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Advicero Nexia | TAX NEWS | July-August 2021

  1. Lack of staff and permanent establishment for VAT purposes.
  2. Expected SAC ruling regarding allocation of interest on loans to appropriate sources of revenue.
  3. Expenses for ECP are not costs directly related to income.
  4. It is not worth delaying the submission of the outstanding MDR.
  5. Purchase of unnamed insurance is not a revenue for board members in the form of gratuitous benefit

1. Lack of staff and permanent establishment for VAT purposes

In recent times, was issued another CJEU judgment of 3 June, 2021, C-931/19, regarding a permanent establishment for VAT purposes. The essence of the judgment was the relevance of having own staff for the conduct of this business activity in the case of providing services related to the rental of real estate.

The case regarding Titanium, the company whose headquarters and management are located on the island of Jersey. The Company rented of its own property located in Austria (in Vienna) to two Austrian entrepreneurs. Additionally, Titanium authorized another Austrian company to management property in Austria with service providers and suppliers of goods and services for the property, invoicing and keeping commercial records and preparing VAT returns. However, all decision-making authorities still remained with Titanium. In connection with the above circumstances, the company assumed that it is not obliged to pay VAT on the activity consisting in renting the property. In the Company’s opinion, the lack of staff in real estate meant that there was no permanent establishment in Austria. However, the tax authority had a different opinion.

The Austrian Court asked the CJEU for a preliminary ruling on the necessity to use the service provider’s human resources to the establishment of a permanent place of business. The CJEU adjudicated that: “a property rented in the Member State does not constitute a permanent establishment of business (…), in a situation where the owner of the property does not have its own staff to provide services related to the rental.” The CJEU emphasized that the presence of human factors is important in the performance of this type of activity – technical resources alone are not sufficient to recognize that a taxpayer has a permanent establishment in a given country.

The judgment concerned the rent of real estate, but it seems that it may refer to other situations – in cases where foreign taxpayers do not have their own personnel in Poland. Consequently, the judgment may affect the manner in which foreign entities settle VAT on services purchased in Poland.

It is worth noting at this point a slightly different judgment of the CJEU of 16 October, 2014, also in the Polish Welmory case (C-605/12). Although the conditions for a fixed establishment for VAT purposes are not explicitly mentioned, a more freely and thus also very broad approach is presented. The CJEU allowed for the possibility of establishing a permanent place of business in a country in which the recipient of the service does not have its own technical or personal resources, but uses the facilities provided by the national service provider.

Until now, tax authorities and administrative courts very often used this judgment, which resulted in negative rulings for taxpayers. For example, in the judgment of the Supreme Administrative Court (of Poland) of 26 February, 2020, case no. I FSK 1313/17 referring to the CJEU ruling in the Welmory case stated: “for the acceptance of a permanent place of business in a given country it is not necessary to have one’s own personnel and technical facilities as long as the availability of other facilities is comparable to the availability of one’s own facilities – the taxpayer must have comparable control over the personnel and technical facilities“.

Let us hope, that the new CJEU judgment will contribute to a different, slightly more favorable approach of tax authorities and administrative courts regarding permanent establishment for VAT purposes.

2. Expected SAC ruling regarding allocation of interest on loans to appropriate sources of revenue

As of 1 January 2018, it is mandatory for Polish CIT Act to separate sources of revenue into (i) revenue from capital gains and (ii) revenue from other sources (so-called operating revenue). Similarly, costs related to a given source of revenue should also be allocated to the appropriate source. In the case of revenues from both capital gains and other sources, the revenue key defined in Article 15 (2) of the Polish CIT Act should be applied. This regulation raises doubts among taxpayers – how to apply the interests on loans raised to purchase shares in a subsidiary. The companies applied for individual tax rulings in this scope.

The tax authorities uniformly resolved that if revenue from shares is classified as revenue from capital gains, then all expenses (direct and indirect) related to the acquisition of shares should also be allocated to the source of revenue, i.e. capital gains. They argued that if interest is an accessory benefit of a loan and the loan finances the acquisition of shares generating revenue from the source of capital gains, then the interest on these loans should be qualified to that source. Provincial Administrative Courts also supported such argumentation, such as the PAC in Gliwice in its judgment of 3 October, 2018 (case no. I SA/Gl 786/18).

This is exactly how the Director of National Tax Information ruled in a recently issued tax ruling dated 26 May, 2021 (mark: 0111-KDIB1-2.4010.93.2021.2.BG) and it seemed that the line of jurisprudence on the subject was beginning to become “established”.

Until then, only the Provincial Administrative Court in Warsaw in its judgment of 6 November, 2019 (case no. III SA/Wa 271/19) held that costs incurred for the acquisition of companies in the form of interest on financing taken out for this purpose should be allocated according to the revenue key to two sources of revenue – capital gains and other revenue. Not – as the tax authorities claim – only to the capital gains source.

The case has now been resolved by the Supreme Administrative Court (SAC), which in its judgment of 20 July, 2021 (case no. II FSK 2627/20) ruled for a more beneficial solution for taxpayers, i.e. allocation of interest on loans drawn to purchase shares of a subsidiary to two sources of revenue using the revenue key. The case concerned a company engaged in vodka production, alcohol distribution in Poland and its import and export. The business strategy was, among other things, to develop a portfolio of foreign alcohol brands, mainly Russian. In order to increase its share in the Russian market and enhance its market position, the company acquired shares in the Luxembourg company on the basis of loans, the interest on which became the subject of dispute.

According to the explanation presented by SAC, article 15 (2b) of the Polish CIT Act makes it possible to allocate costs to particular sources. Indirect costs, which are interest costs, may be allocated proportionally to income from both sources, as the interpretation of the provision indicates this. We are waiting for a written justification from SAC because this judgment may turn out to be a breakthrough and induce tax authorities to adopt the line of argument presented in the judgment.

3. Expenses for ECP are not costs directly related to income

The Director of the National Fiscal Information issued an individual tax ruling dated 9 February, 2021 (mark: 0114-KDIP2-2.4010.347.2020.1.AS) relating to corporate income tax regarding the possibility of recognizing tax-deductible costs for “ECP costs” as costs directly related to incomes according to Article 15 (4) of the Polish CIT Tax Act.

The mechanism of ECP (Employee Capital Plans) is based on the fact that the employee and the entity employing him, after joining the ECP system, are making payments, which are collected in ECP accounts and they are the private property of the participant. The employer establishes cooperation with financial agents in the field of intermediation in the distribution of the ECP system (e.g. insurance agents), who collect a fee for ECP management, which is their tax revenue. The Applicant is an investment fund company engaged in the business of managing alternative investment funds. It has joined the ECP program in order to invest the funds of ECP participants. Through his activity he incurs (i) costs of remuneration of intermediaries for leading them to conclude agreements on management and running ECP, as well as incurs (ii) costs of production and distribution of print-outs and forms connected with the formal joining of an employee to ECP (expenses for ECP).

The Applicant asked the tax authority whether the expenses for ECP are costs directly related to income according to Article 15 (4) of the Polish CIT Act, as there was a doubt concerning the moment of recognising the expenses for ECP in the CIT settlement. The relation of costs to income (indirect / direct) determines the moment of their deduction. In the Company’s opinion, there is a strict / direct connection of the costs of ECP with the Company’s income.

The key aspect of the tax ruling became the analysis of what are direct and indirect tax costs related to revenue, therefore differentiating the moment of their deductibility on the basis of article 15 (4), (4b-4e) of the Polish CIT Act. According to these regulations:

  • tax deductible costs directly related to revenue which were incurred in previous tax years and in the tax year are deductible in the tax year in which related revenue is earned,
  • tax deductible costs other than tax-deductible costs directly related to revenue are deductible on the date they are incurred; the date on which tax deductible costs are incurred is the date on which they are entered in the books (booked) on the basis of a received invoice (bill), or the date on which they are entered on the basis of other evidence in the absence of an invoice (bill), with the exception of situations in which this would apply to reserves or accrued expenses recognised as costs.

The tax authority concluded that the expenses for ECP are reasonable and are used to achieve income by the Applicant, as they are connected with the functioning of its business. However, despite the fact that these costs are related to the achieved income, they are not strictly connected with specific income.

As a consequence, the Director of the National Fiscal Information stated that the expenses for ECP represent costs other than directly related to revenue and, therefore, they should be deducted according to article 15 (4d), (4e) of the Polish CIT Act on the date they were incurred, i.e. on the day when they were entered into the books on the basis of an invoice (bill) or other proof (if there is no invoice). The time when tax deductible costs are recognised has no impact on the fact that they are recognised over time in cost accounts for balance sheet purposes.

It is interesting how the Provincial Administrative Court will resolve this issue in the case of challenging this Director of the National Fiscal Information’s tax ruling. We shall observe the issue.

4. It is not worth delaying the submission of the outstanding MDR

Promoters, beneficiaries and facilitators do not have to notify MDR tax schemes for the time being. The deadlines for providing information and notifications on MDR tax schemes have been suspended or extended under article 31y of the anti-crisis law of 2 March, 2020 (Journal of Laws, item 374 as amended).

The obligation to report tax schemes – domestic was suspended until the 30th day following the cancellation of the COVID-19 emergency (deadlines for reporting cross-border schemes shall run from 1 January, 2021).

Nevertheless, the suspension of the deadline does not mean that it is not possible to submit such a scheme, as confirmed by the Ministry of Finance. Therefore, it is worth, in our opinion, to start drafting them earlier. Although, in view of the still uncertain situation of the ongoing pandemic, there is no detailed information as to when the COVID-19 emergency will be lifted, it may turn out that 30 days is definitely not enough for a reliable preparation of a tax scheme. This requires both the preparation of appropriate descriptions consistent with the facts in question and the collection of detailed data affecting the tax scheme.

We would like to point out that if given transactions were not verified on an ongoing basis in terms of tax schemes, such companies may have their hands full in the near future.

Why it is not worth delaying?

Each tax scheme must be described in detail, often additional source documents are needed for such analysis and at the final stage the information form must be scrupulously filled in, which is extremely extensive – especially the first information – MDR-1. All these activities are laborious and time consuming.

5. Purchase of unnamed insurance is not a revenue for board members in the form of gratuitous benefit

The Supreme Administrative Court (SAC) issued another judgement in profit of taxpayers (of 9 December, 2020, case no. II FSK 2186/18) regarding the impossibility to recognize no-name insurance as a form of gratuitous benefit. The SAC unambiguously indicated that since it is not possible to determine the amount of revenue attributable to a specific person, incl. a manager (Chairman of the Board and other members of the company’s entity), i.e. the value of revenue from of gratuitous benefit, then pursuant to Article 11 (2a) of the Polish PIT Act, it cannot be included in the tax base and consequently taxed.

In the factual state described in this jurisdiction, the company planned to purchase a no-name insurance for its management board members – a D&O (Directors & Officers Insurance) liability policy. In order to confirm that it does not correctly qualify no-name insurance for member of the management board as gratuitous performance – it applied for an individual tax ruling.

The company took the position that no-name insurance, which does not directly specify the persons insured (members of the management board or the Chairman of the Board), cannot constitute revenue for them because it covers a generally specified group of persons covered by the insurance. On the other hand, according to the tax authority, if these persons do not pay de facto for the insurance cover, they obtain a financial benefit, so they should classify it as revenue from activity pursued personally. In addition, the tax authority pointed out that it is possible to determine the tax base even though it does not cover individual persons, but only management entity. However, it did not indicate how such a tax base should be established.

The Provincial Administrative Court in Gdańsk disagreed with this approach and held that it is impossible to determine the taxable base in such a case, therefore, there is no question of revenue arising from the gratuitous service. The SAC also pointed out that the authority failed to justify the calculation of the revenue in question, which could then be taxed. The SAC emphasized that it is impossible to determine for each insured entity the respective portions which could be included in the tax base and therefore it is impossible to determine the revenue from a gratuitous benefit for each member of the management board or Chairman of the board. According to the SAC, since it is not possible to determine a specific amount of revenue for each individual which would correspond to a relevant part of the insurance premium, it is not sufficient to conclude that the cost of paid third party insurance premium will constitute a gratuitous service.

This judgement is another aftermath of the judgement of the Polish Constitutional Tribunal of 8 July, 2014 (case no. K 7/13), in which the concept of gratuitous benefit was resolved. The Constitutional Tribunal ruled that the basic criterion to be applied in determining whether a given gratuitous benefit of the employer constituted revenue under the employment relationship is the occurrence of a gain on the part of the employee, whether in the form of the acquisition of a measurable material benefit or also in the form of a measurable saving of an expense. Therefore, the key issue is the occurrence of a material gain of an individually determined and assign value.

In view of the verdict of the Constitutional Tribunal and following the decision of the first instance, the SAC, distinguished 3 basic conditions that have to be met in order to consider a given benefit – in this case an unnamed policy – as gratuitous, i.e.:

  • fulfilment with the employee’s consent (he took of them fully voluntarily);
  • fulfilled in his interest (not in the employer’s interest) and conferred a benefit in the form of an increase in assets or the avoidance of an expense he would have had to incur;
  • the benefit is measurable and attributable to the individual employee (it is not generally available to all entities).

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