Małgorzata Dankowska
Małgorzata Dankowska Partner, Tax Advisor

Tax & Legal Highlights for Real Estate – May 2020

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The Head of the National Fiscal Administration loses in cases of blocking bank accounts

According with current jurisprudence of the Supreme Administrative Court, the possibility of blocking entrepreneurs’ bank accounts by the Head of the National Fiscal Administration is subject to judicial control both at the stage of imposition and extension of the blockade. Pursuant to the judgment of the SAC of April 27, 2020 (ref. no. I FSK 335/20), the extension of the account’s blockade should be preceded by an analysis of the taxpayer’s previous fulfillment of obligations and their economic situation. In the discussed case, the Head of the NFA blocked the entrepreneur’s account and then extended the blockade due to doubts regarding the reliability of invoices, based on which the company deducted input VAT. The company questioned tax authorities of unjustified extension of the blockade despite its good financial situation. The SAC admitted that the grounds for prolonging the blockade could not be only the presumed bad faith of the taxpayer but the real risk of default. Based on another judgment (ref. no. I FSK 491/20), the SAC decided that an imposition of an account blockade itself is also a subject to court review. The Head of the NFA argued that the imposition of the blockade was only a technical activity, which could not be appealed against. However, in abovementioned judgment, the SAC clearly stated that as part of the complaint about the extension of the blockade, the courts are also obliged to analyze the grounds for its imposition. According to the SAC, the lack of such control would constitute a violation of constitutional principles.

Does tax authorities need to interpret MDR regulations?

The Voivodship Administrative Court in Gorzów Wielkopolski in a judgment of April 8, 2020 (ref. no. I SA/Go 61/20) ruled that the provisions relating to tax schemes reporting (MDR) are of a substantive nature and therefore may be the subject of an application for tax ruling. The case concerned a company which doubted whether it was obliged to inform in writing the employees involved in the implementation of the tax scheme with assigned scheme number. The Director of the National Tax Information stated that the regulations regarding tax schemes are of a procedural and not substantive nature and cannot constitute the subject of an application for an individual ruling. However, the court had no doubts in this respect and supported the company’s position, indicating i.a. placing provisions on reporting schemes in section III of the Tax Ordinance, which determines the substantive nature of the regulations. The court also noted that the reporting obligation results directly from the act and is not an action undertaken as part of tax proceedings. This is another judgment confirming the possibility of asking about proper interpretation of MDR regulations. A similar position was taken by the Voivodship Administrative Court in Warsaw in its judgment of March 11, 2020 (ref. no. III SA/Wa 2423/19). However, a different conclusion was presented in the judgment of the District Administrative Court in Poznań of December 5, 2019 (ref. no. I SA/Po 825/19), which supported the tax authority’s position on refusal to issue an interpretation regarding the regulations on tax schemes reporting.

Artificial restructuring without protection

On February 27, 2020, the Head of the National Fiscal Administration refused to issue an advance (protective) tax ruling (ref. no DKP2.8011.11.2019, according to the information dated April 29, 2020, ref. no 188478/K) regarding the restructuring planned by the capital group, whose main goal, according to the authority’s standpoint, was to avoid tax consequences in CIT resulting from changes in regulations entered into force since 2018. The group’s strategy assumed the transformation of a limited partnership into a limited liability company, the sale of shares to its majority partner, who would then become the company’s sole shareholder and subsequent acquisition of the transformed company by merger. As a result, the assets of transformed company would not constitute revenue for the acquiring shareholder. After a detailed analysis of the facts and strategy of the planned group’s actions, the Head of the NFA considered the nature of the restructuring to be artificial and aimed solely at re-acquisition of the limited partnership’s assets, immediately after they were fully depreciated. Consequently, the authority refused to issue a protective tax ruling.

Place of the services supply – the sentence was passed, the problem remained

Pursuant to the judgment of the Court of Justice of the European Union of May 7, 2020 (C-547/18 Dong Yang Electronics), having a subsidiary on the territory of Poland by entity residing outside the EU does not yet indicate that it has a fixed establishment in that country. At the same time, the supplier providing services for benefit of foreign entity is not obliged to analyze its contractual relations with subsidiaries. The preliminary question concerned the issue whether a foreign entity outside the EU, having a subsidiary in Poland, should purchase services with Polish VAT as well as whether the Polish services’ supplier is obliged to analyze contractual provisions between the foreign entity and its subsidiary for the purpose of proper invoicing. In the standpoint of the CJ EU, to determine the fixed establishment, a Polish supplier should examine the nature and purpose of a provided service. If such analysis is not sufficient – it should be considered whether the permanent place of running business activity is indicated in the contract, order or by VAT identification number of the purchaser. The CJ EU also pointed that for proper analysis it is necessary to take into account commercial and economic reality, and not just the legal status of the entity itself. The analyzed judgment is favorable to the company being a party to the dispute, but it does not give a versatile answer regarding the criteria for determining fixed establishment in Poland.

The new WHT collection regime is to be further postponed

On 23 April 2020 draft of a Regulation of the Minister of Finance was published on the website of the Government Legislation Centre, which provides for another suspension of applying the regulations on new withholding tax (WHT) collection regime until 31 December 2020. Another extension of deadlines by the Ministry of Finance is important for entities making payments to non-residents. The suspended regulations concern the tax remitter’s obligation to apply the basic withholding tax rate if payments to a single taxpayer exceed PLN 2 million (unless the tax remitter submits a statement under penal code responsibilities or obtains an opinion on the application of the exemption). Other regulations introduced as of 1 January 2019 are currently in force, in particular the due diligence requirement and the new definition of the beneficial owner. According to the justification of the draft regulation, the postponement is related to the announcement of a coronavirus pandemic in the territory of Poland.

The rush has caused companies to have doubts about suspending MDR reporting

One of the actions that constitute the so-called Anti-crisis Act is to postpone the dates of reporting of tax schemes until the end of the epidemic risk announced in connection with COVID-19, but not longer than 30 June 2020. Given the literal wording of the provision, there is no doubt that the postponement of the reporting obligation applies to all types of tax schemes (standardised, non-standardised and cross-border). The Ministry of Finance also confirmed on its website that the suspension of the deadlines for reporting the tax schemes concerns information MDR-1, MDR-3, MDR-4 and notification MDR-2 and applies to both domestic and cross-border schemes. However, taxpayers were concerned about the explanatory memorandum to the draft law, which assumed that the suspension of reporting deadlines should not apply to the cross-border schemes. It turns out that the discrepancies between the explanatory memorandum and the finally adopted law were due to the different wording of the provision in the original bill. Regardless of the good intentions of the legislator, the rush accompanying the adoption of the Anti-crisis Act caused unnecessary fears among entrepreneurs as to the scope of schemes which are temporarily not subject to reporting to the Head of the National Fiscal Administration.

Deductibility of the expenses incurred for the purchase of the building in connection with its demolition, which was a fixed asset under construction

In the individual tax ruling of December 19, 2019 (ref. no. 0115-KDIT3.4011.413.2019.1.JG), the Director of National Tax Information confirmed the possibility of including as tax deductible costs the value of the demolished building (an investment within the meaning of the Personal Income Tax Act) at the date of liquidation. The case concerned a taxpayer who decided to demolish a previously acquired real property and build a new production hall in its place. The decision to liquidate was taken for economically justified reasons. According to the entrepreneur, the expenditure incurred for the purchase of the demolished building cannot be considered as a component of a newly constructed fixed asset (a production hall) and settled over time through depreciation. It should be included as a one-off tax deductible cost on the date of its liquidation, constituting the cost of the discontinued investment. The authority considered this position to be entirely correct.

For the application of a preferential withholding tax rate, it is essential that the recipient of the interest (and not the intermediary) is the beneficial owner

The Voivodship Administrative Court (WSA) in Gliwice in the judgment of 30 January 2020 (ref. no. I SA/Gl 1490-91/19) confirmed that an investor of a Korean fund may benefit from a reduced tax rate resulting from the Polish-Korean Double Tax Treaty. According to the background presented, the company being a Korean taxpayer, invested in a Korean real estate fund. The fund’s asset manager purchased from a German bank receivables of a Polish joint-stock company resulting from a loan agreement. The interest was paid directly by the Polish joint-stock company to the account of a German bank, which transferred the funds to a trust bank acting on behalf of the fund (the trust bank is the legal owner of the fund’s assets). The interest payments then went to the fund’s investors. The company emphasized that interest payments were made on an ongoing basis in proportion to the investors’ shares. The authority denied the Korean taxpayer the right to apply the reduced rate, arguing that the requirements for entitlement to the preference under the Polish-Korean DTT are not met, i.e. the beneficial owner of the interest (the fund’s investor) is not the recipient (the trust bank). However, the formation of the court did not share the position of the tax authority, considering its interpretation of the definition of ‚interest recipient’ as unjustified. The WSA judgment is an example of practical application of the „look through approach” concept, i.e. enabling benefiting from the provisions of the relevant DTTs in a situation where there is an intermediary between the payer and the payment owner. The judgment is not binding.

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