Last call for taxpayers in Poland to review ATAD 2
Łukasz Kupień of MDDP explains why taxpayers should verify their shareholding structure and transactions from the perspective of hybrid mismatches.
Poland has implemented European Council Anti-Tax Avoidance Directive (ATAD 2) by introducing anti-hybrid provisions into its domestic law.
The provisions apply starting from January 2021 and the taxpayers should take them into account in their 2021 CIT settlements and onwards. The deadline for the 2021 CIT return and CIT payment elapses on June 30 2022, so there is still time to review and include hybrid mismatch position.
When does hybrid mismatches arise?
Hybrid mismatches arise if the same entity, instrument or transfer is treated differently for the tax purposes in different countries. As a result of the hybrid mismatches double non-taxation may arise in the form of: double deduction, deduction without inclusion and non-taxation without inclusion.
Anti-hybrid mismatches provisions neutralise such situations by excluding the right to recognise tax-deductible costs or by excluding right to tax exemption.
To whom do the rules apply?
In Poland, the rules apply to all CIT taxpayers, without any materiality threshold. By its very nature the provisions concern entities who have foreign shareholders or who do transactions with foreign entities. This also applies to indirect foreign shareholders and indirect foreign parties to the transactions. Hybrid mismatches may also arise for typical taxpayers doing plain vanilla settlements and who do not engage in any optimisation arrangements – depending on the decision of its shareholders or contractors.
From our experience, hybrid mismatches often arise for Polish taxpayers with the US (indirect) shareholders or with financing from the related parties from the US. Moreover, so-called ‘imported hybrid mismatch’ may arise in transactions with non-Polish entities inter alia from the Netherlands, Luxembourg or the UK. Lastly, transactions with entities from tax havens or shareholding from tax havens may give rise to hybrid mismatches.
Imported hybrid mismatches
An imported hybrid mismatch is a specific hybrid mismatch, which arises when a payment from Poland directly or indirectly finances an expenditure giving rise to a hybrid mismatch through a transaction or series of transactions between the related parties or as part of a structured arrangement.
In practice, this means that Polish taxpayers should verify if their payments (e.g. interest) were used by the recipient to finance hybrid mismatches in Poland or abroad. This may be the case when the lender is financed via hybrid instruments (e.g. equity certificates, which are treated in one country as loan/interest and in other country as equity/dividends).
The occurrence of hybrid mismatches may lead to an obligation to exclude particular expenditures from the tax-deductible costs. This may apply to interest or service fees, for example.
In certain cases, when the Polish company is a hybrid entity, it may be not entitled to report tax losses in Poland or even be obliged to exclude all its expenses from the tax-deductible costs. Such a situation may arise when a Polish company (a taxpayer) is at the same time treated in the country of its shareholder (i.e. the US via check-the-box election mechanism) as a transparent entity (not a taxpayer). In such a case double deduction takes place and in order to recognise tax-deductible costs, the Polish company should be able to prove that at the same revenue inclusion in the US took place (double inclusion).
For this reason, anti-hybrid mismatch provisions may have a material impact on tax settlements of certain taxpayers.
How to address it
Taxpayers should verify their shareholding structure and transactions from the perspective of hybrid mismatches. Such verification should also include information about tax treatment in jurisdictions of their shareholders and how the payments from the Polish entities were used. With respect to imported hybrid mismatches, Polish taxpayers may verify if one of the countries in the transaction chain has already made an equivalent hybrid adjustment.
One should also collect supporting documentation regarding the hybrid mismatches position. Such documentation may be needed for the purpose of the tax audit or disposal of shares, when the hybrid mismatch position may be verified.
Senior manager, MDDP