Controversy in the explanations of the Minister of Finance

Łukasz Zalewski, Business Insider: Tax explanations in the case of real beneficiary are not perfect. What are the problems with them?

Agnieszka Wnuk, Quidea: Generally, tax explanations are quite legible, unlike the project from September 2023, which was completely illegible. The final version has a lot of examples and this is definitely a plus. The problem is that there are controversial statements in the examples. This is the first source of problems. Another is a general reservation that even if in a given case the tax preference can be applied in the example, the authority during the inspection may question its application, e.g. on the basis of a tax avoidance clause (Article 22c of the Act). Such a matter weakens the power of issued tax explanations and a sense of security of Polish payers who must comply with the provisions on the source tax.

What controversies are in examples cited in explanations?

For example, it is about refusing to apply tax preferences in the event that – as the Ministry of Finance indicates – it is not possible to clearly trace the payment chain. Such a case was described in explanations in example 14. It concerns the situation when a Polish company pays interest to a German company, which in turn is financed from loans from its shareholders – a French company (has 25 % shares) and a British company (it has 75 %). Moreover, a German company is a company financing the activities of other entities from the group, from Central and Eastern Europe, i.e. finances Romanian and Czech. Explanations show that in such a system interest paid by a Polish company to German is not exempt from tax at the source, because it is not possible to clearly trace the payment chain, and consequently it is not known who the actual beneficiary is.

Do you think a tax preference should be used in such cases, i.e. exemption?

In my opinion, it cannot be determined in advance, as indicated in the explanations that there will be no rights to preferences. In my opinion, in such a situation, as described in example 14, interest can be exempt from tax at the source. In practice, situations when one of the companies in the group is a financing company occurs quite often. The fact that we see part of a group of companies and one of them receives interest revenues from various entities and at the same time also pays to other companies from the group does not exclude the possibility of tracking payments and consequently the application of tax preferences. Example 14 is too far -reaching simplification and a reason for concern, among others for groups in which the entity financing the activities of other companies and at the same time using group financing. This is not the first time the Polish tax authorities hinder the operation in structures that are not aimed at any tax optimization, but only financial. We have seen it before on the example of the approach to cash pooling. Foreign entities do not understand this approach of the Polish tax authorities, because in other countries there are no similar problems with the implementation of purely business solutions and the most economically justified. I am afraid that the tax authorities, encouraged by the content of explanations, can also extend this type of approach to ordinary loans.

In practice, you can usually determine the order of flows, check when loans were granted, from where the German company had funds, etc., you can even expect to separate bank accounts or accept specific proportions or other simplifications.

Do you think, if the company has control, the company will be able to prove that interest paid to an entity financed by loans within the group are exempt from tax or can use another preference?

Yes, I think it will be possible to prove it. If the company is able to trace, for example, it will be able to apply a preference. The problem is that this means additional time, work and costs. In addition, in my opinion, in some cases it should be permissible simplification, i.e., for example, the company should only be able to demonstrate the sequence of funding. This was missing in explanations. I am also afraid that KAS will use this as an argument in disputes with companies, because such cases have already happened and even on the basis of an explanation project.

Something else is disturbing in explanations?

Another example of explanations is disturbing. It is a situation when a Polish company pays payments to the company A based in state A, and it is in turn the daughter company of the company B from State B. This company does not employ employees, and its only members of the management board are people living in the country B and working for company B. recognize that the company A has the so -called a passenger substrate, which means that the Polish company must collect a tax at the source. Again, the Ministry of Finance indicated in the example that it is a situation when there is no documented information. First of all, it is enough to document information about the time spent by board members. Secondly, in the era of video conferences, teams and similar technology, time spent by such people in the country and is it necessary to conduct the company's affairs? In my opinion, the minister's approach from explanations is excessive and unjustified. Does not take into account economic reality.

As I understand, after the explanations of the company that are able to prove or prove certain things, they may apply for individual interpretation to confirm that they are entitled to a source of tax.

Yes, in some cases it will be a must. Since the explanations show that the payer cannot apply preferences in some situation, the Polish company, wanting to secure its situation, should obtain confirmation that in her case the claim from explanations does not apply.

The explanations also indicated a catalog of negative premises that cannot occur to say that a given entity is a real owner. Are there any doubts here?

Yes. One of the points on the list indicates that the actual owner cannot be an entity that performs a low margin on a transaction, because this may indicate that he is only an intermediary of the payment received and does not receive it for his own benefit. It is therefore a situation when a foreign entity receives from a Polish company, e.g. interest, and then pays this amount to pay and realizes a small margin. If we talk about related entities, the margin must be at the market level and take into account the requirements resulting from regulations on transfer prices. As part of the transfer price control, the tax office may check the margin level. If the low margin is justified (in line with the benchmark), then there is no reason to question the status of the beneficiary of the actual lender.

Let us also note that in contracts for the avoidance of double taxation, regulating tax preferences, there are clauses that exclude the possibility of using preferences, if the remuneration (e.g. interest) is non -relocatable, i.e. too low. Application? If the company operates in accordance with the rules of transfer prices, then the source tax preferences cannot be questioned on the basis of a small margin.

In explanations, one of the negative premises, and thus causing that the entity is not a real beneficiary of the payments received is that he does not reinvest the funds obtained in connection with the receivables received. Does the entity have to reinvest the funds?

This is another arbitrary and unjustified premise. These are just examples of controversy in explanations. However, since such premises have been saved in them, I am afraid that the cash register will use them in the inspections.

How do you assess that the ministry decided to catalog the negative premises of the real owner, not the catalog of positive premises?

Companies would prefer a positive directory, i.e. an indication of what they have to do/check so that the receiving payments could be considered a real beneficiary. Tax security would be higher. Companies would know what the tax authorities expect, what the effects would be and could sleep peacefully. From a business perspective, the desired solution would be a positive catalog and also a positive catalog in terms of due diligence. This applies to particular transactions with related entities. And we also postulated and appealed during consultation, but it was not included in the explanations. Perhaps this is due to the fears of the cash registers that in the case of a positive check of the list, dishonest entities would benefit the most. These fears, however, are unfounded, because the organs can always apply clauses against tax avoidance and other tools already provided for in the regulations.

How do you assess the explanations holistically?

They will partially help entrepreneurs. They will partly maintain the existing disputes, but they will also generate new ones. Many business demands have not been included. We also postulated changes in the provisions of the definition of real beneficiary, because it is a source of problems, it generates a lot of disputes. This has not been included either.