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Advicero Nexia | TAX UPDATE | December 2023

  1. Extended deadline for submission of transfer pricing information
  2. The look-through approach concept and the exemption from Article 22(4) of the CIT Act
  3. Tax authorities admit defeat in regarding the IP BOX relief matter
  4. Financial instruments classified as a source of employee compensation
  5. Lack of the possibility to apply a general clause retroactively

1. Extended Deadline for Submission of Transfer Pricing Information

On 27th, November 2023, the Ministry of Finance published a regulation dated 24th, November 2023 on extending the deadline for submitting TPR-P and TPR-C transfer pricing information by 3 months.

According to Article 11k(1) of the Corporate Income Tax Act and Article 23w(1) of the Personal Income Tax Act, related entities are required to prepare local transfer pricing documentation electronically for the tax year. This should be done by the end of the tenth month after the end of the tax year, to demonstrate that transfer prices were established on terms that unrelated parties would agree upon. The deadline for entities whose fiscal year corresponds to the calendar year expired on October 31st. The obligation applies to transactions of a “uniform nature”, with a value in the tax year of at least:

  • PLN 10 million for goods and financial transactions,
  • PLN 2 million for services and other transactions.

Importantly, under existing regulations, related entities, as per Article 23zf(1) of the Personal Income Tax Act and Article 11t(1) of the Corporate Income Tax Act, have until November 30th to submit transfer pricing information.

The regulation proposes an extension of the deadline for submitting transfer pricing information to 31st January 2024.

Changes will also affect the method of submitting information. Until now, taxpayers used active PDF forms. However, on October 30th, 2023, new software was published for submitting TPR information electronically, corresponding to the logical structure available in the Public Information Bulletin on the Ministry of Finance’s website.

Now, there is the option to submit information:

  • through the electronic portal of the Ministry of Finance in xml2 format,
  • through e-Declarations in xml3 format.

It is crucial to ensure that the person authorized to sign the form has a valid qualified electronic signature, compliant with the eIDAS regulation, containing the Polish PESEL or NIP number.

Additionally, obtaining and registering UPL-1, a power of attorney for signing declarations submitted via electronic means, is essential. UPL-1 should be signed following the representation principles of the respective entity.

Even though we will have more time (if the draft regulation is enacted unchanged), it is advisable not to delay the preparation of both documentation and the form.

2. The look-through approach concept and the exemption from Article 22(4) of the Corporate Income Tax Act

In the judgment of September 14th, 2023 (case number III SA/Wa 1513/23), the Provincial Administrative Court in Warsaw unambiguously stated that the conditions for exemption under Article 22(4) of the Corporate Income Tax Act may be met by an entity that is not the direct recipient of dividends but is its actual owner. On this basis, the Court concluded that the condition of holding at least 10% of shares (stocks) continuously for at least 2 years could be fulfilled if the actual owner meets these conditions regarding the intermediary company, and the intermediary company meets them in relation to the entity distributing dividends.

In the case at hand, the Company submitted a query to the Director of the National Tax Information (DKIS) about whether it would be entitled to apply the exemption under Article 22(4) of the Corporate Income Tax Act and not to withhold tax at the source under Article 26(7a) of the Corporate Income Tax Act when paying dividends, guided by the look-through approach principle.

The justification of the judgment indicates that the Applicant Company was a Polish tax resident and belonged to an international group providing transport services. The majority of its shares were owned by a single entity, the parent company, which did not engage in operational activities and did not employ workers. It directly held over 55% of the Company’s shares for a period exceeding two years. Within the group, the ownership function was performed by another entity, which was a tax resident in Denmark.

The Company also obtained a statement confirming that the Danish company was the actual owner of the receivable in the form of dividends, which it received for its own benefit. It further confirmed that the Danish company was not an intermediary, trustee, or other entity obligated to transfer the entirety or part of the receivable to another entity, and that it engaged in actual business activities.

However, during the proceedings, the tax authority contested the approach presented by the Company and deemed that the conditions for applying the exemption under Article 22(4) of the Corporate Income Tax Act and not withholding tax under Article 26(7a) of the Corporate Income Tax Act were not met, guided by the look-through approach concept.

The Provincial Administrative Court in Warsaw has unequivocally stated that since Article 22(4) of the Corporate Income Tax Act does not require the company receiving income (revenue) from dividends and other income from participating in the profits of legal entities, as the “actual recipient” of those dividends, to directly hold no less than 10% of shares (stocks) in the capital of the company paying them, all the conditions allowing for the application of the dividend exemption are met, contrary to the position of the tax authority.

The Court held that even without referencing Article 22(4) of the Corporate Income Tax Act, the exemption would apply based on the concept of transparency. According to the Provincial Administrative Court in Warsaw, a tax preference is permissible when, despite the payment of dividends not made to the actual beneficiary, it is possible to apply the look-through approach. This concept allows for preferential taxation or exemption from taxation when the payment is made through an intermediary – an entity that is not the actual beneficiary, but the actual beneficiary is located within the EU (EEA) and is known.

It is worth noting that a similar decision was issued by the Provincial Administrative Court in Warsaw on October 17th, 2023 (case number III SA/WA 1586/23).

This judgment is important insofar as, according to the previous approach of administrative courts (see III SA/Wa 2542/22, III SA/Wa 2543/22, III SA/Wa 2544/22), the prevailing opinion was that the possibility of applying the dividend exemption was reserved only for direct shareholders of the payer. Although the judgment is not yet final (DKIS may appeal the decision to the Supreme Administrative Court), it is advisable to analyze the shareholding structure and the potential application of the look-through approach concept.

3. Tax Authorities Admit Defeat in the IP BOX Relief Matter

Due to the losses before the Supreme Administrative Court, the National Revenue Administration (KIS) is massively withdrawing his cassation appeals in cases concerning reliefs for IT specialists, which he lost before the WSA. This is a clear signal that he will have to respond to questions about whether this professional group is entitled to tax preferences.

The withdrawal of cassation appeals make that first-instance court judgments legally binding. The Director of KIS will have to comply with the guidelines of the WSA and issue interpretations, which he previously refused, claiming that he did not have the authority to interpret the provisions of the Higher Education and Science Law.

This is because tax regulations refer to the definition of research and development activities, which makes it difficult to grant many incentives if there is no certainty that the taxpayer is actually conducting research and development activities. This concept is crucial in the context of many incentives, such as IP Box (a 5% tax rate on income from qualified intellectual property rights), R&D incentives, incentives for employees in the innovation sector, and incentives for prototypes.

Therefore, individuals seeking to benefit from the IP Box relief typically try to ensure that they are indeed conducting research and development activities, as precisely defined in the Higher Education and Science Law. The tax authorities required taxpayers to state this fact in the background of motions for tax rulings. The taxpayers did not accept this standpoint.

The courts held that the Director of KIS has the authority to interpret the above provisions. This is supported not only by judgments of the WSA but also by the NSA. In April and May 2023 alone, there were 8 and 6 judgments, respectively, in this regard.

The courts emphasized that if taxpayers were to determine in their interpretation request whether their activities qualify as research and development, such requests would be meaningless. They would already know that if they conduct such activities, they are entitled to a tax incentive, and if they do not, they are not entitled to any tax relief.

We encourage you to review your business activities. From our experience, many companies are unaware that they could benefit from such incentives. However now, with the Director of KIS’s decisions available, we could expedite this process and apply innovative tax incentives – feel free to contact us.

4. Financial Instruments Qualified as a Source of Employee Compensation

On October 5th, 2023, the Supreme Administrative Court (NSA) issued a ruling (case number II FSK 758/21) stating that the granting and payment of financial instruments to employees do not immediately result in income. However, this income may be realized in the future, i.e., at the redemption or repurchase of investment fund units by the Investment Fund Company. At that point, such income is classified as employment income, not capital gains, subjecting it to Personal Income Tax (PIT), including social security and health insurance contributions.

NSA rejected the cassation appeals filed by tax authorities regarding two similar cases. These cases involved issues related to the interpretation of individual tax rulings issued by the Director of the National Revenue Administration (KIS) concerning the taxation of variable components of remuneration paid to employees of investment fund companies (IFCs) in the form of fund units, investment certificates, or other financial instruments.

The Director of KIS argued that income from compensation arises both when receiving instruments and when disposing of them for redemption. Initially, it could be classified as employment income or income from personally performed services. However, upon the redemption of investment units, income would arise from capital gains, taxed at a 19% PIT rate.

However, the NSA indicated that the granting of variable elements of remuneration to employees should not be considered income at the time of grant but only when redeeming the investment units or when they are repurchased by the Investment Fund Company. Nevertheless, according to the NSA, such income will be classified as employment income, not capital gains.

Provincial Courts also argued that for income to be recognized, it must be definite. “Definiteness” means that the income is permanent, final, and can be freely disposed of by the taxpayer. Employees of IFCs, receiving compensation in the form of investment units, do not obtain definite income at the time of payment because it is only a potential future possibility. Due to the variability of the value of investment units, the actual value of the employee’s income will only be determined at the time of the redemption of these units. It cannot be ruled out that at the time of redemption, the units may have a lower value than at the time of payment.

While considering cassation appeals from judgments of Provincial Administrative Courts, the NSA shared the position of these courts on the timing of income recognition but disagreed with classification of income from the realization of investment units as capital gains. In oral justification, the Court emphasized that variable remuneration constitutes an element of compensation, thus being linked to the employment relationship. According to Article 10(4) of the PIT Act, income from financial instruments can be classified differently than income from capital gains. In this case, the decisive factor is the legal basis for obtaining income, which is the employment relationship. Therefore, income will be subject to taxation according to the 12% or 32% tax scale, as well as social security and health insurance contributions.

These rulings may have significant implications in similar cases and provide greater clarity on the timing of income recognition and its qualification under the appropriate source. We encourage you to analyze how such incomes have been recognized in your case so far.

5. Lack of Possibility to Apply the General Anti-Avoidance Clause Retroactively

On November 9th, 2023, the Supreme Administrative Court (NSA) announced five judgments (case numbers II FSK 163/22, II FSK 620/22, II FSK 1277/23, II FSK 1637/23, and II FSK 1227/23) concerning identical issues. According to these rulings, the Head of the National Tax Administration was not authorized to invoke the anti-avoidance clause regarding tax benefits that arose after July 15th, 2016, if the actions leading to their acquisition occurred before that date.

This position is also confirmed in judgments from November 25th, 2021 (case numbers II FSK 669/19 and II FSK 670/19). However, on August 22nd, 2023, the NSA presented a different view (case numbers III FSK 354/23, III FSK 489-495/23).

First-instance courts, including the Administrative Court in Wroclaw in judgments from August 31 of the current year (case numbers I SA/Wr 101/23 and I SA/Wr 110/23), also accept the possibility of applying the clause retroactively.

Initially, the Council for the Prevention of Tax Avoidance, the advisory body to the head of the National Tax Administration, agreed with such an approach, as evidenced by opinions of December 18th, 2019. However, later, the council changed its opinion, considering the matter more complex, suggesting that the Constitutional Tribunal issue an opinion (opinions from March 1st, 2021).

As of now, there is no clear resolution on this matter. The entire dispute revolves around Article 7, a transitional provision included in the amendment of May 13th, 2016 (Journal of Laws item 846), which introduced the general anti-avoidance clause into Polish law. According to this provision, the clause applies to tax benefits obtained after the effective date of this law, which occurred in mid-July 2016.

Nevertheless, the line of jurisprudence presented by the Courts so far still lacks a uniform approach.

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