New regulations regarding Controlled Foreign Corporations

Olaf Jędruszek lawyer at Wierciński, Kwieciński, Baehr sp.k.

by Olaf Jędruszek

In June 2014, the lower house of the Parliament passed legislation amending, among others, the Act on Corporate Income Tax. One of its significant changes is the introduction of rules of taxation of Controlled Foreign Corporations (CFC), similar to solutions introduced in other EU states, such as Great Britain, Sweden, Italy and France.The unique character of the new regulations consists in the fact that revenues of the CFCs will be taxed directly in Poland. According to the Ministry of Finance, such a solution constitutes a serious measure for tightening up the Polish tax system and limiting the possibilities of establishing tax optimisation structures.

In order to be perceived as a CFC, the foreign company must meet certain specific criteria. First of all, the Polish tax resident (an individual or a company) must hold for over 30 days continuously, directly or indirectly, at least 25% of shares or 25% of voting rights in the company’s management board or supervisory board. Moreover, 50% of the foreign company’s revenue has to come from the so-called passive income (such as dividends, interests, royalties etc.) and income from the sale of shares. Finally, at least one of the above-mentioned types of revenue has to be exempted or excluded from taxation abroad or be subject to a tax rate equal to or lower than 14.25% (i.e. at least 25% lower than the 19% tax rate prevailing in Poland). Also, it is noteworthy that companies having their seat in so-called tax heavens or in a state which has not entered into an agreement with Poland or the European Union allowing for obtaining relevant information from tax authorities, can be regarded as CFCs.

Subject to taxation in Poland will be the CFC’s revenue limited by the period, in which the Polish tax resident held the specified percentage of shares or voting rights, and by the part that corresponds to the possessed shares entitling the resident to participate in the CFC’s profits. Importantly, adverse tax regulations shall not be applied if the CFC’s revenue does not exceed €250,000 in a given tax year or if the CFC actually conducts business activity. The CFC regulations will most likely come into force at the end of 2014 or at the beginning of 2015, and until then entrepreneurs considered to be CFC shareholders should give a thought to different optimisation solutions.

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