- Another fiscal approach to beneficial owner (BO) when paying dividends (WHT)
- Expenses to assist Ukrainians as a company tax expense
- Changes to model forms related to personal and corporate income taxes
- VAT taxation of management contract vs the liability to third parties
- Changes in transfer pricing
- The definition of R&D activity – how to understand – judgment of Supreme Administrative Court
- A national e-invoicing system (KSeF) from 2024?
1. Another fiscal approach to beneficial owner (BO) when paying dividends (WHT)
The examination of the status of the beneficial owner of the dividend, in order to apply the withholding tax exemption under Article 22(4) of the CIT Act, is still unclear – this time, the Director of the National Fiscal Information in an individual interpretation of 14 June, 2022 (0111-KDIB2-1.4010.128.2022.2.AR) allows the application of the ‘look through’ concept, which somewhat mitigates the hitherto approach of the tax authorities prescribing the examination of the status of the actual owner of the receivable in each case when paying the dividend.
Regardless it seemed that the NSA judgment of 27 April, 2021 (Case No. II FSK 240/21) was a breakthrough – it explicitly stated that there is no obligation to examine the status of the beneficial owner of the receivable when paying dividends, as this constitutes an impermissible departure from the limits of the linguistic interpretation of the CIT Act (such a requirement applies only to provisions concerning the payment of interest/ license fees) – the tax authority still indicated in the aforementioned individual interpretation that this requirement must be met. However, in its view, it is possible to apply a withholding tax exemption to a dividend paid to an entity that is not the beneficial owner of the dividend, but acts as an intermediary (the actual owner is a shareholder who is not the direct recipient of the dividend).
2. Expenses to assist Ukrainians as a company tax expense
According to the individual interpretations of 22 August, 2022 (0111-KDIB2-1.4010.162.2022.2.AR) and 22 June, 2022 (0111-KDIB1-1.4010.117.2022.2.BK), expenses for the purchase of goods and the performance of services provided directly to Ukrainian citizens cannot be included in the company’s deductible costs.
In the case of expenditures for assistance to refugees from Ukraine, it is possible to recognise them as tax deductible expenses on the basis of a special provision, i.e. Article 38w introduced by the Act of 12 March, 2022 on assistance to citizens of Ukraine in connection with the armed conflict on the territory of that country. The aforementioned provision is, inter alia, an exception to Article 16(1)(14) of the CIT Act, which states that donations are not deductible.
In the first of the individual interpretations cited above, the Director of the KIS found that the company had not indicated how the expenditure affected the amount of revenue generated by its service activities (the case concerned IT services). It also failed to justify the connection with preserving or securing the source of revenue, and it does not appear from the application that incurring the expenses for the refugees was of such a nature, i.e. without incurring them, the source of revenue would have been exposed to shocks or would have been lost. The only argument is that the expenditure is incurred as part of corporate social responsibility (so-called CSR).
On the other hand, in the second interpretation cited – the company denied that the costs incurred for the benefit of refugees from Ukraine are donations and based its conclusion on Article 15(1) of the CIT Act. The company argued that it fulfils the prerequisites of the cited provision, as by supporting a country at war and its citizens, it contributes to the successful end of the war, thereby protecting the economic situation of the country, and therefore also the existing source of its income. As highlighted in the application – the company recognises that failure to take aid action could lead to a “real threat to undermine the economic stability of the country” , thus to the violation or loss of its source of revenue.
In the justification for the individual interpretation, the Director of the KIS underlined the essence of the purposefulness of the costs incurred. If they are not explicitly qualified or disqualified as tax deductible costs, they are subject to individual assessment taking into account “the nature and profile of the business activity conducted and the economic rationality of the cost incurred” (judgment of the Supreme Administrative Court of 1 March, 2016, ref. II FSK 4009/13). As noted by the tax authority, the justification followed by the applicant is so general in nature that it could be applied by any taxpayer, regardless of the profile of its business, which contradicts the essence of individual assessment.
At the same time, the Director of the KIS pointed out that support to refugees must occur in the form of donations, given to one of the entities listed in the law. At the same time, the company had already written in its application that it did not meet the premise of a donation. As a result, the only possibility to count the costs shown as tax deductible was to meet the prerequisites of Article 15(1) of the CIT Act, which it also does not meet.
Again, the tax authority referred to the premise of the purposefulness of the cost, finding the company’s argumentation too general and not supported by the application submitted. It considered the earmarking of funds for CSR as the only argument for the existence of a relationship. With that said, there is no provision in the CIT Act that would allow such costs to be automatically recognised as deductible, although in principle they are treated by the courts as advertising and would therefore count as such. However, the company denied in its application that this was the purpose of the costs it had incurred – it emphasised that they had arisen as part of the strengthening of internal relations, although it did not justify how they translated into revenue. Accordingly, Director of the KIS considered the applicant’s position to be incorrect.
Both of the above examples relate to an issue that is currently important for the Polish economy – the accounting of expenses for assistance to refugees from Ukraine. In both cases, the applicants, denied meeting the premise of “donation”, which, according to the tax authority, could constitute their positive consideration of the applications for individual interpretations.
3. Changes to model forms related to personal and corporate income taxes
Among the many tax changes taking place this year, it is worth noting the modifications to certain personal income tax and corporate income tax forms. There are already new templates of, among others, forms CIT-8, CIT-8AB (along with CIT/PKG and CIT/WZG appendices), PIT-2, PIT2A, PIT-3, PIT-36, PIT-36S, PIT-36L, PIT-36LS, PIT-39, or CIT-RB.
Special note, however, is the PIT-CFC/ CIT-CFC, which relates to foreign controlled entity returns and personal/corporate income tax due. It is intended to be aligned with the possibility of donating 1.5% of PIT to a public benefit organisation. In addition, instead of the term “proxy”, the wording “persons representing the taxpayer” or “authorised to sign the return on behalf of the taxpayer” will appear, leaving taxpayers free to do so.
4. VAT taxation of management contract vs the liability to third parties
In a judgment of 22 August, 2022 (ref. III SA/Wa 245/22), the Provincial Administrative Court in Warsaw, following the position of the Director of National Fiscal Information expressed in an individual interpretation of 22 November, 2021. (0114-KDIP1-1.4012.664.2021.1.MKA) indicated that if the management contract between a member of the management board and the company (manager’s contract) does not specify who bears liability towards third parties, it should be deemed that the manager does not bear it.
The case concerned the chairman of the board of directors of a limited liability company, who additionally concluded a contract with the company for the provision of management services, which he provided only to the company (it was clear from the contract that he was obliged to personally manage the company’s affairs and represent it towards third parties). As argued by the chairman of the board, he also carried out his own business activity, which mainly consists in the provision of consulting and management services, so the income from this belongs, in his opinion, to the remuneration for personally carried out activities.
However, the contract did not specify whether the manager was liable to third parties for the actions of the company he represented (the contract in turn implied that he was liable to the company for damages caused during his duties as manager, and this liability was independent of his liability as president of the company).
The essence of the dispute was whether management services (on a management contract) are subject to VAT – whether the taxpayer is liable to third parties.
In the President’s opinion – the company’s management services provided by him are subject to VAT because he is an active VAT taxpayer and the contract does not meet one of the three conditions provided for in Article 15(1), (2) and (3)(3) of the VAT Act (it does not specify his liability towards third parties).
However, the Director of the NFI and the WSA in Warsaw disagreed, holding that if liability is not regulated in the contract, such liability cannot be presumed.
Therefore, the contract with the manager-president was considered to meet all three conditions, so that he does not carry out an independent economic activity and the services he provides are not subject to VAT, meaning that the manager is not acting as a VAT taxpayer.
In summary, one of the factors determining the VAT taxation of a management contract is the establishment of the service provider’s liability towards third parties. If this issue is not addressed in the contract, it is wrong to presume the liability of the contractor, in which case he is not a taxable person within the meaning of Article 15(3)(3) of the VAT Act.
The above means that, in each case, the contractual provisions should be properly and precisely specified in order to prevent such disputes, which, as can be seen, may end up in an unfavourable outcome for the taxpayer – the chairman of the company’s management board. Nevertheless, the verdict is not final and time will tell whether – if the verdict is challenged by the taxpayer – the Supreme Administrative Court will rule similarly.
5. Changes in transfer pricing
The main changes in the area of transfer pricing are changes to TPR, indirect haven transactions and an increase in the documentation thresholds for ‘direct’ haven transactions.
According to the Act of 7 October, 2022, amending the Corporate Income Tax Act and certain other acts, it is envisaged, among other things, to repeal the controversial provisions on verification of counterparties and documentation for transfer pricing purposes of so-called indirect haven transactions, which were introduced at the beginning of 2021. It is worth noting that these provisions are repealed retroactively from 1 January, 2021.
The amended provisions also clarify that in the case of transactions with tax havens, there is an exemption from TPR (transfer pricing information) obligations concerning transactions in which the price or the manner of determining the price of the subject of the transaction results from the provisions of laws or regulations issued on their basis. The previous wording of the legislation did not provide for this possibility due to the lack of reference to transactions other than controlled transactions (i.e. haven transactions with unrelated parties).
The aforementioned act also introduces an increase in the documentation thresholds for ‘direct’ haven transactions – up to PLN 2.5 million for financial transactions and PLN 500,000 for other transactions – the thresholds apply to both transactions with unrelated and related parties (Articles 11k(2a) and 11o(1) of the CIT Act).
The provisions on the application of the arm’s length principle have also been clarified, restoring its essence, i.e. comparing related party/haven transactions to the terms that unrelated (non-tax haven) parties would have agreed between themselves.
6. The definition of R&D activity – how to understand – judgment of Supreme Administrative Court
In a judgment of 17 May, 2022 (ref. II FSK 321/22), the Supreme Administrative Court indicated that: “Clinical research services related to the development, creation and implementation of new medical devices constitute an element of research and development activity referred to in Article 4a(26) of the CIT Act, and therefore entitle the taxpayer who performs them to deduct from the tax base the qualified costs of the research and development activity conducted, referred to in Article 18d of the CIT Act”.
The case concerns a contract research organisation (CRO) company engaged in the comprehensive provision of clinical trial services to third parties. At the end of 2020, it applied for an individual interpretation regarding its eligibility for research and development (R&D) relief. The tax authority held that the company’s activities did not meet the definition of research and development activities and, therefore, the company was not entitled to a reduction in the tax base under the R&D relief. This position was justified by the fact that the company, as an external entity, undertakes such activity only indirectly, performing only work ‘secondary’ to research and development. One could conclude from this position that, in order to meet the R&D condition, every process must be carried out from start to finish.
Nevertheless, fortunately for the company, the Supreme Administrative Court (NSA) did not agree with such a position (as did previously the WSA in Warsaw in its judgment of 10 November, 2021. (ref. III SA/Wa 1162/21). The NSA underlined that such a ‘Formal division of the stages of research into the creation of innovative medicines is completely without basis’. The NSA also pointed out that innovative business processes are so complex and involve such specialised stages that it is difficult to expect them to be carried out in their entirety by a single entity. Furthermore, the provisions relating to research do not distinguish between ‘indirect’ and ‘direct’ research, which means that the authority added an additional criterion when assessing the application wrongly.
Therefore, it is always worthwhile to examine the given facts from the point of view of the possibility to take advantage of the R&D relief, which may significantly influence the final (more favourable) tax settlement of the taxpayer.
7. A national e-invoicing system (KSeF) from 2024?
On 1 December, 2022, a draft law amending the Value Added Tax Act and certain other laws was published on the RCL website, which provides for the introduction of mandatory ‘e-invoicing’ (KSeF) from 1 January, 2024.
The obligation to issue e-invoices using KSeF will apply to taxpayers carrying out activities covered by the invoicing requirement according to Polish VAT regulations, who have their registered office or permanent place of business in Poland (and to taxpayers applying the so-called subjective exemption). Mandatory invoicing will apply to activities subject to VAT in Poland, including, among others, domestic supplies of goods and services between businesses (B2B), transactions to public authorities (B2G), or transactions to consumers (B2C);
In addition, the proposed Article 106nh(1) of the VAT Act proposes the introduction of a financial penalty for failure to comply with the obligations introduced in the amended Act. The head of the tax office will be able to impose, by way of a decision, on the taxpayer a financial penalty of up to 100% of the amount of tax shown on that invoice and, in the case of an invoice without any tax shown, a financial penalty of up to 18.7% of the total amount due as shown on that invoice. A financial penalty will be imposed in cases where:
- the taxpayer has not issued an invoice using KSeF, or
- the taxpayer issued an invoice in electronic form not in accordance with the template provided, or
- the taxpayer did not send the invoices issued during the failure to KSeF, within the specified deadline.
It is not excluded that the bill will undergo further amendments, which we will keep you informed about.