From Dr. Monika Laskowska, Center for Tax Analysis and Studies, Warsaw School of Economics
On June 28, the Polish Ministry of Finance launched a public consultation on a new tax law called the “Polish Deal”. According to the Ministry, the proposed changes to the Corporate Income Tax Act should help create a level playing field for Polish companies.
With regard to the transfer pricing regulations, there are some taxpayer-friendly changes to the documentation requirements for transfer pricing. Most of these changes relate to regulations introduced in 2019 that have been criticized by the practice.
However, there are other changes to general regulations that may raise concerns among affiliates, such as the broadening of the definition of tax residence for corporations.
Tax residence in Poland
According to the current Polish tax law, the definition of tax residence for corporations is relatively narrow and imprecise. The corporation is considered to be taxable in Poland (ie taxable in Poland) if it has its head office or management in Poland.
Since there is no tax definition of the “place of management”, the common interpretation from court judgments is a place where essential decisions for a company are made and the day-to-day management takes place.
In the new tax law, the ministry proposes clarifying the concept of the administrative seat. The amended rule covers two special circumstances for non-residents. According to the amended regulation, non-resident companies (not based in Poland) can continue to have a place of business management in Poland if individuals or other persons exercise functions in control, supervisory or management bodies of this company and meet one of two conditions. On the one hand, these persons have their place of residence, headquarters or management in Poland. Alternatively, these persons actually carry out, directly or indirectly through management companies, day-to-day business of the company – on the basis of a constitutional contract, court decision or other constitutional document, power of attorney or an actual connection between persons who are tax residents in Poland or corporations that are tax residents in Poland.
The new definition of the place of management shows these two conditions separately and disjointly.
In the worst case, this means that – under national law – for example, only a member of the management body of a foreign company could subject the company to world income tax in Poland, even if no economic activity was carried out in Poland.
In general, this provision means that the burden of proof of tax residence is shifted to taxpayers. However, it does not contain a domestic procedure for foreign companies to contest the presumption of tax residence in Poland.
Due to the high potential for conflict with regard to residence with other countries, such cases can only be resolved with mutual agreement between the competent authorities of the two countries. Poland has a network of double taxation treaties. However, according to OECD statistics, the average time it takes to complete MAP cases other than transfer pricing is around 20 months. Accordingly, the new regulation creates a considerable tax burden and uncertainty for foreign companies and entangles them in time-consuming international proceedings through individual “cherry picking” factors such as the seat of the board members.
Amicable procedure to determine the tax residence
Under the new regulations, for example, there could be a problem of dual residence if the other legal system attaches importance to the place of registration of the company. Then the conflict test should be used in the circumstances of a double taxation treaty.
Poland has agreed to replace the provisions on dual domicile entities in its 78 contracts under Article 4 (1) of the Multilateral Agreement on the Implementation of Tax Treaty-Related Measures to Prevent Profit Reduction and Profit Shifting (MLI). This means that residency conflicts should be determined through a mutual agreement procedure (MAP) taking into account the place of actual management, the place where the business is incorporated or otherwise incorporated, and other relevant factors.
Since the new definition does not take into account broad aspects of the creation of an effective administrative seat, Poland would in most cases have to give up its newly created taxation rights on the basis of domestic regulations when introducing the MAP – based on the commentary on the OECD model convention.
However, a very long process can be expected in which the conflict between the two countries may not be resolved. The result is much worse when it concerns countries with which Poland does not have a double taxation agreement, such as Liechtenstein, where no conflict instrument can be used.
Not only people with Polish domicile can pose problems for foreign companies with double taxation of domicile.
The changed regulations on the place of management would also have an impact, for example, on companies that have concluded management contracts between a main company and a subsidiary under Polish company law. The new rules would affect situations where a main company is located in Poland. In such circumstances, Poland would gain the right to tax the subsidiary’s worldwide income.
Statement by the Ministry for the purposes of the change
The Ministry explained the change in the law by showing examples of tax avoidance recognized in Poland. Firstly, it was common practice for Polish private individuals to register companies in foreign jurisdictions, while all administrative or control functions in Poland were performed by Polish residents.
Against this background, however, the ministry should take into account that people with Polish residence in many cases often perform economically justified double hut functions on the board of directors in different countries, especially when a cluster / matrix structure of an organization is introduced.
Secondly, in the Ministry’s view, the provision should be directed against the practice of using bogus companies abroad, such as
If such practices are still recognized by the Ministry, it would make sense for the Ministry to first reconsider the effectiveness of many of the other anti-avoidance regulations introduced into the Act in recent years, such as the General Anti-Avoidance Rule (GAAR), etc. .
According to the author, this is another example of the increasing tendency to shift the burden of proof to the taxpayer. In addition, taxpayers are forced to use inefficient and time-consuming procedures to ensure tax security (as in the case of ensuring the tax deductibility of royalties and intangible services through the advance pricing program created for transfer pricing purposes). While tax auditors lose their cases in court, the ministry has shifted the burden of proof to taxpayers to avoid disproportionate taxation.
The Department should consider removing the requirement that individual residents create business residence and introducing the definition of effective administration that focuses on complex issues without multiplying MAP cases. In addition, the new definition of effective management should include more senior managers. The proposed definition encompasses any actual managerial function, including a simple power of attorney, which alone could lead to disputes that Poland would most likely lose in MAP cases.
Monika Laskowska is a tax clerk with many years of experience in the areas of transfer pricing and international taxation.
Active as a tax partner in one of the Big 4 law firms in Poland. She has more than 20 years of experience in the areas of transfer pricing and international taxation and broad experience in supporting clients with pragmatic solutions in tax dispute and tax audit situations.
For almost a decade he was the competent authority in transfer pricing and double taxation cases in the Polish Ministry of Finance.
She was country delegate for Working Group 6 of the OECD (for transfer pricing matters) and for the European Joint Transfer Pricing Forum. Completed PhD in Political Science and now associated with Center of Tax Analyzes and Studies, Warsaw School of Economics