- Controversy surrounding the limited partnership
- A real estate company as a CIT taxpayer and problems with determining the tax basis for purposes of 24b sec. 3 CIT Act
- The tax authorities still include only 30% of EBITDA in the excess of debt financing costs over interest income
- 50% of tax deductible costs for royalties – general interpretation
- New status of a cashless taxpayer
- The establishment of perpetual usufruct should be regarded as a supply of goods – said a spokeswoman for the CJEU (Court of Justice of the European Union) (No C-604/19)
1. Controversy surrounding the limited partnership
The recently published draft of act related to taxation of limited partnerships has command concerns not only among taxpayers, but also tax experts, who have pointed out numerous irregularities in the proposed changes. It is stated that the application of such a new form of taxation may not only significantly compound the situation of entrepreneurs, who are in principle already in a difficult position, but may also lead to double taxation.
Currently, limited partnerships are tax transparent because they do not have legal personality. It should be noted, that its partners are subject to tax (limited partner and general partner). Therefore, where the partner is a natural person, he pays PIT tax of 17%, 32% or 19%. On the other hand, where the partner is a legal person, is liable to pay CIT of 19% or 9% (depending on whether it achieves the definition of a small taxpayer).
The proposed amendments are intended to apply to the tax on income received. The unfavourable reform is intended to introduce additional taxation on the same basis as is currently the case for limited liability companies, joint-stock companies or limited joint-stock partnerships. Accordingly, the limited partnership would be taxed at the rate of 19% or under the relevant conditions – at a rate of 9%. However, it should be emphasized that, in addition, any payoff of profits to a shareholder would be subject to taxation. Consequently, a situation of double taxation arises, which should not be permissible under tax law. While the amendment provides for exceptions to double taxation, only some entities will be able to make use from them.
There is also controversy about the explanatory to the amendment, which states that the introduction of the legislation is intended to ‘seal the tax system and regulate possible optimization structures’. It should be pointed out that many tax specialist deny any statement that limited partnerships were to be used for tax avoidance purposes and point to mistake and avoids in Ministry of Finance statistics published as additional justification.
2. A real estate company as a CIT taxpayer and problems with determining the tax basis for purposes of 24b sec. 3 CIT Act
The draft act amending the act on natural and legal persons’ income tax is already under works in the Parliamentary Commission, and includes inter alia a new definition of real estate company. According to the current wording of the draft, it is characterized as an entity: in which at least 50% of the market value of assets in any period of 12 consecutive months is composed of real estate located in the territory of the Republic of Poland or rights to such real estate. The definition of such a company has been heavily criticized by experts. The real estate company would become a CIT remitter from January 1st, 2021. And this is mainly with regard to tax on income from transactions concerning their shares. If the shares, general rights, participation units or other titles of a similar nature will be sold from or to entities without a registered office or place of management in Poland, 19% of the tax on the market value of the shares sold will have to be paid to the Polish tax office.
There will also be new obligations in the annual reporting to the National Tax Administration of information about the shareholding. All these activities are carried out under the banner of sealing the tax system and fending off harmful tax optimization.
In recent years, real estate companies have been increasingly popular with the Ministry of Finance. Mainly due to the regulations mentioned above and the unfavorable position on the tax on buildings’ revenue. We refer to determining the initial value of a building, which is the tax base for tax on revenues from buildings. Only in September 2020, the courts issued 2 negative judgments for taxpayers. In cases of September 15, 2020, ref. III SA / WA 2316/19 and of September 29, 2020, ref. III SA / Wa 79/20, taxpayers were surprised by the negative approach of the courts. Earlier, the same court issued uniformly positive judgments and, which should be emphasized, in accordance with the wording of the provision. The current change of approach is justified with the authentic interpretation of the bill initiator, which does not take into account both the marginal significance of this interpretation and the differences between the intentions and the content of the provision. According to this new line of jurisprudence, the value defined in art. 24b paragraph. 3 of the CIT Act should be considered as gross value, not reduced by depreciation charges. In a situation where the value is calculated without depreciation deductions, it significantly increases the tax base. The court justified that the provision referred to the initial value, and not to the value appearing in the records determined for each month. However, taxpayer is obliged to include asset improvements in the value.
3. The tax authorities still include only 30% of EBITDA in the excess of debt financing costs over interest income
Despite the positive judgments issued by voivodeship administrative courts and the jurisprudence which confirms that pursuant to art. 15c of the CIT Act, tax costs in a given year, due to the excess of debt financing costs, can include the amount of PLN 3 million and additionally the surplus over this amount, calculated as 30% of the EBITDA, according to its statutory definition, tax authorities still issue individual interpretations which show that if the excess of debt financing costs over interest income exceeds PLN 3 million, only 30% of EBITDA can be included in the tax costs.
From January 1st, 2018, the new wording of art. 15c of the CIT Act applies, which provides for the extension of the application of the limitation in recognizing interest as tax deductible costs in relation to all taxpayers referred to in art. 3 clause 1 of the CIT Act, and not only to taxpayers who receive a loan from a related entity. The adopted structure of excluding a specific part of the excess of debt financing costs from tax deductible costs does not change the method (moment) of accounting for a given interest cost as adopted in the CIT Act. Nevertheless, from January 1st, 2019, the provision of Art. 15c of the CIT Act has become a generally applicable provision, and not an optional regulation, because as of that date the “old” provisions on the so-called thin (under) capitalization, i.e. art. 16 sec. 1 par.60 and par. 61 and article. 16 sec. 6, sec. 7g and par. 7h of the CIT Act, ceased to apply.
The provision of art. 15c of the CIT Act raised some interpretation doubts on the part of tax authorities, which were resolved in a uniform line of jurisprudence of voivodeship administrative courts. In particular, the issue of how to interpret par. 14 of this article, which excludes the limitation of deductible costs to the amount of PLN 3 million. As emphasized by the WSA, it should first be noted that art. 15c of par. 1. 14 point 1 of the CIT Act contains the wording “in part” at its disposal. This means that the excess of debt financing costs to the amount of PLN 3 million in a fiscal year always constitutes a tax deductible cost. Secondly, it should be noted that the disposition of art. 15c of par. 1. 1 of the CIT Act also contains the wording “in part”, and therefore the CIT deductible costs include an amount exceeding PLN 3 million, provided that the conditions of art. 15c of paragraph 1. 1 of the CIT Act are met.
Nevertheless, despite favorable court judgments, tax authorities continue to issue negative tax interpretations in this respect. This results from the fundamental disadvantage of the provisions on binding individual interpretations: the tax authorities are not obliged to take into account the judgments of courts (as it was written in the general interpretation).
4. 50% of tax deductible costs for royalties – general interpretation
On 15th September 2020, the Ministry of Finance issued a general interpretation (DD3.8201.1.2018) to determine the conditions that will allow the application of 50% of tax deductible costs to the copyright fee.
As indicated in the general interpretation, 50% of tax deductible costs are due to the entities – authors, and objectively – due to their use of copyright or their disposal of these rights. The subject of copyright (work) is any manifestation of creative activity of an individual nature, established in any form, regardless of value, purpose and manner of expression – also in an incomplete form. The creator of the work under the contract concluded (for work, commission or of work) with the employer performs his work for the remuneration specified in the contract. The method of valuation of the remuneration is not clearly specified, but the rulings indicate that it is not possible to determine the amount of the remuneration as a percentage of the share of creative works in the contract – it is possible to apply the remuneration valuation based on the employee’s time for creative activity. The employer, through secondary acquisition, acquires copyrights from the employee, for which he pays remuneration, i.e. the royalties. This is an important issue, in particular for the IT industry, because the creator of the computer program does not use copyright and cannot dispose of it, which means that the programmer does not receive a royalty, so it is not possible to apply 50% of the cost of obtaining income from this remuneration, unless the regulations contained in the employment contract provide otherwise (transfer of copyright to the employee). A similar issue was raised in the judgment of the Provincial Administrative Court in Warsaw of 9th September 2020, sign. Act III SA/Wa2785/19 on the original purchase by the employer of a work made by a programmer – the judgment is not final.
To sum up, in order to be able to use 50% of the tax deductible costs for the royalty, the following conditions must be met:
- the creation of a work being the subject of copyright under the employment relationship – acquisition by the employer of copyright to the work from the creator through secondary acquisition,
- having evidence confirming the creation of a work by the employee – it may be based on records or a statement,
- separation of the royalties from other components of the employee’s remuneration – no possibility of determining the percentage.
5. New status of a cashless taxpayer
Jan Sarnowski’s deputy finance minister announced that work is underway to introduce the status of a cashless taxpayer, which is to appear at the beginning of next year. The advantage of this status will be the possibility of faster VAT refund.
Due to the prevailing pandemic, it is preferable to choose cashless payment. According to the ministry, cashless transactions contribute to reducing the shadow economy and increasing revenues to the state budget. Due to the attractiveness and popularization of this solution, the Ministry of Finance wants to introduce the status of a cashless taxpayer, which will entitle to faster receipt of VAT refund (currently the accelerated deadline is 25 days). As indicated: “if the entrepreneur is honest and the vast majority of his turnover is carried out in a non-cash formula, this is how payments are made and he is fully transparent to the administration, then the administration should treat him as partners and with a much greater degree of trust than in the case of other taxpayers“. It is an incentive for entrepreneurs to make cashless transactions, but at the moment there are no details regarding obtaining the status of a cashless taxpayer and the rights it gives. In the parliamentary bill no. 327 there was a proposal to shorten the deadline for VAT refund to 3 days, but it was rejected because it would not be possible to verify the submitted application in such a short time and to complete all the related procedures.
6. The establishment of perpetual usufruct should be regarded as a supply of goods – said a spokeswoman for the CJEU (Court of Justice of the European Union) (No C-604/19)
According to Juliane Kokott opinion, a spokeswoman for the CJEU, the act of establishing perpetual usufruct bring economic power on the part of the owners. In line with the tax authorities’ interpretations, a spokeswoman for the EU Court stated that this transaction qualifies as a supply of property in accordance with Article 14 (1) of the VAT Directive.
It should be mentioned that, until now, the dispute concerned a transition Act which introduced changes to perpetual users, causing them to become landowners. This resulted in an obligation to pay annual fee according to transition over a period of 20 years.
Until now, municipalities have maintained that the transition operation is not a supply of goods and should not be subject to VAT. Despite this position, the tax authorities disagreeing with the municipalities considered that the first relevant for the indication of the delivery of the goods is to determine the period of use and the perpetual term. The authority states that, before May 1st, 2004, those fees were not subject to VAT. On the other hand, that activity changed after that date and it was stated that the establishment of a right of perpetual usufruct constituted a supply of goods and consequently, should be subject to VAT.
It should be pointed out that the opinion of the CJEU spokeswoman in not binding, but that opinion may be relevant in future judgements of the CJEU.