Strategizing Multinational Tax Risks

The Polish President signed a tax bill, effective 1/1/2015 with some major tax reforms.

The changes include:

• New Controlled Foreign Corp. (CFC) tax regime
• Change in debt-to-equity ratio from 3:1 to 1:1, some planning opportunities available before year-end
• Participation regime not applicable  for dividends that provided a deduction for the payor

EY’s Global Tax Alert provides a summary of the upcoming changes attached for reference:

Executive summary
On 16 September 2014, the Polish President signed a tax bill, approved by the Parliament on 29 August 2014, with several changes to the corporate tax rules. The new measures include the introduction of CFC (controlled foreign corporation) rules and much broader thin capitalization restrictions. Also, under the new measures, the participation exemption regime will not be applicable to taxpayers receiving dividends that gave rise to a deduction from the income (or other decrease in the taxable base or tax) of the distributing company. Furthermore, the new measures make the transfer pricing documentation requirements applicable to joint ventures and partnerships.

International groups may be affected by these changes to the Polish tax system that enter into force on 1 January 2015. Certain steps undertaken early enough may mitigate the impact of the changes.

Detailed discussion
Thin capitalization
New restrictions will limit the deductibility of interest on a much broader range of loans (generally on all intra-group financing). Currently only loans from a direct shareholder and/or direct sister company are subject to thin capitalization restrictions. However, loans granted by the end of 2014 may, under certain conditions, remain subject to the current liberal regulations.

The amended provisions introduce a 1:1 debt-to-equity ratio (currently 3:1) and a new definition of “equity.” In addition, taxpayers will have the option to use a new alternative thin cap calculation method based on a reference rate of the National Bank of Poland and the value of assets capped at a percentage of EBIT.

Taxpayers considering new debt placements may want to finalize plans by the end of 2014 to fall under the current rules. Taxpayers should make projections in order to be ready to choose the optimal calculation method (based on debt-to-equity ratio or the new one based on assets) before statutory deadlines.

CFC rules
2015 will witness an unprecedented change to the Polish tax system with the introduction of the CFC regime. The CFC regime will result in taxation of foreign companies’ income at the level of their direct or indirect Polish shareholders.

Depending on the date when the new law is published and on the tax year of the CFC, income of the CFC may be taxed shortly after the provisions enter into force.

Multinational groups should assess the impact of the CFC regime on their Polish companies with foreign subsidiaries and, if required, decide on steps to be taken to e.g., qualify for exemptions.

Other changes
In relation to the current legislation, it should be noted that General Anti Avoidance Regulations are planned to be introduced in Poland as of 1 January 2016.

Best Practice observation: How do these rules, as well as those from all other countries, get filtered and communicated timely to allow for planning in the current multinational tax structure.  As countries start to embark upon initiatives to change their domestic legislation, coupled with OECD BEPS Action Plan initiatives, there should be a proactive structure in place to review planning strategies and identify new risks in the global structure.