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

This warning set out a list of circumstances, also known as substance requirements within the industry, that can be used to  establish an entity’s “nerve center” from the Polish tax perspective. These substance requirements are as follows:

• Members of the board being natural persons or legal persons (other entities) residing in the foreign country of incorporation, who provide management services to the client as well as other entities and who do not have any professional experience in the industry or business that the entity formally operates (i.e. nominee directors; a standard service provided by law firms, accounting firms, etc.);
• Members of the board being also board members in other Polish companies or other companies within their corporate group;
• Members of the board being present and performing their functions on the territory of Poland (as confirmed by their tax residence or citizenship);
• No assignment of duties or responsibilities to individual board members;
• No documentation of the tasks performed by members of the board (including the lack of correspondence concerning the conduct of its affairs);
• No local email/telephone/business address for the board members;
• Board meetings taking place in the country where the company is headquartered are only a formality consisting solely of adopting resolutions or signing contracts that had already been agreed to or negotiated in Poland;
• The signing of resolutions/agreements/reports at the entity board meetings mainly performed by agents, who do not make decisions for the entity during the regular course of business (corporate services). Such services are usually provided by a law firm;
• The foreign company’s bank account is either accessible in Poland and banking transactions are performed in Poland or even cash withdrawals are made with a „company debit card” at ATMs in Poland;
• Employing within the 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);
• Outsourcing the majority of its basic functions by the entity (including extensive use by the entity of „domiciliation” services);
• Extensive use of fiduciary services;
• Consultation regarding entity decisions are conducted mainly with Polish advisors (including tax advisers);
• 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.

Factors also to be considered:

• legitimacy/purpose related to the setting up an entity by the taxpayer (e.g. the initiative in this area came from legal or tax advisors and forming the company was not a justifiable business decision);
• form of its acquisition (e.g. the use of ready-made paper companies, also known as „shelf companies”);
• scope of the activity (e.g. the entity conducted only one transaction or one type of transaction arising from decisions made in Poland).

In essence, Polish tax liability may be imposed not only on those foreign entities that are qualified as having a formal seat in Poland, but also on those foreign entities, where a “sufficient substance” of their effective management is also carried out in Poland.  Furthermore, the Polish tax authorities may even impose Polish tax liability on foreign entities that are unable to prove a “sufficient substance” abroad.

If more information on the impact of this warning to your current holding structure is required, please feel free to contact us.

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).