ATAD 2 rules in Poland – latest practice
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ATAD 2 rules in Poland – latest practice

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Łukasz Kupień of MDDP analyses Polish regulation on preventing hybrid mismatches, and assesses its implications on the tax position of international groups

General rules

The regulations on preventing hybrid mismatches in Poland came into force on January 1, 2021, and are an implementation of the EU ATAD 2 directive. Analogous regulations are in force in other EU countries, as well as outside the bloc (the UK, Australia). 

The purpose of the regulations is to prevent double deduction of benefits or their deduction without corresponding recognition in income - assuming this occurs because of a different tax classification of an entity or an instrument in at least two countries. This can happen either at the Polish company level or at the level of subsequent entities or steps. Moreover, hybrid mismatches may arise for Polish taxpayers without their active participation or knowledge.

Regardless of these circumstances, Polish taxpayers may be required to apply rules against hybrid mismatches and, for example, exclude some expenses from tax-deductible costs, or lose the right to tax exemption. Expenses which could be non-deductible may include interest, remuneration for services, royalties and in certain cases, virtually all the taxpayer's cost items which were considered as tax-deductible.

The regulations apply particularly to corporate income tax (CIT) payers with direct or indirect foreign shareholders, and taxpayers obtaining financing from foreign related parties. There are no safe harbours related to having a small scope of operations or the value of the transaction.

Hybrid mismatches often arise for entities with shareholders (direct or indirect) from the US who applied a check-the-box election (CTB) mechanism. Hybrid mismatches should also be closely investigated by taxpayers who have equity relationships or contracts with entities from tax havens or if such entities or contracts are present in the taxpayer's group.

Practical application

Although it has been in force for almost three years, there is still little case law regarding the prevention of hybrid mismatches in Poland. Based on this and our tax practice, we present key practical issues.

Check-the-box election mechanism

As stated, the most common hybrid mismatches occur with entities that have direct or indirect shareholders from the US who applied CTB mechanism. By using the CTB mechanism under internal US tax laws, a Polish company may be treated as tax transparent in the US and simultaneously as a non-transparent CIT taxpayer in Poland. This makes the Polish company a hybrid entity under the hybrid mismatches rules.

Consequently, a double deduction or deduction without inclusion may arise in Poland, with respect to the transactions concluded between the Polish entity and indirectly its US shareholders.

Double deduction

A double deduction occurs when the value of the same benefits, costs or losses is deducted in two different countries. Costs subject to double deduction are excluded from tax-deductible costs in Poland if the double deduction was made by related parties or under a structured arrangement.

However, the cost exclusion does not apply if the double deduction corresponds to double reported income (revenue) in the current or subsequent accounting period (the so-called ‘double inclusion escape’).

Double deduction may arise between a Polish company, which is a Polish CIT taxpayer and a tax transparent entity under the US tax law (based on the CTB mechanism). In such a case, costs of the Polish company are included twice:

  1. In Polish CIT settlements; and

  2. Are allocated to the US shareholder from its transparent Polish subsidiary.

If revenues of the Polish company are also recognised twice, the double inclusion escape may apply (provided that the Polish company can prove it).

Doubts arise when the Polish company reports a tax loss (i.e., the amount of double-reported expenses is higher than the double-reported revenues). Under hybrid mismatch provisions, the Polish company may be obliged to not recognise part of its tax-deductible costs which gave rise to a tax loss.

Deduction without inclusion


Deduction without inclusion means deducting a payment or deemed payment between the non-transparent entity and its permanent establishment, without a corresponding inclusion for tax purposes of that payment or deemed payment in the recipient’s jurisdiction. 

There are doubts whether a Polish subsidiary, which is treated under the CTB mechanism as tax transparent for US tax purposes, will constitute a “permanent establishment” of the US shareholder. If so, payments (interest, royalties, remuneration for services) made from the Polish company to the US shareholder may give rise to a deduction without inclusion mismatch. This will happen because the payments would be a tax-deductible cost in Poland and disregarded for US-tax purposes (as a transaction between a taxpayer and its tax-transparent subsidiary). Consequently, the Polish entity would not be allowed to recognise such tax-deductible costs in Poland.

Nevertheless, according to the latest tax rulings, a Polish subsidiary does not become a “permanent establishment” of the US shareholder under the CTB mechanism. Consequently, according to the tax rulings, deduction without inclusion shall not take place in such situations.

To recap, provisions on hybrid mismatches may significantly impact the tax position of companies operating in international groups. This impact should be analysed and planned for.

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