added to the Polish CIT Act. Under the definition, the beneficial owner must receive interest for its own benefit and should not act as intermediary, representative, trustee or other body obliged to transfer the interest received to the other entity (in whole or in the part). This definition seems vague as it does not precisely describe the elements of substance that an entity requires to meet the definition.
As of 1 January 2017, a new real estate clause in the Polish CIT Act took effect. Generally, a disposal of shares in a company whose value is derived mainly from real estate is taxable in Poland, provided that the relevant tax treaty contains a real estate clause. Additionally, indirect transfers of such shares may be taxable in Poland where the relevant tax treaty contains a real estate clause.
As of 1 January 2017, a reduced 15 percent CIT rate was introduced for so-called ‘small’ taxpayers and taxpayers starting business activity in their first tax year.
In January 2017, the Polish legislator reinstated value added tax (VAT) sanctions, including an additional tax liability of 20 percent, 30 percent and 100 percent of the understated VAT liabilities or overestimated refund for certain infringements of the VAT Act provisions.
In April 2017, a new bill on exchange of information with other countries came into force. The aim of this regulation was to implement the Euro-FATCA Directive, as well as to introduce provisions enabling fulfilment of the obligations under the Competent Authority Agreement with respect to the Common Reporting Standards (CRS). As a result, new reporting obligations have been imposed on Polish companies belonging to international capital groups.
On 1 January 2018, some important CIT amendments were introduced:
- Disallowance of deductibility of interest on debt push down structures: This amendment denies tax deductions for interest on credits and loans incurred to acquire shares in a company, insofar as they would reduce income related to the continuation of the business of that company, in particular in connection with a merger and transformation of the legal form.
- Separation of sources of income and loss: The bill implemented a concept of two sources of income: capital gain (e.g. from a sale of shares) and income from business activity. As a result, taxable profits and tax-deductible costs are to be separately settled for CIT purposes. Taxpayers must recognize tax losses incurred within each income source separately, except for the tax losses incurred before the provisions entered into force, which can be settled with both sources of income.
- Changes to thin capitalization rules: The thin capitalization rules are extended to loans granted by unrelated parties. The deduction of net financing costs is limited to 30 percent of earnings before income tax, depreciation and amortization (EBITDA) in relation to the surplus of interest over PLN3 million. In addition, the tax authorities can now assess income or tax loss if the cost of debt financing exceeds the amount that the taxpayer would have received from an unrelated party (based on taxpayer’s market creditworthiness).
- Limitation of deductibility of fees for intangible services: As of 1 January 2018, fees paid for certain intangible services (e.g. consultancy, advertising, marketing, data processing), royalties and insurance costs, guarantees and suretyships are excluded from tax-deductible costs if they exceed 5 percent of EBITDA. The limitation covers payments made directly or indirectly to related parties. The restrictions do not apply if the taxpayer obtains an advance pricing agreement (APA) from the Polish Ministry of Finance in that regard. The restriction does not apply to the fees for intangible services up to PLN3 million annually.
- Minimum taxation on commercial property: A minimum taxation is introduced for commercial or office buildings (e.g. shopping centers, department stores, boutiques) with an initial value exceeding PLN10 million. The tax rate is 0.42 percent per year of the surplus of the initial value over PLN10 million. The tax is not levied on real estate assets used exclusively or mainly for the taxpayer’s own purposes. Taxpayers may deduct the commercial property tax from their CIT base.
- Tax rules on demergers: The new CIT rules changed the determination of profits and costs on the sale of shares in a demerged company after the spin-off (where the transaction was based on the organized parts of enterprise). The shareholder’s income is now based on the issue value of shares, which is understood as the shares’ acquisition price, which cannot be lower than their market value.
- Economic substance (anti-avoidance) clause for certain in-kind contributions: As of 1 January 2018, contributions of a business or of an organized part of a business are not tax-neutral without a valid business purpose.
- Tax capital group rules: As of 1 January 2018, the minimum average share capital of entities required to form a tax capital group was reduced to PLN 500,000 (from PLN1 million), direct stake threshold was reduced from 95 percent to 75 percent and the minimum profitability ratio was reduced to 2 percent (from 3 percent). Moreover, donations made within aTCG are no longer tax-deductible.
- Controlled foreign company rules: Controlled foreign company (CFC) status currently depends on, among other things, the effective tax rate imposed on the foreign company (in lieu of a nominal tax rate). The passive profits threshold has decreased to 33 percent (from 50 percent), and the required ‘controlling’ stake has increased to 50 percent (from 25 percent).
In November 2017, a new draft bill of Tax Ordinance Act has been announced. As the bill proposed assumes introduction of several important new regulations, it is therefore considered to be an overhaul of the Polish general tax law principles, in particular those governing tax proceedings. The bill is expected to come into force as of 1 January 2019.
Also in November 2017 the Polish Ministry of Finance and Development announced a project of a new system of special economic zones (SEZ), administratively separated parts of Polish territory providing certain incentives for the investors (i.e. CIT exemption). The legislation is expected to enter into force in 2018, but its final wording may change during the legislative process. Highlights of the proposals are as follows:
- No territorial restrictions: The CIT would be available throughout Poland, not only in SEZ-covered territory as currently.
- New access criteria: Investment expenditure would be based on the unemployment rate (quantitative criteria) and compatibility with Poland’s Mid-Term Development Strategy (qualitative criteria); these criteria will be defined in further regulations.
- Time-limited relief — A decision to allow the CIT exemption for an investment would be limited to a fixed period of 10 to 15 years.
The current system is expected to continue to operate until 2026, but only for permits issued before the new system enters into force (until 2026, two systems will operate in parallel).
In July 2018, a voluntary split payment system for VAT will be introduced, giving buyers the choice of paying VAT amounts into a dedicated bank account of the seller. In some cases, entities that decide to apply the split payment mechanism are expected to receive a number of incentives (e.g. lack of VAT sanctions).
Asset purchase or share purchase
An acquisition in Poland could take the form of a purchase of the shares of a company, its business or particular assets.
However, there is no one preferential form for the acquisition, as the chosen form could depend on many circumstances and the objectives of the entity concerned.
Purchase of assets
Minimal formalities usually mean a purchase of single assets is a swift procedure unless real estate is involved. Only technical issues related to the transfer of the assets affect the timing and signing of the sale agreement.
The sale price should be based on the market value of the assets.
No goodwill arises for tax purposes on such transactions.
For the buyer, the acquisition price of the fixed assets and intangibles is the base for tax-depreciation purposes. Individual depreciation rates (higher than the standard rate) can normally be applied to secondhand assets.
Tax losses are not transferred on an asset acquisition; they remain with the seller.
For the seller, a profit on the sale of assets is added to the mainstream income subject to corporate or personal income tax at normal rates. On disposal, the taxpayer can deduct the net value of the assets. No relief is available to reduce the tax burden. Any losses of the selling company can be used to offset any profit (subject to the normal restrictions).
Value added tax
VAT arises on the sale of goods (e.g. stock, equipment) and certain intangibles. Currently, the standard VAT rate is 23 percent.
Generally, sales of buildings, constructions and their parts are VAT-exempt (except where the sale is performed in principle before the period of 2 years from the first occupation expires). However, in most cases, the taxpayer can waive the exemption where certain conditions are met. Supplies of buildings, constructions and their parts are also VAT-exempt if the seller has no right to deduct input VAT on the sale and certain other conditions are met.
Where the sale is VAT-exempt, it is usually exempt from transfer tax on civil law activities (PCC), except for land and buildings. The purchase of real estate is subject to 2 percent PCC even if VAT-exempt.
A sale of assets outside the scope of VAT is subject to PCC of 1 or 2 percent, payable by the buyer. There is no separate PCC land tax in Poland.
Purchase of a business or organized part of a business
The sale of a business or an organized part of a business gives rise to taxable income for the seller on the difference between its acquisition cost for tax purposes and the sale price taxed at normal corporate rates. For an individual, such profit is taxed in the same way as normal business income.
The purchase of a business or organized part of a business is very quick if land is not included. The main complication is the need to prepare detailed lists of assets and liabilities and arrange for the transfer of agreements. In certain cases, permission of the competition authorities and/or the European Commission is required. The buyer generally is the legal successor for most purposes, but administrative decisions and permits generally do not automatically transfer.
The purchase of a business or an organized part of a business is generally advantageous where the disposing company has tax losses to offset against any potential taxable gain arising on the transaction and the acquiring company can benefit from tax-depreciable goodwill.
The buyer can depreciate the assets purchased based on their market value if goodwill arises. If no goodwill arises, the depreciation base of fixed assets and intangibles is the difference between the purchase price and current assets less liabilities. Goodwill can be depreciated for tax purposes over a minimum of 5 years. Where the assets are regarded as secondhand (more than 6 months old for movable property or 5 years old for buildings), individual depreciation rates (higher than standard rates) can be applied. Difficulties can arise if liabilities are included, especially in connection with the deductibility of interest on assumed debt.
VAT and transfer taxes
Where a whole business or an organized part of a business is sold, the transaction should be outside the scope of VAT. Instead, it is subject to PCC of 2 percent on movable property and real estate and 1 percent on rights. The buyer is liable for the PCC payment.
Responsibility for tax liabilities
The buyer of a business or an organized part of a business is jointly and severally liable with the seller for the tax liabilities relating to the acquired business activity that arose prior to the purchase, up to the amount of the purchase price (unless, despite acting with appropriate care, the buyer was not able to identify such tax liabilities). The seller or the buyer (with the seller’s consent) can seek a certificate from the tax authorities confirming the seller’s outstanding tax liabilities. In this case, the buyer would not be responsible for any liabilities not included on the certificate (which is valid for 30 days).
Purchase of shares
The purchase of a target company’s shares does not cause an increase in the base cost of that company’s underlying assets.
Any gain arising on the sale of shares is subject to CIT as income from capital. Any associated costs of acquisition that were previously disallowed are also deductible within this source of income. Gains on the sale of shares by an individual are subject to 19 percent income tax.
Tax indemnities and warranties
In a share acquisition, the buyer is taking over the target company together with all related liabilities. Therefore, the buyer normally requires more extensive indemnities and warranties than in the case of an asset acquisition.
Tax losses normally stay with a company (there is no change of ownership rule in Poland). Tax losses can be lost if the company is merged or split unless the loss-making company remains in existence. As of 2018, capital losses generated in 2018 and later years cannot be offset against operating income. Tax losses can be carried forward for up to 5 years. Only 50 percent of a tax loss from each previous period can be used in any 1 tax year.
Generally, a sale of shares is subject to PCC of 1 percent, calculated on the shares’ market value (in practice, the sale price). The buyer is liable for the PCC. Generally, PCC tax applies regardless of the nationality of the buyer and the seller if the transaction includes shares in a Polish company (some tax-effective arrangements may be considered).
Purchase of partnership interest
Partnerships (except joint stock partnerships, as of 2014) are regarded as fiscally transparent for income tax purposes, with the profits and losses being allocated directly to the partners. On the sale of the business of a partnership, each partner is regarded as selling their allocable share of the partnership assets. The sale proceeds are taxable together with the value of any liabilities assumed by the buyer, but the net tax value of the assets being sold is deductible. Any profit is subject to tax at the normal rates.
The sale of an interest in a partnership is subject to PCC of 1 percent in Poland, calculated on the market value of the partnership share.
Partnerships are taxpayers for purposes of other taxes (e.g. VAT, PCC).
Choice of acquisition vehicle
Several potential acquisition vehicles are available to a foreign buyer, and tax factors often influence the choice. A 0.5 percent capital duty/PCC applies on capital contributions to a Polish company (share premium is not subject to capital duty in Poland).
Local holding company
Given the limitation on deductibility of interest incurred within debt push-down structures introduced as of January 2018, arrangements that use a Polish special-purpose vehicle acquiring debt to purchase the shares, followed by a merger with the target, are not tax-efficient.
Foreign parent company
The foreign buyer may choose to make the acquisition itself, perhaps to shelter its own taxable profits with the financing costs. Non-residents are not subject to tax in Poland on gains on the disposal of shares in a Polish company (unless a so-called ‘real estate clause’ in a relevant tax treaty applies). All transactions concerning real estate companies should be carefully analyzed.
Non-resident intermediate holding company
Where the foreign country taxes capital gains and dividends received from overseas, an intermediate holding company resident in another territory may be used to defer this tax and perhaps take advantage of a more favorable tax treaty with Poland.
However, in an official 2017 letter, the Ministry of Finance indicated that a structure interposing an EU holding company between the Polish company and a non-EU ultimate parent would potentially lead to tax avoidance on the taxation of dividends if the structure lacks substance.
Acquisitions via a Polish branch are unusual in the Polish market. It is more common to conduct the business activity of a foreign entity through a branch.
Joint ventures can be either corporate (with the joint venture partners holding shares in a Polish company) or unincorporated (e.g. a partnership). Partnerships are generally considered to provide greater flexibility from a tax viewpoint. For example, where the joint venture is initially expected to make losses, the partners should be able to use their shares of those losses against the profits of their existing Polish trades.
In practice, non-tax reasons may lead a buyer to prefer a corporate joint venture. In particular, a corporate body may enable the joint venture partners to limit their liability to the venture (assuming that lenders do not insist on receiving guarantees from the partners).
Choice of acquisition funding
A buyer needs to decide whether an acquisition will be funded with debt or equity. The main concern is often to ensure that the interest on any funding can be offset against the profits of the target to reduce the effective Polish tax rate.
The principal advantage of debt is the potential tax- deductibility of interest (see this deductibility of interest), as the payment of a dividend does not give rise to a tax deduction. As of 2018, however, where loans or credits are taken to fund a purchase the shares, it is no longer possible to deduct the interest cost from the business income of the acquired company. By contrast, the costs of a share issue are not generally tax deductible.
However, according to an interpretation of the administrative courts, this treatment relates only to direct costs (e.g. court fees). Still, the tax authorities’ interpretation of the tax- deductibility of these costs should be carefully observed case-by-case.
Until the end of 2017, a typical scheme considered using a debt push-down structure. Because of limitations introduced on the deductibility of interest incurred within such structures and the new distinction between types of income, these scenarios are no longer tax-effective.
PCC is levied on loans (from non-shareholders) at a rate of 2 percent but can be mitigated if properly structured.
Loans from banks or financial institutions are PCC-exempt. Shareholder loans granted to corporates are PCC exempt. Loans granted by partners to partnerships generally are subject to 0.5 percent PCC.
Cash injections to increase the share capital and additional payments to a company’s equity are subject to PCC at 0.5 percent (except for share premium).
Deductibility of interest
Interest incurred to earn revenue is normally deductible when paid within the respective source of income. However, according to Polish CIT provisions (and confirmed in various interpretations and court verdicts), the capitalization is a form of payment. The exception to this rule is when the loan is used to purchase fixed assets. In this case, interest up to the time the assets are brought into use should be capitalized as part of the acquisition cost of the assets.
Interest on a loan to buy shares is currently considered to be tax-deductible when incurred; however, the source of income in which they should be classified is uncertain.
When financing is to be taken by the Polish company, Poland’s thin capitalization rules should be taken into account.
As of 1 January 2018, the amount of debt financing costs exceeding 30 percent of EBITDA is not tax deductible.
For purposes of the new limitations, debt financing costs include all costs related to obtaining financial resources from other entities, including unrelated parties, and using such resources. In particular , this includes interest, including interest capitalized or included in the initial value of the fixed or intangible asset, fees, commissions, bonuses, the interest component of leasing instalments, penalties and charges for delays in paying liabilities, and the costs of securing liabilities, including the costs of derivative financial instruments, without regard to the recipient of the payment.
Interest-like revenues include interest revenues, including interest capitalized to the loan principal and other revenues economically equal to interest that could fall into a category of debt financing costs.
Surplus debt financing costs are the excess of debt financing costs deductible in the tax year over the interest like revenues subject to the tax in that year. Debt financing costs related to loans used for financing a long term public infrastructure projects are excluded (where certain conditions are met). In a TCG, debt financing costs and interest-like income resulting from agreements concluded between group entities are also excluded. According to the new legislation, the restrictions do not apply where the surplus debt financing costs do not exceed PLN3 million in the given tax year (12 months). In the case of TCGs, the threshold applies to the whole group.
Where debt financing costs exceed the amount of financing that the taxpayer could obtain from a third party, the tax authority is entitled to adjust the taxpayer’s income or loss.
Withholding tax on debt and methods to reduce or eliminate it
Interest, royalties and certain payments for services (including advisory, advertising and accounting services and guarantee fees) paid to a foreign entity are subject to 20 percent WHT under domestic legislation. This is reduced or eliminated under most Polish tax treaties. To qualify for the reduced rate, the payer must have a certificate of the beneficiary’s tax residence. In addition, the entity receiving interest must be the beneficial owner. Where the interest is WHT-exempt under the domestic legislation, the status of the beneficial owner must be confirmed with a written statement.
Under current law, if the certificate confirming the tax residence of the payment’s recipient does not include the period of its validity, then it should be considered as valid only for 12 calendar months following its date of issuance (as the data included in the certificate must be up-to-date). Where the recipient’s seat changes during the 12-month period, a new certificate should be obtained immediately.
This practice applies only where the respective tax treaty includes an exchange of information clause.
The EU Interest and Royalties Directive is fully in force in Poland. Consequently, interest and royalties paid toEU- resident companies or EU permanent establishments (PE) can be exempt from WHT in Poland. In order to apply the exemption, the Polish company paying the interest or royalties should have appropriate documentation, which includes the beneficiary’s certificate of residence and a written statement that the beneficiary’s revenues are not CIT-exempt (regardless of their source). Similar provisions apply to Switzerland.
Checklist for debt funding
- The use of bank debt may eliminate transfer pricing problems and should obviate the requirement to withhold tax from interest payments. (The relevant tax treaties and the new beneficial ownership of interest rules should be analyzed.) A certificate of tax residence and, where the exemption claim is based on the EU directives, a shareholder statement is required.
- Deductibility of interest over PLN3 million on debt (including both related and unrelated) is limited to 30 percent of EBITDA.
- WHT of 20 percent applies to interest payments to non-Polish entities unless a lower rate applies under the relevant tax treaty or EU directive.
- Potential foreign exchange implications.
- PCC implications on providing funds.
A buyer may use equity to fund its acquisition, possibly by issuing shares to the seller in satisfaction of the consideration. Further, the buyer may wish to capitalize the target post- acquisition.
Any establishment (or increase) of the share capital in the Polish company is subject to 0.5 percent PCC in Poland (a share premium is not subject to PCC). Dividend payments from a Polish company may be exempt from WHT if the conditions of the EU Parent-Subsidiary Directive are met. Dividends are not deductible for Polish tax purposes.
Although equity offers less flexibility should the parent subsequently wish to recover the funds it has injected, the use of equity may be more appropriate than debt in certain circumstances, such as:
- low EBITDA and/or creditworthiness of the borrowing entity
- where the target is loss-making, in which case it may not be possible to offset the cost of interest
- where the funding company prefers not to recognize taxable revenue arising from interest.
Generally, dividends paid by a Polish company are subject to 19 percent WHT, which is reduced under most of Poland’s tax treaties. To qualify for the reduced rate, the payer should have a certificate of tax residence for its shareholder.
In principle, foreign dividends received by a Polish company are subject to normal CIT, unless a tax treaty stipulates otherwise. The Polish company receiving the dividend can offset the WHT against its mainstream corporate tax liability where the treaty includes the respective provisions.
For 75 percent shareholdings in non-EU, non-European Economic Area (EEA) and non-Swiss tax residents, a credit can also be claimed for underlying tax paid on the profits from which the dividend is paid. This only applies where the subsidiary is resident in a country with which Poland has concluded a tax treaty and the Polish entity has held the shares for at least 2 years. The total foreign tax credits cannot exceed the Polish tax payable on the dividend income. However, this applies only where the relevant treaty includes an exchange of information clause.
Domestic dividends and dividends paid to an EU OR EEA- resident company (or its PE), where the shareholder owns at least 10 percent of the payer, are exempt from Polish WHT, provided the shares have been owned for more than 2 years. In order to apply the exemption, the Polish company paying the dividend should have appropriate documentation, which includes the beneficiary’s certificate of residence and a written statement that the beneficiary’s revenues are not CIT-exempt (regardless of their source). Dividends can qualify conditionally even where the holding period has not been met. This treatment also applies to dividends paid to Swiss shareholders (the required shareholding threshold is 25 percent) and European cooperative societies (societas cooperativa Europaea — SCE).
Dividends paid by an EU OR EEA subsidiary to its Polish parent company are exempt from income tax in Poland where the 2-year holding period is met and the subsidiary is taxable on its worldwide income in an EU OR EEA member state. The participation requirement for a Polish parent company is a shareholding of at least 10 percent. This treatment also applies to dividends paid from a Swiss subsidiary to its Polish parent company. In this case, the required shareholding threshold is to 25 percent. These parent-subsidiary provisions also apply to SCEs.
The Polish tax system used to be very form-driven and generally classified hybrid instruments by their legal form. Currently, due to the legislative amendments aimed at artificial tax avoidance schemes, the Polish tax authorities have adopted a more substance-oriented approach. Not only are the tax authorities authorized to re-characterize the transaction based on the substance over form principle, but they are also empowered to apply the GAAR. As the set of instruments granted to the authorities by the legislator expands, a need to have sufficient business justification before implementing planned transactions is ever more essential.
Any discount on the issue of securities is recognized as a deduction for tax purposes when the security is redeemed. This is only treated as income for the buyer on redemption.
Any deferred settlement must be analyzed in detail case-by- case as its tax treatment in Poland depends on the wording of the agreements and circumstances of the transaction.
Based on the CIT law, in principle, any method of settling liabilities (e.g. by offset of mutual receivables/liabilities between the parties) should be treated as a payment and result in the recognition of foreign exchange differences for tax purposes (provided other conditions are met).
Many of the recently introduced regulations to the Polish CIT law are likely to have a significant impact on the CIT position of the Polish companies. As some aspects of the changed rules are ambiguous, the potential loopholes arising are yet to be established in the Polish tax authorities’ practice. Therefore, when making the decision about undertaking a transaction involving any Polish-based company, it is recommended to observe how the market practice evolves in this respect.
Concerns of the seller
Sale of assets
Capital gains are subject to tax at the normal Polish CIT rate. In principle, the sale of assets is subject to VAT. The buyer is liable for any PCC payment. A capital gain obtained by an individual seller is subject to tax at normal progressive tax rates. However, where the individual is subject to flat-rate tax on business activities, the gain is taxed at 19 percent.
Sale of shares
Based on Polish income tax provisions, the seller is subject to CIT on a gain on the sale of shares of a Polish company. However, non-residents should not be subject to income tax in Poland under most Polish tax treaties (unless a so-called ‘real estate’ clause in the treaty applies).
Where the shares are acquired in exchange for a contribution in kind to an enterprise or an organized part of enterprise, a gain may be deferred until the shares are sold. A compulsory redemption of shares is treated as a dividend and the income derived thereupon is deemed as an income of a capital nature.
A share buyback is treated in the same manner as a gain on a sale of shares.
Gains on the sale of shares obtained by an individual are subject to 19 percent tax, settled within the capital source of income
In principle, most investments in Poland do not require advance approval for non-strategic sectors. On an acquisition, the most common approval required is that of the Office for the Protection of Competition and Consumers, often referred to as the anti-monopoly office. The EU competition rules apply.
Where the Polish target company owns land, the buyer must obtain advance permission from the Ministry of the Interior to acquire more than 50 percent of the shares. As of 1 May 2004, this requirement does not apply to EU/European free trade area buyers.
In case of agricultural and forest lands there are still some restrictions.
Company law and accounting
Based on Polish Commercial Companies Code, the main forms of reorganizations are mergers and demergers of the companies. Another popular form of reorganization is the contribution in kind of a business or organized part of the business.
Two types of mergers are possible in Poland: a takeover by an existing company and a merger of two companies into a new company. From a legal perspective, the merger is the most complete method of integration because the acquiring company is the legal successor to all rights and obligations of the acquired company. A merger also generally ensures that administration decisions, concessions and permits are automatically transferred to the acquiring company. This is the general position, but other legal issues may be involved and each case should be analyzed separately. The interpretations of tax law issued by the Ministry of Finance to the company being subsequently merged into another entity (the acquiring entity) do not protect the latter after the merger.
Most mergers between Polish companies are tax-free for the merging companies and their shareholders, provided that no cash is distributed and/or that, before the merger, the acquiring entity owned either no shares or more than 10 percent of the shares of the acquired company.
The amendments to the CIT Act which has come into force as of 1 January 2017 introduced a presumption according to which if a merger was not carried out for valid business reasons it should be deemed as executed with the main objective (or one of the main objectives) of avoiding or evading taxation. Where it can be shown that the merger was not carried out for bona fide commercial reasons and that there was intent to avoid tax, the transaction is no longer tax-free.
Mergers do not affect hidden tax values, such as goodwill or increases in the value of assets. Existing prior year tax losses are eliminated unless the loss company survives. Generally, a merger may be beneficial where the business being transferred is profitable because unrealized gains are not taxed on the merger. A merger may also be beneficial where the company taken over has no significant tax losses (which would be lost on a merger). On the other hand, income derived upon mergers qualify as income from the capital source and therefore cannot be offset against tax deductible costs resulting from an ongoing activity.
Poland has fully adopted the EUTax Merger Directive, so mergers between Polish companies and entities resident in EU member states are treated the same as domestic mergers.
Thus, under the commercial law, cross-border mergers can take place where a European company is being created. Also, domestic corporations (and limited joint stock partnerships) can be merged cross-border with the EU-based company described in the directive (although a limited joint stock partnership cannot be the acquiring entity).
Where the acquiring company has a shareholding of less than 10 percent of shares of the company being acquired, the value of the net assets acquired in excess of the acquisition costs of this shareholding is treated as a dividend. However, gains realized upon merger cannot benefit from the WHT exemption provided in the Polish CIT Act. The other shareholders of the entity being taken over are treated as realizing a gain equal to the difference between the acquisition cost of those shares and the issue value of new shares, but taxation is deferred until the new shares are disposed of.
Where a merger is accounted for using the acquisition method, the books should be closed on the date of the merger and the tax year-ends. There is no such obligation where the merger is accounted for using the pooling of interest method. In this case, the merged entity can file a single year-end return.
Mergers are outside the scope of VAT and, in principle, create no negative VAT consequences.
A merger of a Polish corporation and an SCE is not subject to PCC. Generally, any increase in share capital as a result of the merger is subject to PCC at 0.5 percent (provided the increase was not previously taxed in the merging entities, unless, in the case of a corporation, such non-taxation of contributions was allowed by the domestic law of the EU country of one of the merging companies).
Due to complex legal procedures, the process can take 6 to 8 months, although a merger of a parent and a 100 percent owned subsidiary or a merger of sister companies usually takes 4 to 6 months.
KPMG in Poland notes that the timeframes for cross-border mergers vary, depending on the local jurisdictios and the direction (inbound or outbound) of the merger. During recent years, cross-border mergers became more popular in Poland.
A company may be divided into two or more companies.
A division of a joint stock company is not possible unless the initial capital is fully paid-up. Partnerships cannot be divided. A company in liquidation that has started distributing its assets to shareholders or a company in bankruptcy cannot be divided.
A division may be effected by:
- transferring all the assets of the company
- being divided to other companies in exchange for shares in the acquiring company, which are taken up by the shareholders of the divided company (division by takeover)
- forming new companies to which all the assets of the divided company are transferred in exchange for shares in the new companies (division by formation of new companies)
- transferring all the assets of the divided company to an existing company and a newly formed company or companies (division by takeover and formation of a new company) transferring some of the assets of the divided company to an existing company or a newly formed company (division by separation).
No CIT obligation usually arises for the demerged entity or its shareholders as long as an organized part of the business is transferred to the receiving entity and, in a division by separation, an organized part of the business remains in the company being demerged and an organized part of the business is transferred to the receiving entity. This does not apply where the main purpose of the demerger is to evade or avoid tax. In addition, the demerger is not tax-free if the acquiring entity has less than 10 percent of the shares of the company being demerged and/or the cash is distributed. The amendments to the CIT Act that came into force as of 1 January 2017 introduced a presumption that where demerger was not carried out for valid business reasons, it should be deemed as executed with the main objective (or one of the main objectives) of avoiding or evading taxation.
If the transaction is not tax-free, the following income tax implications arise:
- Shareholders of the company (companies) being divided: The difference between the value of the shares received and the acquisition costs of the original shares established in proportion to the transferred assets is treated as a dividend. However, gains realized on demerger may not be subject to the domestic WHT exemption.
- Demerged company: The difference between the market value of the assets being transferred and the tax written-down value is taxable or tax-deductible. The WHT exemption is not applied.
- The entity receiving part of the demerged business: The difference between the value of assets received and the issue value of the shares issued to the shareholders of the demerged company is treated as taxable income or tax-deductible.
Generally, a demerger should not be subject to VAT. Any increase in share capital is subject to PCC at the rate of 0.5 percent. Whether the increase of the share capital covered by assets that were previously taxed in the demerging entity is subject to 0.5 percent PCC should be analyzed case-by-case.
Contribution in kind
The contribution in kind of a business or an organized part of a business in exchange for shares is not subject to corporate tax at the time of contribution. As of 1 January 2018, the tax neutrality of such events depends having on valid business justification. A contribution of assets (including shares) is regarded as a taxable disposal. The contributor is regarded as having received proceeds equal to the value of contribution determined in the articles of association or another document of a similar nature. However, if the value of contribution is lower than the market value of contributed shares or the value is not indicated in the above documents, the income would be equal to the market value of the contribution performed.
For companies, any gain is added to the capital source of income and subject to corporate tax at normal rates. For individuals, a profit from a contribution of assets other than a business or organized part of a business in exchange for shares is subject to 19 percent tax.The contribution of shares carrying an absolute majority of voting rights in companies by a Polish company to another EU OR EEA-resident company is not subject to tax. In order to benefit from the preferential taxation for such events, valid business justification should exist.
For tax depreciation purposes, taxpayers receiving a contribution in kind of a business or organized part of a business generally should use the initial value of the fixed assets in the books of transferring party (the continuity principle). Special care should be taken if liabilities are included.
Contributed goodwill, knowhow and assets allocated to reserve capital cannot be depreciated for tax purposes. The contribution in kind of a business or an organized part of business is not subject to VAT. A contribution of assets or rights is subject to VAT if the supply of such goods would be subject to VAT. An increase in share capital is subject to PCC at the rate of 0.5 percent (a share premium is not subject to PCC). By contrast, the contribution in kind of a business or an organized part of the business to a capital company is currently not subject to PCC.
Generally, each company is taxed on a stand-alone basis. A fiscal group can be created for corporate tax purposes, consisting of a Polish parent and its 75 percent Polish subsidiaries with an average qualified share capital per company of PLN500,000. The subsidiary companies cannot own shares in other companies that are members of the group.
An agreement must be signed by the members to form a fiscal group for at least 3 years. This should take the form of a notarized deed, which is then registered with the tax office. A fiscal group is regarded as one taxpayer. Losses arising before the group is formed cannot be offset against the group’s profits.
A number of conditions need to be met. Operationally, the most significant requirement is that the taxable income of the group for tax purposes must be equal to at least 2 percent of gross taxable revenue.
The arm’s length principle generally applies to transactions between related companies. The Organisation for Economic Co-operation and Development’s (OECD) transfer pricing guidelines are followed in applying domestic transfer pricing legislation. The provisions apply to transactions between related parties in circumstances where the taxpayer does not carry out transactions on an arm’s length basis. In these cases, the tax authorities have the right to adjust the level of declared income.
As of 1 January 2017, significant changes to the rules governing the relationships between related parties were introduced. In particular, the amendments imposed new transfer pricing reporting obligations and new criteria for the preparation and extent of transfer pricing documentation.
The changes also increased the threshold for determining the existence of capital relations to 25 percent. Taxpayers whose revenues or expenses in the year preceding the tax year exceed 10 million euros (EUR) are obliged to prepare a comparable analysis (benchmarking study), and those exceeding EUR20 million also have to prepare a master file. Further reporting requirements are imposed on domestic taxpayers whose consolidated revenue exceeds the equivalent of EUR750 million — they are required to prepare and submit to the tax authorities a report on the amount of income and tax paid and the places of business activity of its subsidiaries and foreign establishments.
A taxpayer may conclude an APA with the Minister of Finance to confirm the appropriateness of the taxpayer’s transfer pricing policy. The purpose of an APA is to agree in advance on the arm’s length nature of the terms of the transactions between related parties. APAs also cover the attribution of profit to PEs. Once an APA is concluded, the local tax authorities will not be able to question the arm’s length nature of the covered transactions. As of 1 January 2018, restrictions on the deductibility of fees for intangible services do not apply to entities that have obtained an APA. At the end of January 2018, the Minister of Finance had concluded only 43 APA agreements. However, this number may rise in the future as the government has announced plans to introduce a less formalized APA procedure for low value-adding services.
Foreign investments of a local target company
Poland recently amended CFC provisions — see ‘Recent developments’ above for details.
Comparison of asset and share purchases
Advantages of asset purchases
- The buyer may depreciate the assets acquired at market value. If goodwill arises (it is possible to acquire only part of the business) on assets under an asset deal, the price constitutes the depreciation base.
- The tax liabilities assumed by the buyer (for which they are jointly and severally liable with the seller) can be eliminated or limited if a special certificate is obtained from the tax authorities (where a business or organized part of a business is acquired, no such liability arises on purchases of single assets).
- If the purchase is funded by debt, the interest can be offset against the profits of the acquired business.
- Loss-making companies within the buyer’s group can absorb profitable operations (or vice versa), reducing the effective tax rate.
- If the purchase is subject to VAT, the input VAT can be deducted.
- Where a business or organized part of the business is purchased, goodwill is subject to tax depreciation.
Disadvantages of asset purchases
- Possible need to renegotiate supplier agreements and employment contracts.
- Pre-acquisition losses and other tax attributes of the target company are not transferred with the business. They remain with the target company or are lost.
- Higher capital outlay is usually involved.
- Higher capital taxes if ongoing business is purchased (usually) or a cash flow disadvantage if the transaction is subject to VAT.
- Possible VAT clawbacks (if the transaction is VAT-exempt).
- May be unattractive to the seller, thereby increasing the price.
- Usually involves more formalities because each individual component needs to be transferred.
- Structure of transaction must be carefully examined; re-classification may trigger adverse tax consequences.
Advantages of share purchases
- Likely more attractive to seller, so the price is likely lower (if properly structured, no capital gains tax arises for the seller).
- Tax losses and other attributes of the target company can be used post-acquisition.
- May gain the benefit of existing supply and technology contracts.
- Lower capital taxes payable (usually).
- Not subject to VAT, so simpler and quicker to execute.
- Purchased company is not subject to taxation on the transaction.
Disadvantages of share purchases
- Liable for any claims or previous liabilities of the entity, including tax liabilities.
- No immediate deduction for the purchase price.
- More difficult to finance tax-efficiently.
- Lack of effective tax-consolidation means that post- acquisition integration with the buyer’s existing Polish operations can be complex; no step-up on assets is possible.
- 1 percent PCC payable by the buyer on the acquisition but no recognition of tax-deductible goodwill.
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