On June 12, 2017, the Ministry of Finance (MF) warned against the use of aggressive tax optimization schemes that exploit foreign entities. In this scheme, a Polish taxpayer would acquire shares in a foreign company through which it would then tax its Polish business activity.
By doing so, the company would circumvent the Polish tax regulations and would pay taxes on its Polish earned income only in the foreign country of its registered office even though no business transactions were actually conducted in said foreign country. In order to combat this type of optimization, the MF warned that taxpayers, whose management boards are effectively located in Poland, will be subject to the Polish corporate income tax (CIT) on all of their income (unlimited tax liability), regardless of where their registered office is located.
The MF explained that, in assessing a foreign entity’s management location, rather than only consider the company’s formation resolution, which the company’s governing body would have signed outside of the territory of Poland, they will focus more on whether the circumstances surrounding such a resolution actually indicate that the decision-making process will be performed abroad. In other words, the place of effective management will not only refer to the company’s registered office or headquarters, but will also encompass the location where its high level officers direct, control, coordinate, and manage the company’s business activities and assets (also known as the company’s “nerve center”).
To further explain what the MF will consider in their assessment of the management location, the warning also set out a list of circumstances, also known as substance requirements, that the Polish tax authorities will use to establish an entity’s “nerve center.” Circumstances indicating the location of a company’s nerve center include, but are not limited to, the following:
- Lack of ability to conduct any actual activities of the entity in its home country (no office/conference room available);
- No accounting/corporate/legal documentation kept at entity’s registered office.
- Members of the board being present and performing their functions on the territory of Poland (as confirmed by their tax residence or citizenship);
- Outsourcing the majority of its basic functions by the entity (including extensive use by the entity of „domiciliation” services);
- Employing within the foreign company only (or almost exclusively) administrative staff (especially if that same staff provides services to other entities, specifically other clients of the law firm or other entity promoter/incorporator);
Thus, the MF will consider not only the location where the management board makes important decisions but also where they make decisions during the regular course of business. Furthermore, they will even consider evidence where professional staff prepared for such decisions to be made, as well as where data was collected, processed, or analyzed for the purpose of those decisions.
In essence, the MF stated that Polish tax liability may be imposed not only on those foreign entities that are qualified as having a registered office in Poland, but also on those foreign entities, where a “sufficient substance” of their effective management is also carried out in Poland. They went so far as to state that the Polish tax authorities may even impose Polish tax liability on foreign entities where said foreign entities are unable to prove that a “sufficient substance” of their effective management is performed at the registered office.
For a full English translation of the MF warning against tax optimization through foreign entities, please click here.
For a full English translation of the MF warning against foreign holding structures, please click here.
For a full English translation of the Place of effective management, please click here.
