U.S. taxpayers have a lot to consider when setting up cos.
Lots seems to be happening on the entrepreneur and business front these days, as we have seen a few sell-offs and start-ups taking place. Most of the deals are dead confidential of course and I can't tell you what we're working on. In accordance with normal security policies I'd have to shoot you afterward, and the publisher says I should be aiming to increase circulation figures, not reduce them.
Much of what we do that is probably of interest to WBJ readers is for foreign investors setting up companies in Poland. Of course a lot of this applies to Poles, too, but there are probably fewer alternatives to be creative there (assuming you wish to remain legal) and the possibilities of setting up foreign companies means you get complexities such as the foreign exchange law to deal with.
The issues for American taxpayers for example can get horrendously tricky.
Please bear in mind, though, that as U.S. tax is so complicated, don't try this at home without an adult to help with the glue and scissors, as it can easily go horribly wrong if you don't know exactly what you're doing.
Practically, if you're in start-up mode, you typically don't have the time nor money to put in place proper structuring at the beginning, and so the tax consequences on sale only really become an issue once a sale proposal is sitting on the table. If you wait until such time, then room for maneuver is limited, and if we are looking at value appreciation between set up and sale, it is difficult to argue that the company you set up for zl. 4,000 five years ago is still worth zl. 4,000 today when you transfer the shares to your company in the Cayman Islands, but is actually worth $3 million tomorrow when you sign the deal (although someone did try that with me once and kept a straight face).
As every transaction is different, let me just talk you through some of the issues for consideration in selling your Polish company.
Firstly, if you are selling the company, are you staying in Poland or not? If you are, then there is a risk that as a Polish tax resident subject to tax on worldwide income, this gain would be subject to Polish tax. There are no special rules for capital gains in Poland, so gains are subject to normal income tax rates. As the gain is calculated based on the difference between the zloty proceeds on sale and the zloty cost at the time of acquisition, then you will have a gain even if you sell something for the same dollar amount as you acquired it.
Many of the basic expatriate tax planning techniques to limit the tax base to income received for work performed in Poland, and other Polish-source income only, apply if someone is temporarily in Poland to take employment in a company formed with foreign participation. If you've been an employee of your company and then you sell it, you could be taking away this tax status for yourself, rendering the gain liable to tax here.
The simple planning technique of having the Polish company owned by a foreign holding company can help here as then it is the foreign company that recognizes the gain. If the holding company is a tax resident of a country that has a double-tax treaty with Poland, then it is likely that the country of residency will have the rights to tax the gain, and not Poland (unless the company is a real estate holding company, when there are sometimes special rules to ensure that these gains are taxable in the country where the real estate is sited, regardless of who the legal owner is).
However, just going and setting up an offshore holding company without taking tax advice is probably the single biggest area for creating expensive disasters. Most people look at the simple argument of being in a tax haven location with "no tax." This sounds great, but the biggest problem there is "no tax" usually means no treaty, and so the capital gain would then be subject to tax in Poland if it relates to shares in a Polish company.
The other big problem is if the shareholders are tax residents of other countries, particularly the United States. In such case, anti-avoidance rules designed to stop taxpayers sheltering their gains "offshore" come into force, and these often tax the individual in their home country at the same or higher rate than if they had just owned the shares directly. Typically, a "controlled foreign corporation" in a tax haven gets picked up by all the anti-avoidance, and for say U.S. companies, other rules can kick in if you are accumulating "passive" income such as dividends, interest or royalties in the holding company.
Also, if you have a company in Poland that you're aiming to sell sometime in the future, and particularly if you have some intellectual property that you might license to other countries, then you need to give some thought to how you're structuring the company both in Poland and abroad.
To give you the perfect answer, all we need to know at the time you set up the company is how much you will be selling it for, when, and to whom. Will they want to buy the Polish company's business, its shares, or maybe the shares in the holding company. Also, it's good to have perfect forecasting ability on whether you will be making profit in Poland or whether you will be selling once the initial investment starts making a return but before a big profit is made.
Will you take the proceeds and retire (one structure) or will you re-invest them into something else (another structure). And does your buyer have a particular preference toward a certain jurisdiction for the holding company.
If you can answer all those questions at the beginning, then that makes my job easy. If there's some uncertainty there, then sounds like you could do with some tax advice.
Peter Ferrigno is a tax manager in the Warsaw office of Arthur Andersen.
