Controlled Foreign Corporations – new rules as from 1.1.2015

According to the recently passed amendment to the CIT Act (which is to come into force as from 1.1.2015), the income generated by the Controlled Foreign Corporations (CFC) is to be treated as taxable on the part of their Polish shareholders.

In general, the new regulations will affect two groups of companies:

1) Companies, which have a seat or management in a country applying harmful tax competition or in a country, that has entered no DTT (or similar) with Poland.

2) Companies that meet all of the three following conditions, concerning:

– the level of control exercised by the Polish taxpayer (at least 25% of the voting rights, participation in equity or in profits),

– sources of income (at least 50% of the revenue being passive income such as dividends, interests, or generated by alienation of shares etc.),

– the place of seat or management (in a country with a tax rate lower than the one being in force in Poland at least by 25%, which implies that the threshold rate is 14,25% ).

The new regulations obligate the Polish taxpayers to keep a register of CFCs and to record defined events, affecting their tax liabilities.

The income generated by the Controlled Foreign Corporation should be included in the tax basis for CIT/PIT purposes. However, the tax paid by the CFC abroad may be deducted from the Polish income tax (at the rate of 19%), taking into consideration a respective profit share due.

An exclusion will be provided for Controlled Foreign Corporations with annual income not exceeding Euro 250 000 and for these foreign companies which conduct actual business activity within the European Union, European Economic Area or in any other country, being a party of the respective international agreement (in the latter case additional conditions apply). The actual business activity would be existent, if, e.g., the resources (premises, staff, etc.), commensurate with the scope of activity, are available.

The new regulations will not apply to the partnerships, which are tax transparent.

The aforementioned regulation is also addressed to the taxpayers operating through a permanent establishment outside Poland.