Change to the regulation for a Controlled Foreign Company (CFC)

On the 9^th August, 2014, Sejm (lower chamber of the Polish Parliament) has approved the amendments from the Senate, to the draft bill amending the Corporate Income Tax Act, Personal Income Tax Act and other Acts, and thereby introduced new rules on CFC’s. These changes were largely to confirm and for editorial character, with the next step being, the draft law being submitted for signature by the President. The draft law must be signed by the President within 21 days. The rules for CFC’s is likely to come into force from 1^st January, 2015.

The purpose and scope of the regulations

The legislative changes are designed to discourage Polish taxpayers from investing outside of Poland purely for tax purposes, and reduce tax planning structures which use CFC subsidiaries and Permanent Establishments (PE).

In particular, a foreign company will be regarded as a CFC if:

• it is a resident in ‘tax haven’;
• it has residency in a country with which Poland has not concluded any international conventions, in particular, double tax treaties, or the EU has not concluded any international conventions;
• it meets the following criteria:

a) at least 25% of the capital shares, voting rights or shares related to the right to participate in profits, held directly or indirectly by a Polish taxpayer, for an uninterrupted period of 30 days;

b) at least 50% of the income should come from so-called passive income (i.e. dividends, interest, royalties, capital gains from the sale of shares in companies or receivables);

c) at least one type of passive income is subject to a lower rate tax rate than the nominal tax rate of 14.25%, or is exempt from tax in the country of residence, or excluded (unless the exemption from the Directive 2011/96/EC of the Council seen on the common system of taxation and subsidiaries of different Member States);

The regulations will be applied appropriately to activities in the form of foreign permanent establishments. CFC regulations will not apply if the foreign company conducts real business activities.

Actual business activity – definition

In order to assess, whether the controlled foreign company conducts real business activities, it will be verified if:

• it has at its disposal premises/offices, professional/specialised staff and equipment;
• it does not create an artificial arrangement without a connection with the economic activity;
• there is proportionality between the scope of its actual economic activity and the level of its assets in terms of premises/offices, professional/specialised staff and equipment;
• the agreements made by the company are consistent with economic reality, they have an economic justification and they are not noticeably contrary to the general economic interests of the company;
• it carries out its basic economic functions, using its own resources, including the current on-site managers.

Notwithstanding the above points, the company will not be subject to regulations concerning CFC, if its annual income does not exceed EUR 250,000.000.

What’s does this mean for my business?

Under the envisaged regime the income earned by the CFC subsidiaries or the PEs, should be subject to 19% income tax.