Controlled Foreign Corporation Mechanism will reduce the benefits of optimisation

A draft amendment to the laws on corporate and personal income tax aimed at introducing a taxation scheme specific to controlled foreign corporations (CFC) has been filed with the Sejm. What effects will these proposals bring? 

The new regulations will change the existing rules for international tax planning in Poland, as they will substantially reduce the so far available opportunities for reducing or even avoiding taxation of certain categories of income (from dividends, interest, royalties, capital gains).
The draft provides for taxation (subject to certain exceptions) at the rate of 19 per cent of income of Polish companies holding no less than 25 per cent of shares (in equity, voting rights, or profit sharing) in foreign subsidiaries which generate no less than EUR 250,000 of annual revenue and receive at least 50 per cent of the revenue from financial transfers. The CFC mechanism will apply where in the state of the registered office of the foreign company the income of the company is subject to taxation at a rate lower than 75 per cent of the rate of the Polish corporate income tax, i.e. lower than 14.25 per cent.

The essence of the provisions is to apply taxation to income which is, as it were, virtual, i.e. has not yet been transferred from a foreign subsidiary company to its Polish parent company. As a result, the existing optimisation structures may cease to be attractive to Polish entrepreneurs. It concerns, for instance, the structures based in the first step on the transfer of intellectual property (copyrights, licences, patents, trademarks) to foreign subsidiaries, and in the second step, rendering these available to Polish operating companies in exchange for licence fees.

Similar negative effects may be exerted on optimisation structures encompassing a foreign holding company, which generates income in the form of capital gains from disposing of shares in subsidiaries having their registered offices in Poland to third parties. These structures are frequently used in the real property trading. It consists in transferring shares in real property companies instead of real property, which facilitates obtaining non-taxable capital gain in the state of the holding company’ registered office, e.g. in Cyprus.