On June 12, 2017, the Ministry of Finance warned against the use of aggressive tax optimization schemes that exploit foreign entities, when such entities are actually Polish taxpayers and managed from within the territory of Poland.

The scheme is as follows: a Polish taxpayer acquires shares of foreign companies through which it then taxes its Polish business activity in the foreign country even though no business transactions are actually conducted in said foreign country.  This is also known as a „conduit company” or a „letterbox company.”  By doing so, the company circumvents Polish tax regulations and pays taxes on its Polish earned income only in that foreign country. For this purpose, companies based in tax havens as well as entities from the EU (e.g. Czech Republic, Luxembourg, Great Britain, Slovakia, Cyprus, Malta, Netherlands, Sweden) and other European countries such as Switzerland are used.

Alternatively, a company registers itself in the territory of a neighboring country for the purpose of acquiring luxury or sports vehicles. These vehicles, with foreign registration plates, are then made available to the company’s shareholders, who are natural persons permanently residing in Poland, for exclusive use in Poland (e.g. in one province).

This warning also applies to a number of similar situations in which the foreign corporation’s high level officers direct, control, and coordinate the corporation’s activities in Poland (e.g. headquarters or “nerve center”) and their registration abroad is merely a pretense for tax avoidance in Poland.  In particular, where this tax avoidance affects any divestment of shares, issuance of debt instruments, dividends, interests and royalties, as well as commercial transactions.

Tax authorities can prevent tax avoidance in Poland in such cases by using the General Anti Avoidance Rule or by establishing where the foreign entity has its headquarters or “nerve center”.

Taxpayers, whose headquarters or management are in Poland, are subject to the Polish corporate income tax (CIT) on all of their income, regardless of where they have residency (unlimited tax liability). Such is the case when a company is formally registered abroad, but its management board is, in fact, headquartered in Poland.

The condition of having a board of directors within the territory of Poland not only refers to the seat of the governing body or headquarters, but also encompasses the location where the high level officers direct, control, coordinate, and manage the business activities and assets.

The place of management will be determined on an individual basis by the regulatory authorities, which have the authority to consider all available evidence in making their decision. Substance requirements in Poland.

Effects

If discussed clauses are applied, all earned income of a foreign SPV will be subject to taxation in Poland. This means requirement to pay income tax, make annual declarations, and pay advances on income tax in Poland.

The following publication written by Magdalena Zalewska is an English version (translation) of a warning against the use of Foreign Entities for aggressive corporate income tax (CIT) optimization issued by the Ministry of Finance on June 12, 2017 (source: www.mf.gov.pl).