Financing Cost Limit of Pln 3 Mln. Plus 30% EBIDTA
On November 13, 2018 the Administrative Court in Wrocław in its ruling with ref. I SA/Wr 833/18 declared that debt financing costs can be included in tax-deductible costs up to PLN 3 million increased by 30% EBITDA.
The ruling is a precedent as until now individual tax rulings issued by the Head of the National Fiscal Information Service (KIS) defined tax-deductible costs of debt financing as 30% EBITDA or PLN 3 million, depending on which value was higher.
The problem was related to the interpretations of the provisions of Article 15c of the CIT Act, effective as of January 2018, which implemented the ATAD directive of the EU. The ruling applies to a company which believed that if debt financing costs exceed PLN 3 million, tax-deductible expenses may include PLN 3 million increased by 30% EBIDTA. The Head of KIS did not agree with the company’s position.
The Administrative Court in Wrocław agreed with the company, emphasizing the fact that according to the literal interpretation of Polish regulations the limitation does not apply up to amounts under the threshold stipulated in Article 15c(1). The Court decided that the limit of 30% EBITDA shall apply only to debt financing costs exceeding the threshold of PLN 3 million. Therefore, the tax-deductible costs shall include the amount of PLN 3 million and the remaining part of the surplus of debt financing costs over interest revenue – up to 30% of tax EBITDA.
Possibility to Change Depreciation Rates Retroactively
Administrative Court (WSA) in Warsaw issued a precedential ruling for LOT Polish Airlines (ref. III SA/Wa 566/18), regarding the possibility to decrease depreciation rates pursuant to Article 16i Section 5 of the CIT Act. According to the ruling, the taxpayer can decrease depreciation rates, both with respect to future and past settlements, provided that the liability is not past due. Pursuant to the previous interpretation of the law, taxpayers had a possibility to decrease depreciation rates only with respect to the future. According to the court, if a grammatical and functional interpretation is applied, the regulation allows for decreasing depreciation rates in two separate ways – rates can be decreased after a month since including a fixed asset in the register, or after the first month of each tax year following the tax year when the fixed asset was included in the register.
The ruling is non-final.
Ruling of the WSA in Warsaw of December 11, 2018, (ref. III SA/Wa 566/18)
The Obligation to Draft Transfer Pricing Documentation for Polish Permanent Establishment of Foreign Entity on Arm’s Length Terms
In its response of November 14, 2018 (ref. DCT1.054.2.2018) to Parliamentary question no. 26892 of October 25, 2018, regarding transfer pricing, the Ministry of Finance stated that in the case of a taxpayer running business activity through a permanent establishment located in Poland, a legal fiction needs to be assumed, consisting in treating the permanent establishment as an entity separate from the taxpayer (the headquarter). As a result, pursuant to the provisions of the CIT Act, a permanent establishment shall be treated as an entity related to its headquarter, which entails the obligation to draft transfer pricing documentation (including benchmarking study), to submit a simplified report, as well as to provide a possibility to estimate the amount of income earmarked to that facility based on the market data (i.e. on arm’s length terms).
The above response to the parliamentary questions was issued in view of the law applicable until December 31, 2018. As of January 1, 2019, the provisions of the CIT Act were amended with respect to transfer pricing documentation; nonetheless, the above conclusions remain valid.
Supreme Administrative Court Again in Favor of Taxpayers on Exchange of Shares
Late November 2018 saw another ruling of The Supreme Administrative Court (NSA) regarding the exchange of shares favorable for taxpayers. The NSA sustained the ruling of the Administrative Court in Warsaw and, basing on systemic and historic interpretation, pointed out that the neutral nature of the exchange of shares guarantees the absolute majority of voices in the company whose shares are purchased, also in case when the acquiring company purchases shares from more than one shareholder. Following the justification of the amendment to the CIT Act, which entered into force on January 1, 2015 and regulations of the EU (Directive 2009/113/WE, to be precise), the NSA rejected the arguments of the Head of the National Fiscal Information Service (KIS) based only on the imprecise, literal interpretation of Article 12 Section 4d of the CIT Act. Just as in many cases before, the Head of KIS decided that this provision applies exclusively to the exchange of shares where the purchasing company obtains the absolute majority of votes following a transaction with a single shareholder.
The NSA ruling is in line with the prevailing line of judgements of Administrative Courts. With that in mind, the question arises when the tax authorities will finally include it in their decisions, or when the lawmakers will intervene by improving the unfortunate wording of the Article 12, paragraph 4d of the CIT Act.
Ruling of the NSA of November 28, 2018, (ref. II FSK 247/17)
Subsidiary Is Also a Qualified Lender
On November 28, 2018 the Supreme Administrative Court (NSA) in its ruling II FSK 3395/16 confirmed that Article 16, Section 1, item 61 of the CIT Act, amended on January 1, 2015, would apply also when the loan was granted by a subsidiary company, while debt was created to „significant shareholders” at a level stipulated in Article 16(1)(61) of the CIT Act.
The taxpayer argued that the amended provisions of Article 16(1)(61) of the CIT Act should be interpreted in line the systemic interpretation, according to which the limit resulting from Article 16(1)(61) of the CIT Act should not apply if the taxpayer is granted the loan by a daughter company, where he held at least 25% of shares, while the debt level to the daughter company exceeds the limit stipulated in the thin capitalization rules.
The NSA emphasized the primacy of linguistic interpretation, whose boundaries are set by the wording used in the interpreted regulation, while interpreting the tax law regulations. Only unclear results of the linguistic interpretation may be verified using other methods such as systemic, functional or purposive interpretation.
At the same time, the NSA confirmed that according to the literal wording of the analysed provisions, the loan from the daughter company was granted by a qualified lender. Therefore, if the loan is granted by a „qualified lender” and at the same time the applicant company becomes indebted to subsidiary at a level exceeding the limit stipulated in Article 16(1)(61) of the CIT Act, the limitations provided for in the said regulation shall apply.
Tax on Civil Law Transactions on Agio While Transforming Company into Partnership
Pursuant to the interpretation issued by the Head of the National Fiscal Information Service (KIS) on October 31, 2018 (ref. 0111-KDIB2-2.4014.131.2018.1.MZ), the agio on contribution shall be taxed when transforming a company from capital company into a partnership.
According to the Head of KIS, in the case of the resulting surplus of the net book value of the assets of the transformed company over the nominal value of rights in the partnership, the tax exemption under Article 9 (11) (a) of the TACL Act does not apply. The value of the part of reserve capital coming attributable to the agio, which has not been taxed before, shall be subject to the civil law transaction tax.
Despite the previous favorable verdicts of the Supreme Administrative Court (NSA) (cf. II FSK 242/16 of February 1, 2018), in which the NSA repeatedly held that the agio is not subject to the tax on civil law transactions in case of a transformation of a company from capital company into a partnership, the position of the Head of KIS presented in current tax rulings is that the tax on civil law transactions applies; therefore, taxpayers wishing to obtain a TACL exemption shall challenge the issued tax rulings in the Administrative Court.
Transmission Easement as a Transaction Subject to VAT
In its ruling of November 15, 2018 (ref. I FSK 1401/18), the Supreme Administrative Court (NSA) confirmed that the single payment (including both the “remuneration” for establishing the transmission easement on an agricultural property, as well as the “compensation” for the use of the property where agricultural activity takes place) is consideration for establishing the transmission easement. The entire amount paid is the remuneration for a service subject to VAT taxation.
The commented case involved natural persons, active VAT taxpayers, who were running an agricultural farm. They received the remuneration for establishing the transmission easement and the compensation for lowering the value of the property and the possibilities of its agricultural use (in this case revenue from future agricultural production).
The dispute consisted in determining whether establishing the transmission easement should be classified as a transaction performed as part of agricultural activities carried out and whether only the “remuneration” or the entire amount (i.e. both the “remuneration” and the „compensation”) should serve as the VAT tax base.
The NSA pointed out that the amount gained, referred to as “compensation” in the notary deed, does not have elements that would allow to differentiate its purposes and function from the amount gained as “remuneration”.
Additionally, according to the NSA, the transaction of establishing the transmission easement was related to business activity carried out due to the fact that the properties where the easement was established where the part of the agricultural farm, as a result of which natural persons agreed to continuously abstain from cultivating the land as part of their business activity on the area defined by the agreement. The taxpayers failed to prove that the transaction of establishing the transmission easement was made as part of the normal exercise of property rights, unrelated to the business activities carried out.
VAT Exemption Shall Not Include Utilities Supplied to Housing Units
In its ruling of October 23, 2018 (ref. I FSK 1880/16) the Supreme Administrative Court (NSA) judged that reselling of utilities by a housing community may not be treated as a transaction related to property management. Therefore, the value of the utilities resold cannot be included in the value of sale referred to in Article 113 item 1 of the law on VAT (making the taxpayer eligible for a tax exemption).
In the analyzed case, the NSA emphasized that while the action of reselling utilities is clearly related to a particular property, it is not directly related, and only the services in a direct relation to the property may be included in the value of sales referred to in Article 113 item 1 of the law on VAT.
Fee for Municipal Waste Management Can Be an Element of Remuneration for Service Subject to VAT
Pursuant to the ruling of the Supreme Administrative Court (NSA) of November 28, 2018 (ref. I FSK 1098/18) dwelling rental agreements concluded on behalf of the city by the management of municipal buildings, under which tenants are obliged to bear the costs of municipal waste collection, are civil law agreements binding both parties. The city acts as the owner and the landlord – VAT taxpayer. The case in question concerned VAT tax settlement when renting properties owned by the municipality. Eventually, the case was sent to the NSA, which declared that the public nature of the fee for collecting municipal waste is not sufficient grounds to claim that the city acts as a public authority. In that case, the fee for municipal waste management shall be treated as payment for the provision of service of renting premises, which, together with rent, constitutes turnover, as referred to in Article 29 item 1 of the Law on VAT.
A Billboard Is Not an Advertising Device but an Advertising Board
With regard to the ruling of the Supreme Administrative Court (ref. II FSK 1897/18), a billboard which consists of a single metal supporting structure with two displays on top does not meet the definition of an advertising device. An advertising device is an object used for or designed to display an advertisement other than an advertising board. The court noted that the difference between an advertising board and an advertising device consists in the advertising board being a flat surface object. According to the justification of the ruling, the described billboard is a flat surface object, therefore it shall be treated as an advertising board (and not an advertising device).
Ruling of the NSA of December 12, 2018, (ref. II FSK 1897/18)
More information about CIT and VAT changes on our blog.
See the latest Legal News.
