Funny business with tax

Cash is the lifeblood of business and sometimes they need injections of money. Loans are generally the simplest and quickest way of obtaining funds but, since interest rates are relatively high and many Polish companies are financed by foreign parent companies, loans are often sourced from abroad. It is common for loans to be granted by entities whose main objective is to grant them to companies belonging to the same group. A point of interest here is that Polish legislation allows foreign loans to be exempted from the tax on civil law transactions (let's call it TCLT), which is a sort of multi-rate stamp tax (a maximum of 2%).

Under the law on tax on civil law transactions, loans are subject to this tax if the tangible assets or other proprietary rights are executed in Poland. You may not be surprised to hear that some time ago there was a dispute between taxpayers and the tax authorities as to whether the rights resulting from loans granted by foreign entities are executed here or abroad. The Supreme Administrative Court ruled on several occasions that such loans were executed in Poland, and are therefore subject to tax on civil transactions.
As a rule, loans are normally subject to 2% at the TCLT rate, whereas loans granted by a shareholder are regarded as a change of the articles of association and are subject to the same tax rate as the articles of association. The upshot of this is that you pay only 0.1% of the value of the loan.

Some loans, moreover, are tax exempt. This affects: loans granted by entities with registered offices outside the country, which extend credits or loans in the normal course of their business; and loans granted by persons or entities, such as Polish banks, which are subject to VAT on account of such loans. This means that TCLT may be avoided if the loan is granted by a foreign institution whose business involves granting loans or credits.
The tax authorities have started asking for the articles of association of lenders in order to check whether they may provide loans. Sometimes the authorities also check whether loans may be granted to non-related parties. If not, the tax authorities try to argue that a lender is not a "financial institution" for civil transactions. So they try to apply TCLT on the loans.

However, the fact is that such a practice is contrary to current tax legislation which states that loans are tax exempt if granted by entities that do not have registered offices here and which actually conduct activities within the scope of extending credits or loans. If the legislator had indeed wanted to exempt loans granted by entities whose articles of association expressly provide for the possibility of granting loans, it would have drafted the law differently (e.g., "Tax exempt are such loans as are granted by economic entities which do not have their registered office in Poland and whose articles of association or statutes expressly provide for conducting activities within the scope of granting credits or loans"). You may not be surprised to learn that the law does not say this. (This is an issue with some countries, such as the United States, which do not demand such prescriptive articles of association.)

Therefore, if the foreign entity actually grants loans (which means, among other things, that the lender possesses all licenses necessary under local law in order to legally grant loans, and its articles of association do not limit its business activities to certain areas exclusive of lending money) and it does so in the normal course of its business - even if its articles of association do not clearly provide for such possibility - then foreign loans should be exempt from TCLT.
The current practice of the tax authorities seems to constitute an overinterpretation of the rules. One should keep in mind that, according to the general principles of tax law set forth in the Polish Constitution, the law is such that its interpretation and application must conform to the Constitution. One article of the Constitution states that "the imposing of taxes or other public levies, the determination of taxed subjects and objects and tax rates as well as rules for granting allowances and redemption and categories of entities exempt from taxation shall be performed pursuant to parliamentary acts". It follows from this article that the above-mentioned constitutional elements of taxes should be regulated solely by way of parliamentary acts.

Thus, you may raise an argument against the tax authorities' interpretation that the relevant law (established in the form of a parliamentary act) provides only for the necessity of conducting activities within the scope of granting credits or loans. It does not require you to have such scope of activity clearly stated in the articles of association.
Furthermore, some of the tax offices in Warsaw agree with this interpretation. They argue that in order to prove that an entity actually carries on activities within the scope of granting credits or loans (in the case the statutes do not clearly provide for this), it is necessary to present an appropriate statement to this effect from the board of directors. In order to make this statement more reliable for tax authorities (and more impressive), the statement might be confirmed by a notary public of the lender's country of residence.
Finally, the borrower can always apply to the tax authorities for a written interpretation of law with respect to this issue. Although this "ruling" does not bind the tax authorities in the same way as court decisions do, they normally comply with it. Having said that, you should remember that, sometimes, seeking a ruling attracts the (unwanted) attention of the local tax office.

Anna Bryńska is a senior associate at Salans law firm. She specialises in tax and accounting law.