Taxation of limited joint-stock partnerships and limited partnerships
The Ministry of Finance is focused primarily on introducing changes in the area of corporate income tax (CIT) chargeable on limited joint-stock partnerships (LJSPs).
According to the draft amendments to the CIT Act, the above type of partnership will lose its tax transparency (generally from January 1 2014) and will become a regular CIT payer (just as limited liability companies and joint-stock companies currently are). As a result, all operating profits of LJSPs will be taxable both at the level of these partnerships and then – on distribution – potentially also at the level of their partners or shareholders.
Distributions from an LJSP to its corporate shareholders resident in an EU or EEA member state will be able to benefit from the Parent-Subsidiary Directive withholding tax exemption, provided the recipient of the dividend holds at least 10% of the shares in the LJSP for an uninterrupted period of at least two years.
Obviously, the above changes may directly influence the budgetary income that the state realises from CIT. However, as claimed by the Ministry of Finance, the changes are motivated not only by their positive effect on the state budget, but also by the intention to guarantee “tax fairness” in the Polish tax system, which cannot be achieved if some taxpayers (in this case shareholders of LJSPs) are provided with unjustified benefits.
From this perspective, there can be no denying that LJSPs have been commonly used over the recent years for tax optimisation purposes.
In particular, LJSPs have played an important role in the investment fund structure which was very popular among large multinational corporations (for example in the real estate business) as a highly effective method of optimising the taxation of current profits from business activities carried on in Poland. Under these schemes, such profits have not been effectively taxed.
On top of that, a general tax ruling addressing the tax status of the shareholders of LJSPs (issued by the Ministry of Finance in 2012) has opened even greater opportunities for tax planning schemes based on the preferential tax features of LJSPs.
At that point, an LJSP has become commonly used at least to defer the payment of a tax liability until the distribution of profits via dividends.
It has also become a perfect vehicle for carrying out a step-up in the tax value of fixed tangible or intangible assets (in particular trademarks). In a nutshell, within such structures an LJSP carried out a sale of assets to another entity of the group.
The ever-growing attractiveness of an LJSP was rapidly reflected in the sudden increase in the number of these entities on the market. For example, in 2011 there were 1,548 LJSPs registered in Poland, while in 2012 this number almost doubled to 2,908. Needless to say, such interest in this legal form was mainly motivated by the tax benefits it provided.
Taking the above into account, it is hardly surprising that the taxation of LJSPs has attracted the attention of the Ministry of Finance and that it is so motivated to introduce changes to counteract the LJSP-based tax planning discussed above.
At the same time, it was initially planned to cover with CIT taxation not only LJSPs, but also limited partnerships (LPs). However, any changes in this respect were difficult to understand since LPs were not used for tax optimisation purposes as such. Therefore, subjecting them to CIT does not seem to realise the “tax fairness” goal the Ministry wants to pursue (as LPs do not offer any particular unjustified tax benefits). At the same time, changing the tax treatment of LPs in such a way could have adversely affected the overall business environment in Poland and impede the development of local enterprises (given that so far LPs have been an attractive form of running a business from the legal perspective since they offer the opportunity to split responsibility between the general and limited partners). With the initially planned changes, a tax-transparent vehicle ensuring limitation of responsibility would no longer exist. In light of the above, it has just been proposed to maintain the tax transparent nature of LPs. Still, it should be closely monitored what would be the final outcome of the legislative process in this area.
Following the example of many other developed tax systems, in order to prevent the erosion of the domestic base and shifting income to jurisdictions with preferential tax regimes the Ministry of Finance is also contemplating the introduction of controlled foreign company (CFC) rules into the Polish tax system. Even though at this stage it is not yet certain when these new regulations would come into force, the first draft amendments in this respect have been already published.
As may be expected, the introduction of the CFC rules may substantially affect many popular international structures taxpayers currently use.
Amendments to double tax treaties
In addition to the changes to national tax law, the Ministry of Finance has also made wide-scale efforts to amend a series of double tax treaties (DTTs) concluded by Poland, including those with Cyprus, the Netherlands, Luxembourg and Slovakia. As the direction of these amendments clearly shows, one of the main goals was to counteract the most commonly used treaty-based international tax optimisation schemes applied by Polish taxpayers.
The above could be well illustrated by the new wording of the DTT between Poland and Cyprus (applicable as of January 1 2013), which eliminated the preferential tax treatment of dividend payments to Polish individuals (under the tax sparing mechanism) as well as tax neutral schemes for directors' fees distribution.
We are also seeing several new protocols amending existing treaties (for example those with Luxembourg and Slovakia) which provide for the introduction of the real estate clause.
Another trend (which can be implied from the protocols to the treaties with Slovakia and Luxembourg) is the change of the method of eliminating double taxation with respect to profits of a permanent establishment (the credit method instead of the full exemption). As a result, such profits will be taxable both in the state of residence of an enterprise and in the state where its permanent establishment is located, with a potential credit of the tax paid.
Finally, it is worth noticing that the protocol to the treaty with Luxembourg provides for the introduction of a new concept in the treaties concluded by Poland. Namely, based on the ”artificial arrangements” clause, benefits resulting from the treaty should not be applicable to the income realised from artificial arrangements (structures where the sole aim is to achieve tax benefits). It seems that the clause will become more common in international practice. At the same time, as there is no experience in the Polish law system in this respect, it is hard to predict how the above provision will be applied in practice.
Needless to say, taxpayers in Poland are facing changes that are not merely cosmetic. At the same time, most of the changes follow the worldwide trend to seal tax gaps and improve internal revenue figures. In this context, however, this initially planned cold shower for individuals acting through limited partnerships was not expected to provoke applause. However, according to the recent news there is hope that the amendments in the area of LPs would not be adopted in the end.
Mateusz Pociask (Mateusz.email@example.com) is a partner, Magdalena Cwik-Burszewska (Magdalena.firstname.lastname@example.org) is a manager, and Karol Dabek (email@example.com) is a senior consultant, in the Tax Advisory department of EY Poland (Business Tax Advisory team), principal Corporate Tax correspondent for Poland.
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