TAX DEVELOPMENTS IN POLAND UPDATE 2009

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1 TAX DEVELOPMENTS IN POLAND UPDATE 2009 WARDYŃSKI & PARTNERS TAX PRACTICE APRIL /8

2 INTRODUCTION The purpose of this report is to present key tax developments in Poland in 2009 which may be relevant to foreign practitioners advising clients on cross-border tax issues relating to Poland and to parties operating or considering commencement of operations in Poland. LEGISLATIVE DEVELOPMENTS CORPORATE INCOME TAX ( CIT ) Introduction of a participation exemption for domestic dividend payments As of 1 January 2009, the holding threshold which allows benefiting from the participation exemption under the Polish CIT law was reduced from 15% to 10%. The exemption applies, in general, to corporate profits distributions between Polish and EU-based (including Polish) corporations. To become eligible, it is further required to hold participation for an uninterrupted period of at least two years (the holding period requirement can be met prior to or after payments). Introduction of cross-border mechanism to correct income The Polish CIT Act has implemented the European Union Convention of 23 July 1990 on the Elimination of Double Taxation in the adjustment of profits of associated enterprises. As of 1 January 2009, Polish corporations and branches may adjust their income when a related foreign entity is assigned this income by the foreign tax authorities as belonging to taxable income of the related foreign entity. The underlying purpose is to determine the income of the Polish entity at the arm s length. Possibility of crediting expenditures on discontinued investments to tax deductible costs As of 1 January 2009, it is possible to allocate the cost of tax expenditures on a discontinued investment to tax deductible costs if the investment is sold or liquidated. New progressive PIT scale PERSONAL INCOME TAX ( PIT ) Since 2009, a progressive PIT scale of 18% and 32% replaced a former scale of 19%, 30% and 40%. 2/8

3 New definition of a small taxpayer As of 1 January 2009, the term small taxpayer applies to taxpayers whose sales revenue together with VAT due did not exceed in the previous fiscal year the PLN equivalent of EUR 1,200,000. Earlier that equivalent was EUR 800,000. New regulation regarding depreciation deductions On 22 May 2009, under transitional regulations of the Act of 5 March 2009 on the Amendment of PIT and CIT, the limit of one-off depreciation deductions for 2009 and 2010 was raised from the equivalent of EUR 50,000 to the equivalent of EUR 100,000. Changes in the settlement of social security and health contributions paid abroad The amended PIT Act, in force since 1 December 2008, allows the taxpayer to deduct mandatory social security and health insurance contributions paid in EU and EEA Member States as well as the Swiss Confederation. Deductions from income will apply to compulsory social security and health insurance contributions paid in the fiscal year by the taxpayer on his behalf and that of his collaborators under provisions regulating obligatory social security and health insurance contributions applicable in the corresponding EU or EEA Member State or in the Swiss Confederation. Non-residents do not have to pay a lump sum tax on orders Under the amended PIT Act, persons with limited tax liability in Poland obtained the right to tax income derived from contracts for specific work and contracts of mandate according to progressive rates. Earlier, such persons were obliged to pay lump-sum tax. Since 2009, nonresidents can tax in accordance with general rules (including recognition of available corresponding tax deductible costs) all income generated in Poland from contracts for specific work and contracts of mandate, as well as income received by management board and supervisory board members. The change applies to taxpayers who are residents for tax purposes in other EU and EEA Member States or in the Swiss Confederation, and who can provide certificates of residence for tax purposes. New regulations for disposal of real estate As of 1 January 2009 one of three different tax regimes can apply when an individual decides to sell the real estate, depending on the date of acquisition of this real estate. 3/8

4 General and current regime Under PIT rules currently in force and effective as of 1 January 2007, the general rule is that the individuals disposing of real estate (other than premises used for business) that was purchased after 1 January 2007 are taxed on the accrued income (deemed to be the surplus of proceeds from the disposal over acquisition and development costs), unless the real estate is disposed of five years or more after purchase. The tax is levied at a flat rate of 19%. Income from selling a property is tax exempt if the taxpayer allocates it to purchasing a dwelling within 2 years after the sale or disposes of the property 5 years from the date of acquisition. Past regime 1 Although in general subject to the above rules, owners disposing of a residential property acquired between 1 January 2007 and 1 January 2009 are exempt from PIT if they have registered residence at that property for at least 12 months. This exemption, although attractive, has been subject to restrictive interpretation by the tax authorities and is only available under the acquired rights doctrine. Past regime 2 Individuals disposing of real estate (other than premises used for business) that was purchased prior to 1 January 2007 are taxed according to the old rules. This essentially implies that they are taxed on the proceeds from the sale (no expenses are deductible) at the rate of 10%. The disposal after five years or more after purchase remains exempt from the taxation. VAT Introduction of a general exemption for supply of developed real estate Up to the end of 2008, secondary trading of buildings, structures and parts thereof (which is always done together with the land where they are located) was in principle subject to 22% VAT. Exception was made in respect of trading of used real estate which was VAT exempt under certain conditions. Sales of undeveloped land not assigned for development (e.g. forests, agricultural land) were VAT exempt. As of 1 January 2009, sales of buildings, structures and parts thereof are in general exempt from VAT. The exemption includes the establishment or sale of perpetual usufruct of developed land with buildings and structures. Nonetheless, a sale of buildings, structures and parts thereof remains subject to VAT if it is done prior to, upon or within two years of first occupancy of buildings, structures and parts thereof. Notwithstanding, a sale of such real estate done within this deadline could still be exempt from VAT where (i) the seller was not entitled to deduct input VAT in relation to supplied real estate and (ii) the seller has not incurred expenses for the improvements, for which he was entitled to deduct the input from output VAT and if he incurred such expenses, they were lower than 30% of the initial value of the real estate. 4/8

5 First occupancy takes place upon delivery of the real estate to the first buyer or user in execution of taxable transactions. At the same time, VAT exemption of sales of used real estate, which applied until the end of 2008, was abolished. Sales of undeveloped land not assigned for development (e.g. forests, agricultural land) remains VAT exempt. Simplified VAT treatment of consignment warehouses As of 1 December 2008, a supply by a VAT tax payer from another EU Member State (without registration for VAT purposes in Poland) to a consignment warehouse in Poland is treated as an intra-community acquisition of goods. Consequently, when certain organizational and administrative conditions are met, such supply does not trigger any obligation for the supplier to register for tax purposes in Poland and the corresponding VAT liability is settled by the Polish VAT taxpayer running the consignment stock. Introduction of organized part of an enterprise definition to the VAT law The amendment of VAT law in 2008 introduced the definition of the organized part of an enterprise: set of tangible and intangible components organizationally and financially separated in an existing enterprise, including liabilities, designed for execution of specific business tasks, which could function as an independent enterprise. Exemption of organized part of an enterprise supplies As of 1 December 2008 any supply of an enterprise or its organized part is exempt from VAT, regardless of whether it is a self-balancing branch (which was required to benefit from for the exemption previously). Moreover, an increase of share capital resulting from an in-kind contribution of an organized part of an enterprise which is a branch became as of 1 January 2009 exempt from the civil-law activities tax (commonly abbreviated as PCC). VAT refund As of 1 December 2008, it is possible to obtain, within 180 days, a direct reimbursement into the bank account of input VAT calculated on the acquisition or production of fixed assets even before starting taxable sales. 5/8

6 CIVIL LAW ACTIVITIES TAX ( PCC ) Changed civil-law activities tax regulations came into force in They brought new exemptions financially beneficial to corporations. Abolition of PCC on corporate restructuring As of 2009, corporate mergers, divisions and transformations are free of PCC. Also, there is no PCC charged on increasing the share capital by an in-kind contribution in the form of a branch. However, the new rules do not define the concept of "branch" for the needs of PCC. In consequence, it is necessary to refer to the Polish Commercial Code regulations. Moreover, when a share-for-share deal leads to acquisition of majority of votes or further increases the participation, the corresponding share capital increase in a company that acquired majority or increased participation remains free of PCC. Furthermore, as of 1 January 2009 shareholders loans have been exempt from PCC. Up to 31 December 2008, shareholder loans were subject to 0.5% PCC. A loan granted to start a new or expand an existing business activity is generally treated as a standard loan and is subject to 2% PCC. The loan granted to partnership by its partner will be subject to 0.5% PCC. Notwithstanding the above, some loans, including intra-group and cross-border loans, can still benefit from a PCC exemption if they are granted within the scope of financial services (within the meaning of VAT regulations) provided by the lender. Introduction of effective management requirement Since 1 January 2009, changes of the articles of association of a company (e.g. share capital increases) will be subject to PCC when the company is effectively managed from Poland or when the registered seat of that company is in Poland the latter only if the company is managed from outside the European Economic Area. TAX ORDINANCE No more liability for the vendor s tax arrears? As of 1 January 2009, the acquirer of certain part of assets bears no liability for the vendor s public debts. However, such acquirer will still be liable for the vendor s tax arrears, if the arrears existed prior to 1 January /8

7 No tax inspection without prior notification As of 1 January 2009, the Polish tax authorities must as a matter of principle notify the taxpayer of their intention to initiate a tax audit. The authorities will be entitled to start the audit not earlier than 7 days and not later than 30 days from the date of serving the notification. New rules regarding payment of taxes via wire transfers from foreign accounts As of 1 January 2009, the date of payment of tax via a wire transfer from an account held in a foreign bank or credit institution is the day on which that account is debited, provided that the payment reaches the relevant Polish tax authority s bank account within the next 5 business days. In case of exceeding that date, the payment date is deemed to be the day on which the amount is credited to the account of the tax authority. NEW DOUBLE TAXATION PREVENTION TREATIES The following double taxation prevention treaties or protocols thereto entered into force on or apply since 2009: - Between Poland and Austria (Protocol entered into force in 2008, applies since ); - Between Poland and Qatar (Treaty entered into force in 2009; applies since ). During 2009 Poland signed new treaties with Finland and Norway and protocol to the treaty with Denmark. Their ratification is still pending. DEVELOPMENTS IN ADJUDICATION In 2009, Poland referred four times to the European Court of Justice (ECJ) with prejudicial questions. The ECJ provided replies in rulings dated 15 January 2009 (case C-502/07 K-1), 23 April 2009 (case C-544/07 Rüffler), 19 November 2009 (case C-314/08 Filipiak) and 12 November 2009 (case C-441/08 Elektrownia Pątnów). ECJ on the Polish tax law Polish VAT penalty was consistent with European law In case C-502/07, the ECJ analysed the Polish VAT penalty. The Polish tax authorities would impose 30% penalty provided for in the Polish VAT Act, upon determining that the taxpayer overstated the amount of VAT for reimbursement. Therefore, the additional VAT liability was in fact an administrative penalty. In the ECJ s assessment, the principles of the common system of VAT do not prohibit Member States from imposing administrative penalties which they deem necessary for the correct levying and collection of VAT. Moreover, ECJ 7/8

8 emphasised that the penalty was not a special measure for derogation for preventing certain types of tax evasion or avoidance. Consequently, the Polish penalty was consistent with EU law. However, the Polish legislator did not take heed of this solution. A VAT penalty in the form of an additional VAT liability disappeared from the Polish VAT Act on 1 December Modified regulations on social security and healthcare insurance contributions paid abroad In subsequent cases, C-544/07 and C-314/08, the ECJ decided that Polish regulations discriminated citizens of other Member States in that they restricted foreigners right to deduct paid social security and healthcare insurance contributions from income tax. The court noted that a person who upon retirement leaves a Member State to settle in another Member State exercises the right of free movement on the territory of the European Union, which cannot be denied. In consequence, the ECJ decided that the legislator of a Member State who conditions granting the right to reduce the amount of income tax by paid social security and healthcare insurance contributions on paying those contributions to the Polish social security institution places the citizens of other Member States in an unfavourable position and thereby acts against the rules of EU law. The ECJ judgement is a sort of confirmation of the position of the Polish Constitutional Tribunal which already in its judgement dated 7 November 2007 (case K 18/06) recognised the unconstitutionality of the personal income tax law provision that excludes the possibility of taxpayers reducing the tax owing by the sum of social security and healthcare insurance contributions paid on account of business activities conducted outside Poland. As of 1 December 2008, this restriction disappeared from the Polish Personal Income Tax Act. Conversion of loans into equity In case C-441/08, the ECJ decided that upon imposing PCC on the increase of share capital the tax authorities should take into account any prior taxation of the subject matter of the increase made prior to accession. In consequence, PCC paid on loans drawn before accession and converted into shares after accession should be taken into account upon payment of PCC paid on corresponding increase of the share capital. ECJ pointed at the incorrect implementation in the Polish PCC Act of the directive concerning indirect taxes on the increasing of capital. As a result, Polish taxpayers were granted the possibility of directly invoking the directive in court disputes. Five other cases concerning the Polish tax system are pending before the ECJ. 8/8