Tax changes implemented as of January 1, 2022 expanded the catalog of entities qualifying as Controlled Foreign Corporations (CFC), thereby requiring more entities to apply tax rules specific to those entities.
The most significant of these changes include:
- the addition of two new specific entity qualification categories,
- extension of the catalog of revenues determining the qualification as a controlled foreign corporation by, among others: revenues from intangible services (e.g. consulting, accounting, etc.), revenues from the sale of goods or products purchased from or sold to related entities, revenues from lease, sublease and other contracts of a similar nature,
- taking into account, while verifying the level of relations (above 50%) of Polish taxpayers with foreign entities, both related entities (i.e. spouses, relatives or legal persons or organizational units without legal personality, in which the taxpayer or his spouse or relative holds, directly or indirectly, at least 25% of shares in the capital or at least 25% of the voting rights in the controlling, constituting or managing bodies or at least 25% of the right to participate in the profit) and unrelated entities,
- introducing taxation on the level of 8% certain assets for entities that do not generate sufficient income in relation to their assets (passive entities).
Tax rules for controlled foreign corporations
Entities qualified as controlled foreign corporations should submit a separate tax declaration – by the end of the ninth month of the following tax year. The amount of tax due, calculated at 19% rate, should be paid by the taxpayer as a single payment. The calculated tax is reduced by the value of the tax paid abroad.
The tax basis in this case equals the amount reflecting the income of the controlled foreign corporation in proportion to the period in which the foreign corporation was controlled by the taxpayer in its tax year, in such part as is corresponds to the rights held to participate in the profit of this corporation, after deducting the amount of:
- dividends received from the foreign controlled entity included in the taxpayer’s tax basis;
- income on the disposal by the taxpayer against payment of shares in the foreign controlled entity, in the share included in its tax basis.
Controlled foreign corporations subject to taxation on their entire income in a member state of the European Union or in a member state of the European Economic Area that engage in substantial, genuine business activity in that state are exempt from income tax in Poland, however the Act clarifies both the definition of “genuine activity” and the “substantial character” of that activity.
What are controlled foreign corporations?
Regulations relating to controlled foreign corporations are specified in Article 24a of the Corporate Income Tax Act of 15th February 1992 [PL] (Journal of Laws 2021, item 1800, as amended) and Article 30f of the Personal Income Tax Act of 26th July 1991 [PL] (Journal of Laws 2021, item 1128, as amended). According to current regulations, this group includes:
- foreign corporations having their registered office or management board or which are registered or headquartered in a territory or country listed in the current notice of the minister responsible for public finance (according to the announcement of 13th October 2021 [PL] it refers to Republic of Fiji, Guam, Republic of Palau, Republic of Trinidad and Tobago, American Samoa),
- foreign corporations having their registered office or place of management board, or which are registered or headquartered on the territory of a country other than that specified in item 1, with which:
- The Republic of Poland has not ratified an international agreement, in particular a double taxation treaty, or
- the European Union has not ratified an international agreement
– which constitutes the basis for obtaining tax information from the tax authorities of that country, or
- foreign corporations that meet detailed conditions set forth in the Act regarding:
- the level of shareholding and the level of control exercised over the foreign corporation by Polish taxpayers and their related entities or other entities having their place of residence or office or management board in Poland,
- the level of income of these corporations from specific sources or the share of this income in the value of their assets,
- the amount of income tax actually paid by the corporations in relation to the amount of tax due if they were taxpayers having their registered office or management board in Poland,
- the amount of income of these corporations,
- the share of income of these corporations derived from transactions with unrelated entities having their residence, office, management board, registration or location in the same country as these corporations.
All of the above criteria apply directly to “foreign corporations” as defined in the Act, which means:
- legal persons,
- capital companies in organization,
- organizational units without legal personality other than a company without legal personality,
- unincorporated companies having their registered office or management board in another state, if they are treated as legal persons under the tax laws of that other state and are subject to taxation in that state on their total income regardless of where it is earned,
- foundations, trusts or other entities or legal relationships of a fiduciary nature,
- tax capital groups or companies from a tax capital group, which on their own would meet the condition concerning the amount of income tax actually paid by these entities in relation to the amount of tax due in a situation when they would be taxpayers having their registered office or management board in Poland – if they were not part of a tax capital group,
- organizationally or legally separated parts of foreign companies or other entities having either legal personality or none
– not having their registered office, management board or registration within the territory of the Republic of Poland, in which taxpayers, having their registered office or management board within the territory of the Republic of Poland, individually or jointly with related entities or other taxpayers having their registered office or management board within the territory of the Republic of Poland, hold, directly or indirectly, a share in the capital, the right to vote in the controlling, establishing or managing bodies, or the right to participate in profits, including their expective nature, or in which they will be entitled to acquire such rights in the future, including as founders or beneficiaries of a foundation, trust or other entity or legal relationship of a fiduciary nature, or over which taxpayers exercise effective control.
Who is the subject of the controlled foreign corporation (CFC) regulations?
Classification of an entity as a controlled foreign corporation requires an individual, in-depth analysis of the foreign entity’s structure as well as its dependencies, relations and connections with entities having their registered office or management board within the territory of the Republic of Poland – on the basis of the currently effective regulations from the CIT and PIT acts. An entity may conduct such verification on its own, using in-house tax and legal specialists, or outsource the analysis and support of CFC entity settlements to a tax advisor.
getsix® Tax Services includes full-scope consulting on the taxation of earnings from controlled foreign companies – our specialists will determine whether a tax obligation exists, calculate the tax amount and show how the tax should be settled.
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