An unpopular tool in effective tax planning
Legal conditions A tax capital group may only consist of limited liability companies or joint-stock companies registered in Poland. That condition is only the first step. The average initial (share) capital for each of these companies must not be lower than zł. 1 million ($250,000). The "dominant company" should have direct shareholdings of at least 95% in the initial capital of the remaining companies, called "dependent companies." Dependent companies cannot hold shares in the initial capital of other companies that make up the group. Next, the companies must not be in arrears with the payment of taxes owed to the state treasury. And the most important condition is the requirement of a minimum profitability ratio in the tax group (profits/total sales) on the level of 6%. Members of the tax capital group cannot use corporate income tax holidays or VAT exemptions.
Formal requirements The dominant company and dependent companies must conclude, in the form of a notarial deed, an agreement to form a tax capital group for the period of at least three tax years and this agreement must be registered by the local tax office of the parent company. After the formation of a tax group at the tax office, no new subsidiaries can be added to the tax group. The agreement presented to be registered at the tax office must contain at least: " A list of the companies that form the tax capital group and the amount of their initial capital.
" Information about the shareholders and the amount of their shareholdings in the initial capital of the dominant company and dependent companies that make up the tax capital group if they have at least 5% of shares in these companies.
" A designation of the period of the agreement's validity and indication of the company representing the tax capital group as regards the legal requirements of Polish tax law.
" And information regarding the adopted tax year.
Group advantages The most important advantage of being a tax capital group is the special method available to calculate taxes. The group's income tax base is a surplus before the sum of profits of all companies and the sum of their losses. The second important benefit of being a tax capital group is the non-applicability of regulations on capital or business connections in selling goods and providing services between members of the group (transfer-pricing). As a result, the companies can establish their own pricing polices without the risk of negative transfer-pricing consequences, which is a real risk for companies that are not members of a tax capital group. These companies are also exempted from the income tax on dividends, if such dividends are received from members of the tax capital group. Donations between such companies are fully tax-deductible.
Avoiding violations Any violations of the conditions described above could result in the immediate termination of the tax group arrangement. The violation date is considered the commencement of a new fiscal year for all companies forming the tax group. If a subsidiary ceases to meet such conditions during a tax year, it will be excluded from the tax group as from the beginning of the tax year. In the situation where the parent company is the only remaining member of the group, or if the group violates one of the conditions, the entire tax group arrangement is terminated as of the beginning of the tax year.
Rigid rules, clear benefits The rules for forming tax capital groups are relatively rigid. The most unpredictable rule is the obligation to maintain the minimum profitability ratio of 6%. In current economic circumstances, it is almost impossible to reliably plan costs and profitability of the company for at least three years. The 6% level is also considered even from the point of view of the profitability ratio of a particular kind of business. This condition must be treated as a serious obstacle to the formation of tax capital groups. The second very difficult condition is the requirement for direct shareholding of at least 95% in the initial capital of the dependent companies by the dominant company. In Poland, where the problem of the concentration of the capital is relatively important due to the lack of investors, this ratio, should be minimized to the level of 75%-80%. However, the benefits of such particular status can be advantageous for conducting business within a group of companies in Poland.
Piotr Augustyniak is a fully licensed tax adviser at White & Case in Warsaw.
