BRIEFING NOTE Taxation of factoring in Poland 1. Introduction 2. VAT rate 3. Financial services exemption 4. Factoring prior to 2011 5. EU Tribunal of Justice steps in 6. Factoring after the EU Tribunal of Justice judgement 7. Factoring and CIT This Briefing Note has been prepared by TGC Corporate Lawyers as a general guide to legal and procedural issues relating to commercial litigation in Poland. We trust that you will find it useful; however it is not comprehensive and is not a substitute for taking professional advice. If you wish to discuss any matters set out in this Briefing Note, please contact us.
Introduction Factoring is a legal relationship with three participating entities: factor (most frequently a bank), entrepreneur (seller) who within the scope of his business activity sells goods or provides services with deferred payment period, customer of the seller (debtor). The factor purchases from the seller receivables of a usually commercial nature prior to the receipt of the payment from the debtor. Due to this, factoring constitutes one of the methods of financing the business activity of the entrepreneur. The factor who that purchases receivables from the seller supports the financial liquidity of the latter and performs for him additional services. The factoring contract is an innominate contract. It combines elements of various contracts from the Civil Code, e.g. contract of assignment of receivables and contract of mandate. Within the scope of the factoring contract the factor also undertakes to perform additional actions which are not directly related to the assignment itself. What constitutes the essence of the factoring contract is also the remuneration collected by the factor. VAT rate VAT exemptions provided for financial services do not apply to debt collection activities. They are subject to the basic 23% VAT rate. Financial services exemption Pursuant to the VAT Act, numerous types of financial services are VAT-exempt. The exemption applies also in the case where particular services are a specific and necessary component of another VAT-exempt service and, at the same time, constitute a separate whole themselves. However and as per express wording of the statutory provisions, debt collection activities, including factoring, are excluded from this exemption. Therefore, they are subject to the basic VAT rate, currently at 23%. Factoring prior to 2011 Until 2011 it was assumed that in the case of the factoring service it was the purchase of the commercial receivable by the factor from the entrepreneur (seller) that was first of all subject to tax. Therefore, the basis for taxation was the difference between the nominal value of the receivables and the value paid by the factor to the original creditor (seller). If due to the purchase of the receivables within the scope of the factoring contract the remuneration (apart from or instead of the discount) was also paid in the form of interest, it was assumed that it did not constitute a separate financial service which would be subject to a VAT exemption. Tax authorities emphasized that such interest
constituted a component of the remuneration for the factoring services and, as such, was subject to VAT. EU Tribunal of Justice steps in However, such an approach changed after the judgment of the EU Tribunal of Justice of 2011 in the case of GFKL Financial Services AG C- 93/10. The Tribunal concluded that although the purchase price of the receivable agreed by the parties to the assignment contract was lower than its nominal value and, at the same time, the difference between the two reflected the actual economic value of the receivable at the time of sale and, hence, one could not talk about provision of services for remuneration. This applies only to a sale of receivable from the original creditor and, hence, sale of a receivable purchased from the original creditor (seller) will, generally, constitute a transaction subject to VAT. Interest (other than penal interest) or other charges agreed by the parties as the remuneration for the factoring services will continue to be subject to the 23% rate, but not the discount itself. Factoring after EU Tribunal of Justice judgement In consequence of the aforesaid judgment of the Tribunal, the assignment of receivables in the implementation of the factoring contract may be subject to tax on civil-law transitions (stamp duty). It will be the case, if the assignment is made in the form of one of the contracts listed in the Act in Tax on Civil-Law Transactions, e.g. purchase contract. In other cases tax will not be due. Generally, in the case of factoring services the taxable event in VAT is service performance, namely receivable purchase. However, if the remuneration for factoring was not paid in the form of the discount at the purchase of the receivable but rather in a different form after it has been purchased already, then it seems that the taxable event in VAT would take place not earlier than at that time. If the supplier of services for a Polish VAT taxpayer is an entity not registered for VAT purposes in Poland, then the purchaser is required to settle the said services on a reverse-charge basis. He shows input and output VAT in the tax declaration for the month/quarter when the taxable event took place. If the purchaser uses the services for the purposes of transactions subject to VAT, then he may deduct input VAT from the output VAT on general terms. After the assignment of the receivable the seller will be able to decrease his tax liabilities by the discount or interest and, possibly, other charges agreed by the parties. Factoring and CIT The very payment of the receivable by the factor will not be taxable income for the entrepreneur (seller), provided that he has recognised that income earlier and has made no correction in this respect to date. The income for the factor in this case will be the amount due received as a result of collection or sale of the receivable as well as interest and
other charges. The tax deductible costs, on the other hand, will be the expenses for the purchase of the receivable. In the case of Polish CIT taxpayers, income from factoring will be subject to tax on general terms, namely at the 19% rate. If any of the parties to the factoring contract is a foreign entity, a treaty on avoidance of double taxation may apply. What needs to be examined on its basis is, first of all, whether there are any exemptions and/or reduced rates available.
Contact Details TGC Corporate Lawyers is an international full-service law firm providing professional, constructive and cost-effective advice and assistance to clients. We are one of the leading law firms in Poland and we act on a wide range of transactions, including high-value, complex and ground-breaking transactions and deal with various contentious issues which may emerge in relation with our clients activities. Beata Ordowska Nicholas Fielding Advocate, General Partner Senior Partner TGC Corporate Lawyers TGC Corporate Lawyers ul. Hrubieszowska 2 ul. Hrubieszowska 2 01-209 Warsaw 01-209 Warsaw Poland Poland Tel: +48 222953300 Tel: +48 222953300 Email: bordowska@tgc.eu Email: nfielding@tgc.eu Warsaw ul. Hrubieszowska 2 01-209 Warsaw, Poland Tel.: +48 22 295 3300 Fax: +48 22 295 3301 Wrocław ul. Legnicka 51-53 54-203 Wrocław, Poland Tel.: +48 71 733 1313 Fax.: +48 71 733 1314 Łódź ul. Nawrot 114 92-029 Łódź, Poland Tel.: +48 42 671 8560 Fax.: +48 42 671 8561 Kraków ul. Smoleńsk 18/1 31-112 Kraków, Poland Tel: +48 12 334 91 00 Fax: +48 12 334 91 01 Prague Hybernská 32/1271 110 00 Prague, Czech Republic Tel.: +420 221 111 611 Fax.: +420 221 111 612 Brno Česká 17 602 00 Brno, Czech Republic Tel.: +420 542 425 821 Fax.: +420 542 425 822 Bratislava Karadžičova 16 821 08 Bratislava, Slovenská Republika Tel.: +421 2 52 444 010 Fax.: +421 2 54 645 032