- Remote work during a pandemic and a tax permanent establishment
- Problematic VAT settlement from intermediation
- Costs of exchange differences as costs of debt financing
- No eligible costs – an important judgment for the Research and Development relief
- The second wave of the pandemic brings support to entrepreneurs, but only some
- Planned changes in the field of CIT taxation
1. Remote work during a pandemic and a tax permanent establishment
As the OECD points out, remote work as a consequence of COVID-19 is not of a sufficiently permanent nature for the establishment of a tax PE to take place.
The pandemic caused the job to move from the office to the so-called ‘home office’. As a result, employers’ problems with proper taxation have begun to emerge. Particular attention should be paid to employers who employ a remote worker in another country, as in some situations remote work may create a potential situation for the establishment of a CIT PE. In this case, the foreign entrepreneur would have a limited tax liability in Poland, which would result in additional formalities (e.g. the necessary registration as a taxpayer, as well as CIT obligations in relation to the revenues of the establishment).
In order to correctly determine the place of taxation, additional assistance is provided by the guidelines contained in the Commentary on the OECD Model Convention, which lays down three main conditions for the establishment of a CIT PE. On 3 April 2020, the OECD issued an additional document, Analysis of Tax Treaties and the Impact of the Covid-19 Crisis, which stated that a pandemic is of an extraordinary nature and that, where it is not a target form of work, the tax permanent establishment will not be created due to a lack of lasting character. However, it should be borne in mind that some international agreements, even those based on the OECD Model Convention, often contain different provisions. So it’s always worth checking out.
On the other hand, in relation to the position of the Polish tax authorities, in the ruling of 26 June 2020 (0114-KDIP2-1.4010.131.2020.1.JS) issued in relation to a German employer wishing to hire a worker remotely in Poland, the authority confirmed that, in the event that the employee does not have the right to conclude contracts with customers and is not responsible for the sale of services, the employee performs only a support work, since he supports only in the creation of the application and not its sale. Therefore, there will be no creation of a CIT permanent establishment in Poland.
2. Problematic VAT settlement from intermediation
A consultation is currently underway on the elimination of the provision of Article 7 (8) of VAT Act, according to which, where several entities are responsible for the supply of the same goods, in such a way that the first of them delivers the goods directly to the last purchaser, it is considered that the supply of goods was carried out by each of the entities which participated in each stage of the transaction.
The Ministry of Finance does not note the problem and points out that the removal of the provision is merely orderly and, in return, the general principle of taxation of the supply of goods will apply. But in fact, what are the consequences of removing this provision? Why does tax authorities want to eliminate chain supplies when EU rules on the place of such supplies have just entered into force?
Primarily, problems in the classification will arise and whether the supply operation or services which are taxed differently should be applied appropriately. This also creates the risk that the tax authority may complain about the correctness of the invoice issued by the intermediary, which may conclude that the service took place and not the supply. In such case, the tax administration may challenge the intermediary’s actions and consider that it has not documented the actual event and that the transaction in question results in an empty invoice being issued. In such a situation, the intermediary will be obliged to pay the output tax and will lose the right to deduct and the recipient of the document will also not have the right to deduct input tax.
The above changes may lead to a questioning of the tax in authorities existing positions and, in the future, may case massive problem in VAT settlements in the overall chain of transactions carried out and perhaps this is the hidden purpose of the tax office, and the rules are perhaps not so much ‘written’ as ‘scratched under control’.
3. Costs of exchange differences as costs of debt financing
On 2nd October 2020 the Director of the National Tax Information issued an interpretation of tax law, ref. 0111-KDIB1-2.4010.346.2020.1.ANK on the costs of debt financing in terms of negative exchange rate differences.
The facts were as follows: the company belongs to an international group of related entities. It was subject to unlimited tax liability in Poland on all its income. The company took out a loan in a foreign currency (EURO) from one of its related entities in order to acquire shares. In 2017, it assigned receivables together with the accrued interest. In the same year, in December, the company paid interest on the loan.
In connection with the above, the applicant asked the Director of KIS: Do negative exchange rate differences arising in connection with the repayment of the principal of loans granted in foreign currency (EUR) for the purpose of acquiring shares (shares) constitute tax deductible costs and are therefore not subject to deduction limitations pursuant to art. 16 sec. 1 point 13e of the CIT Act in connection with art. 15c sec. 12 of the CIT Act?
The taxpayer was of the opinion that the negative exchange rate differences would be tax deductible. Extensive argumentation was based on several factors, including mainly the analysis of Art. 16 sec. 1 point 13e and its purposeful and systemic interpretation. The taxpayer argued that, in line with the justification for the draft, it cannot be considered that the deduction exemption applied to all possible cases, but only to those related to the so-called “debt push down” used in acquisitions of companies.
Having analyzed the facts, the Director of KIS did not agree with the applicant’s opinion. A tax deductible cost arises when a causal relationship exists between its incurrence and the income. The director referred to Art. 16 sec. 1 point 13e, which does not consider as tax deductible costs the expenses related to debt financing as referred to in Art. 15c sec. 12. And the latter provision specifies in detail the expenses that should be included in the costs of debt financing. “As a consequence, negative exchange rate differences arising on the repayment of loans in foreign currency as part of debt financing costs within the meaning of Art. 15c of paragraph 1. 12 of the CIT Act are excluded from tax deductible costs pursuant to Art. 16 sec. 1 point 13e of the CIT Act.“
4. No eligible costs – an important judgment for the Research and Development relief
R&D tax relief makes it possible to deduct tax-deductible costs incurred for research and development activities from the tax base. Does the acquisition of expert opinions, opinions and advisory services from non-scientific entities allow the entrepreneur to include them in eligible costs and deduct them from income? The Supreme Administrative Court has recently commented on this issue.
As part of its research and development activities, the company cooperates with research units and entities that do not have such a statute. In connection with research and development projects, it purchases research, analyzes, opinions and expertise from private institutions (not having the statute of a research unit). The company applied for a tax interpretation regarding corporate income tax. In the application, she asked the following question: can the incurred expenses be classified as eligible costs pursuant to Art. 18d paragraph. 2 points 3 of the CIT Act – according to the Company, yes, but the tax authority did not agree with the applicant’s position. Ultimately, the case was resolved by the Supreme Administrative Court with the judgment of 13th August, 2020, sign. II FSK 1015/18: eligible costs are expertise, opinions, advisory services, equivalent services and the acquisition of scientific research results for the purposes of research and development activities only and only if they are acquired under a contract from scientific units, within the meaning of the Act on the Principles of Financing Science. However, for eligible costs described in Art. 18d paragraph. 2 point 3 of the CIT Act expenses for the purchase of expertise, opinions, advisory services and equivalent services, provided or performed by entities other than scientific units, within the meaning of the Act on the principles of financing science, cannot be considered.
5. The second wave of the pandemic brings support to entrepreneurs, but only some
The advent of new Anti-Crisis Shields in the current situation gives hope for entrepreneurs for surviving these hard times. However, Shields 5.0 and 6.0 turn out to be a solution only for selected industries whose activities have been limited to some extent.
At part of Shields 5.0 the support is to be granted to entrepreneurs operating in the tourism, stage and exhibition industries. From 15th October, it is possible to apply to the Social Insurance Institution (ZUS) for a parking benefit, additional parking benefits and for exemption from paying ZUS contributions. Applications must be submitted in electronic form via the Electronic Services Platform (PUE) of ZUS. An important requirement is having the right PKD code (specific PKD codes are indicated in the Act), which the entrepreneurs should have indicated as the main economic activity at the moment and in 2019 – if the entrepreneurs change the PKD before submitting the application, they will not receive the requested aid.
In order to apply for the additional parking benefit, the income from activity in the month preceding the submission of the application should be at least 75% lower than in the corresponding month of 2019. A similar decrease in income should be noted by the entrepreneurs, when they are applying for an exemption from the obligation to pay ZUS contributions for July, August and September 2020 – additionally, they should be reported as a contribution payer before 30th September 2020.
There is also a project of Shield 6.0 in the Polish Parliament, which provides for further support for selected industries – the catalog of activities to be covered by aid has been expanded here, but it is estimated that aid for these companies may not start until 1st January, 2021. The Shield 6.0 project provides for support in the form of, among others: exemption from social security contributions and parking benefits, a non-returnable loan of PLN 5,000, aid in the form of co-financing up to 70% of uncovered fixed costs for SMEs, redemption of subsidies from PFR and extension to March 31, 2021 of financial support for large enterprises.
6. Planned changes in the field of CIT taxation
As we indicated in previous publications, the Government and the Parliament are working on changes in the field of CIT taxation, including introduction of the so-called flat-rate income tax (the so-called Estonian CIT) and the CIT taxation of limited partnerships. Moreover, the introduction of special taxation rules for the so-called real estate companies is planned.
The bill on the last two issues has already been submitted to the Senate, but it is not certain whether it will be passed during the year 2020. Therefore, there are voices that the planned changes will not enter into force from the beginning of 2021.
On the other hand, as far as Estonian CIT is concerned, there is no draft law in this area yet, while the Ministry of Finance is conducting intensive consultations and is determined to introduce this solution from the beginning of 2021. Estonian CIT is considered a benefit for entrepreneurs by the Ministry of Finance, and not as the imposition of new obligations, which is to justify the lack of the need to maintain appropriate vacatio legis.