On June 26, 2017, the Ministry of Finance (MF) issued a warning against the use of tax capital groups (PGK) for aggressive corporate income tax (CIT) optimization. Such optimization resulted in tax avoidance as the proceeds from asset sales were, in effect, not subject to CIT. According to the MF, this type of optimization in transactions totaled several billion zlotys nationally.
In this warning, the MF divided the optimization scheme into a 4-stage transaction and provided detailed explanations for each of the 4-stages.
- The first stage of the transaction involved a share exchange between a holding company (Company A’s shareholder) and Company B. In this stage, Company B, in exchange for its own shares, would obtain from the holding company an in-kind contribution of shares in Company A, whose sole asset was a piece of real estate.
- The second stage of the transaction involved the formation of the PGK.
- The third stage involved the sale of Company A’s real estate assets along with a donation to Company B of either the proceeds or the receivables from the sale.
- The fourth and final stage of the transaction, when Company A’s shares were no longer of any value, involved Company B’s sale to Company C of Company A’s shares.
Once the share exchange/asset sale optimization was carried out, the PGK would be dissolved.
Under Polish tax law, an exchange of shares is neutral; thus, Company B would not be taxed on Company A’s shares until their sale. Company B would, however, be able to include the value of its own shares, which it issued in exchange to the holding company, as a tax deductible cost as this would be the „price” of acquiring Company A’s shares. In effect, Company B would be able to recognize the cost of the share exchange (based on the value of Company A’s assets) in their accounting records, which costs it would then be able to write off once A’s shares were actually sold.
The high cost of acquiring Company A’s shares combined with the sale of A’s shares at a very low price, provided for Company B to realize a huge loss from the sale of Company A’s shares. Company B could then use this loss to offset the revenue from Company A’s donation, the source of which was the sale of Company A’s assets. In effect, neither Company B nor Company A were subject to tax.
In an effort to combat this type of tax avoidance, the MF provided a list of circumstances that it will consider when determining if an illegitimate transaction has taken place. Where these circumstances are found to exist in a given transaction, the presumption will be that the sole purpose of the transaction was tax avoidance. Such circumstances include, but are not limited to, the following:
- Entity restructuring, preceding the sale of assets, to a more complex business structure with intermediary involvement in transactions despite the lack of economic justification;
- Related entities or fiscal ties between the entities participating in the transaction;
- Carrying out transactions with high administrative costs and business or legal risks that do not suggest any economic benefits to the parties other than tax avoidance;
- A company disposing all of its assets (or its key components) without obtaining any economic equivalent in exchange or benefit other than a tax advantage;
- Lack of actual financial transfers (donating receivables);
- Performing transactions over a short period of time; the effect of which cancels each other out (establishing a PGK for a period of 3 years and then dissolving it after a period of several months).
The MF warned that, the tax authorities may determine that an illegitimate transaction has taken place through several different legal applications.
- The tax authority may apply the anti-avoidance clause of Article 119a of the Tax Ordinance to deprive the taxpayer of any tax advantage that it may have unduly received.
- Under Art. 199a of the Tax Ordinance, the tax authorities can consider extrinsic evidence including the intent of the parties. Thus, if evidence is found that, from the outset, the intent of the parties had not been compliant with the statutory requirement of forming a PGK, the PGK registration decision, as well as any tax obligations or benefits resulting from its formation, may also be called into question.
- By invoking a special anti-avoidance clause in Art. 22c of CIT, the tax authorities could deny a tax exemption for the disbursement of profits to foreign shareholders participating in the profits of legal persons.
- Under the provisions of bilateral double taxation avoidance agreements and the provisions of national law, profits disbursed to a foreign shareholder may be subject to taxation in Poland because such profits were earned from the sale of immovable property located in Poland.
- Finally, according to the MF, wholesale interpretations might not necessarily correspond to the actual operations involved in executing a particular transaction, and consequently, the individual interpretations may not be binding.
Thus, not only did the MF provide a list of circumstances where the presumption will be that an illegitimate transaction has occurred, but it also established several legal options that it will be able to apply in order to deny to entities, engaged in tax optimization through the use of PGKs, any tax benefit obtained therefrom.
For a full English translation of the MF warning against tax optimization through tax capital groups, please click here.
On June 26, 2017, the Ministry of Finance (MF) issued a warning against the use of tax capital groups (PGK) for aggressive corporate income tax (CIT) optimization. Such optimization resulted in tax avoidance as the proceeds from asset sales were, in effect, not subject to CIT. According to the MF, this type of optimization in transactions totaled several billion zlotys nationally.
In this warning, the MF divided the optimization scheme into a 4-stage transaction and provided detailed explanations for each of the 4-stages.
- The first stage of the transaction involved a share exchange between a holding company (Company A’s shareholder) and Company B. In this stage, Company B, in exchange for its own shares, would obtain from the holding company an in-kind contribution of shares in Company A, whose sole asset was a piece of real estate.
- The second stage of the transaction involved the formation of the PGK.
- The third stage involved the sale of Company A’s real estate assets along with a donation to Company B of either the proceeds or the receivables from the sale.
- The fourth and final stage of the transaction, when Company A’s shares were no longer of any value, involved Company B’s sale to Company C of Company A’s shares.
Once the share exchange/asset sale optimization was carried out, the PGK would be dissolved.
Under Polish tax law, an exchange of shares is neutral; thus, Company B would not be taxed on Company A’s shares until their sale. Company B would, however, be able to include the value of its own shares, which it issued in exchange to the holding company, as a tax deductible cost as this would be the „price” of acquiring Company A’s shares. In effect, Company B would be able to recognize the cost of the share exchange (based on the value of Company A’s assets) in their accounting records, which costs it would then be able to write off once A’s shares were actually sold.
The high cost of acquiring Company A’s shares combined with the sale of A’s shares at a very low price, provided for Company B to realize a huge loss from the sale of Company A’s shares. Company B could then use this loss to offset the revenue from Company A’s donation, the source of which was the sale of Company A’s assets. In effect, neither Company B nor Company A were subject to tax.
In an effort to combat this type of tax avoidance, the MF provided a list of circumstances that it will consider when determining if an illegitimate transaction has taken place. Where these circumstances are found to exist in a given transaction, the presumption will be that the sole purpose of the transaction was tax avoidance. Such circumstances include, but are not limited to, the following:
- Entity restructuring, preceding the sale of assets, to a more complex business structure with intermediary involvement in transactions despite the lack of economic justification;
- Related entities or fiscal ties between the entities participating in the transaction;
- Carrying out transactions with high administrative costs and business or legal risks that do not suggest any economic benefits to the parties other than tax avoidance;
- A company disposing all of its assets (or its key components) without obtaining any economic equivalent in exchange or benefit other than a tax advantage;
- Lack of actual financial transfers (donating receivables);
- Performing transactions over a short period of time; the effect of which cancels each other out (establishing a PGK for a period of 3 years and then dissolving it after a period of several months).
The MF warned that, the tax authorities may determine that an illegitimate transaction has taken place through several different legal applications.
- The tax authority may apply the anti-avoidance clause of Article 119a of the Tax Ordinance to deprive the taxpayer of any tax advantage that it may have unduly received.
- Under Art. 199a of the Tax Ordinance, the tax authorities can consider extrinsic evidence including the intent of the parties. Thus, if evidence is found that, from the outset, the intent of the parties had not been compliant with the statutory requirement of forming a PGK, the PGK registration decision, as well as any tax obligations or benefits resulting from its formation, may also be called into question.
- By invoking a special anti-avoidance clause in Art. 22c of CIT, the tax authorities could deny a tax exemption for the disbursement of profits to foreign shareholders participating in the profits of legal persons.
- Under the provisions of bilateral double taxation avoidance agreements and the provisions of national law, profits disbursed to a foreign shareholder may be subject to taxation in Poland because such profits were earned from the sale of immovable property located in Poland.
- Finally, according to the MF, wholesale interpretations might not necessarily correspond to the actual operations involved in executing a particular transaction, and consequently, the individual interpretations may not be binding.
Thus, not only did the MF provide a list of circumstances where the presumption will be that an illegitimate transaction has occurred, but it also established several legal options that it will be able to apply in order to deny to entities, engaged in tax optimization through the use of PGKs, any tax benefit obtained therefrom.
For a full English translation of the MF warning against tax optimization through tax capital groups, please click here.
