Capital groups are allowed to consolidate their corporate tax (CIT) results provided that they fulfil a number of conditions.
Firstly, consolidation for CIT purposes is possible in clear capital structures. A group of at least two companies may be treated as one CIT payer provided that it consists of a Polish parent company holding at least 75% of shares in at least one another Polish company. Thus, in practice, there may be a Polish holding company with several direct subsidiaries (second and further tier subsidiaries results may not be consolidated).
Figure 1 shows a typical consolidated tax group (CTG) structure, including tax transparent partnerships belonging to Polish companies.
Figure 1. A typical CTG structure in Poland
There is also a minimal capitalisation requirement, and the condition that the companies cannot have tax arrears or benefit from tax exemptions. The CTG must be set for at least three years based on the agreement concluded by the companies and registered by the head of the tax office.
It should be noted that under the Polish CTG regime, the tax results of Polish subsidiaries of a foreign holding company – including an EU parent company – cannot be consolidated. This may be controversial in regard to subsidiaries of holding companies from the EU countries, when taking into account Court of Justice of the European Union (CJEU) verdicts.
After registration, the CTG must achieve a minimum profitability level of 2% (taxable income to tax revenues). This condition is sometimes perceived as an obstacle by the groups, in particular taking into account that the CTG is tied up for at least three years. In response to the expectations of the business, in 2020, the requirement of minimum profitability was suspended for the groups that faced negative consequences from the COVID-19 pandemic. The suspension is expected to be prolonged to 2021 based on the most recent draft amendments to CIT law.
Moreover, in contrary to the case of breaking other CTG regime requirements – such as the abuse of transfer pricing rules with regard to the transaction concluded with the entity from outside the CTG, or decreasing the number of companies constituting the CTG – failing to achieve the required level of income does not result in severe tax consequences such as the obligation of a retroactive CIT settlement at the level of particular companies. If the CTG fails to report required profitability, the CTG is dissolved at the end of the year in which the condition was broken.
The CTG regime provides for several other advantages apart from the consolidation of the tax regime of member companies.
For instance, the limitation of tax deductibility of debt financing costs (interest, etc.) is not applicable to loans or similar agreements concluded between the members of the CTG.
Likewise, the limitation of tax deductibility of costs of intangible services acquired from related parties is not applicable to the costs of such services bought from other CTG members.
Furthermore, the local transfer pricing documentation file is not required for the transactions concluded between CTG companies.
Taking into account the most recent changes in CIT law, limited partnerships that are tax transparent may become tax opaque (CIT payers) in 2021. A CTG may become an attractive alternative for these groups whose businesses require the conducting of activities through several entities (e.g. the construction industry where particular projects are often held by separate partnerships), allowing for tax consolidation.
Moreover, due to other CIT law changes implemented in recent years, the effective tax rates of numerous groups are constantly increasing. This has happened despite the nominal CIT rate being the same or even decreased in some cases. The level of tax safety has also been brought down by the unclear, low quality legislation and the increasingly aggressive approach of tax authorities during tax audits. Applying an instrument for utilising tax losses generated by another group company on current basis, even though it requires the fulfilment of sometimes restrictive conditions, may seem to be a worthwhile solution.
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