- No obligation to examine the beneficial owner during dividend payment
- Tax clarifications regarding VAT e-commerce
- First judgments handed down on the basis of new regulations concerning limited partnerships and charging advances to general partners
- Indirect rebate from the original manufacturer without impact on VAT
- Recognition moment of tax deductible during sale of shares
- Maintaining a blog to provide advertising services may be within the scope of a business activity
1. No obligation to examine the beneficial owner during dividend payment
“In the opinion of the Supreme Administrative Court, the absence in article 22 (4) of the CIT Act of the condition referred to above that the company receiving the dividend must have the status of beneficial owner determines that in order to enjoy the right to exemption from corporate income tax with respect to dividends it is not required that the recipient of the dividend be its beneficial owner. The implication of the existence of the condition of the beneficial owner status in relation to the exemption from income tax referred to in Article 22(4) of the CIT Act in the absence of such a reservation in the wording of Article 22 (4) of the CIT Act and taking into account that such a condition was formulated exclusively in relation to the exemption referred to in Article 21 (3) of the CIT Act is an impermissible departure from the bounds of linguistic interpretation of these provisions.” – stated the Supreme Administrative Court in judgement of April 27, 2021 (sign. II FSK 240/21).
For years, companies paying dividends to foreign entities have been facing the problem of verification of the beneficial owner status when applying for WHT exemptions.
It is worth mentioning that in Article 22 (4) of the CIT Act lacks the condition obliging the taxpayer to verify the status of the beneficial owner in case of dividend payment. Such obligation is only present in case of payment of interest and royalties to foreign entities. However, the general standpoint of the tax authorities on this issue is not favourable for taxpayers. Tax authorities consistently argue that in order to apply the WHT exemption it is necessary to verify the beneficial owner status also when paying out dividends.
Therefore, it might seem that the SAC verdict will be a breakthrough for the position on the above issue and will end numerous disputes on this issue. Unfortunately, the courts continue to rule to the disadvantage of taxpayers, ordering verification of the beneficial owner status when paying out dividends, as evidenced by the recently issued judgment of 9 July, 2021 by the Provincial Administrative Court in Poznan (case ref. PAC in Poznan (sign. I SA/Po 230/21). The PAC stated that this is the basis for exercising due diligence, and such verification is necessary to determine whether in fact such payment is not artificial in nature.
It is to be hoped that the awaited explanations of the Ministry of Finance regarding the withholding tax will additionally specify that there is no obligation to examine the beneficial owner when paying out the dividend, as it follows directly from the tax regulations (by not indicating such a requirement in Article 22 of the CIT Act). Such clarifications, contrary to the SAC’s judgment in an individual case, should be applied by the authorities.
2. Tax clarifications regarding VAT e-commerce
With the growing importance of the e-commerce industry in the market, the number of regulations that cover this rapidly expanding area of business activity is also increasing. The regulations implementing the EU e-commerce VAT package were introduced on 1 July, 2021, while now a package of explanations of the Ministry of Finance in this regard has appeared. Will it be sufficient to dispel any doubts about the emergence of the new regulations?
The e-commerce VAT package introduced many new concepts into the VAT Act that were not explained in the bill itself.
In this connection, it is worth noting that the appearance of the explanations may facilitate the proper interpretation of these regulations. The tax clarifications in turn go through the new concepts and regulations introduced, i.e.:
- CTSO, or distance intra-Community sale of goods (introduced in connection with the repeal of the concept of distance selling from the national territory and distance selling within the national territory),
- SOTI – distance selling of imported goods,
- Role of operator of electronic interfaces, which refers to internet platforms
- special procedure OSS (One Stop Shop)
- special procedure IOSS (Import One Stop Shop)
- special procedure for declaration and payment of tax on importation of goods: the so-called special regulation “USZ”.
It explains such issues as place of supply, moment of tax obligation emergence and recording duties. Furthermore, the explanations contain 66 examples that are intended to help analyse the new regulations. Whether this is the case will probably turn out in practice in individual cases of particular entities.
The tax clarifications, by their very nature, are intended to provide protection for the taxpayer as in the case of complying with an individual interpretation, so it is worth examining each time whether the provisions of the Notes apply to a particular taxpayer and how they are interpreted.
3. First judgments handed down on the basis of new regulations concerning limited partnerships and charging advances to general partners
As of recently, i.e. as of January 1, 2021. (or in some cases from 1 May 2021) limited partnerships have been included in the Corporate Income Tax (CIT) Act. This has resulted in double taxation of profits distributed to the partners of the partnership and to both limited partners and general partners. The reason is that the tax liability arises at the level of taxation of the limited partnership itself (with CIT at the rate of 9% or 19%) and later, upon payment of profits to partners – with PIT. At the same time, a possibility of reducing the tax amount proportionally to the general partner’s share in the partnership’s profit was introduced in order to limit this double taxation. As a result of those changes, doubts arose concerning taxation of an advance payment to such a partner.
When an advance profit payment is made to a limited partnership during the fiscal year, a tax liability arises. As far as the advances of limited partners and general partners are concerned, the partnership must collect the tax as payer. The main dispute in this matter is the taxation of the advance payment made to the general partner in connection with the regulation that allows to deduct an amount corresponding to the product of the general partner’s percentage share in the partnership’s profit and the tax due on the partnership’s income. As it is not difficult to guess, tax authorities are guided in this matter by an interpretation unfavourable for the taxpayer.
The tax authorities claim that at the time of advance payment, the limited partnership should pay the tax and then after the end of the tax year possibly claim a refund as overpaid tax. This solution is undoubtedly disadvantageous for taxpayers due to the fact that the funds may return to entrepreneurs only after several months limiting their liquidity.
Significantly, in the case of general partners of limited joint-stock partnerships (to which analogous provisions now apply for limited partnerships), this issue was resolved by the Supreme Administrative Court in its judgment of 3 December, 2020 (sign. II FSK 2048/18).
First of all, the Supreme Administrative Court indicated a significant difference between a tax obligation and a tax liability. A tax obligation is an unspecified obligation to make a compulsory cash payment in connection with the occurrence of an event specified in tax acts, whereas a tax liability results from the tax obligation and obliges the taxpayer to pay tax to the State Treasury.
SAC clearly indicated that the moment of recognizing the tax obligation due to the payment of profit advances is the moment of the actual payment of these advances. However, the mere fact that the tax obligation arises does not mean that the taxpayer is obliged to pay the tax. It arises when the tax obligation transforms into a tax liability. Without such a transformation obligation the payer will not be able to properly fulfill its duty because it will have no basis for determining the amount of tax it should collect from the taxpayer and remit to the competent tax authority. Therefore, in order to collect such tax, the taxpayer should be able to calculate it correctly beforehand. In other words, there is no obligation to collect advance payments each time from the profit distributed to general partners. Conclusions resulting from the analysis of the Supreme Administrative Court’s regulations were also used for the interpretation of regulations on advance payments to general partners of limited partnerships by the Provincial Administrative Court in Krakow in the judgment of 13 July, 2021. (sign. I SA/Kr 794/21).
The PAC in Kraków confirmed the positive approach for taxpayers. The court held that “due to its interpretation (of the judgment on limited joint-stock partnerships – editor’s note) of the same provisions that, as of 1 January, 2021, apply to the income of general partners of a limited partnership, the theses contained therein remain fully adequate with respect to the legal issues covered by the applicant’s request for an interpretation.”
Thus, it might seem that in the case of profit distributions to general partners in both limited joint-stock partnerships and limited partnerships, the issue of collecting advance payments is uniformly considered by administrative courts. However, time will tell how other administrative courts will approach this issue, and perhaps even, in the case of a limited partnership, the SAC.
4. Indirect rebate from the original manufacturer without impact on VAT
The Supreme Administrative Court in the judgment of September 16, 2021. (sign. I FSK 705/18) ruled on the scope of the obligation to reduce the amount of input tax in connection with the receipt of an indirect rebate from the original manufacturer. The ruling was based on the judgment of the CJEU of 11 March, 2021 in the case of Firma Z v Finanzamt Y (ref. C-802/19).
The SAC assessed in its ruling the relationship between the foreign supplier and the company. A relationship consisting in fact only in timely filing of a request for payment of a bonus by the company and its payment by the supplier in a situation where the company is obliged to file a request for payment of a bonus and its payment by the supplier (as it does not constitute a supply of goods or provision of services for consideration) remains outside the sphere regulated by the VAT Act. Consequently, we cannot talk about any tax consequences. Therefore the supplier cannot reduce its tax base and the company cannot reduce the input VAT.
Particular attention should be paid to the fact that in the present case the rebate was granted not by the direct contracting party but by an upstream party in the supply chain. Therefore the sum of the tax amounts resulting from the invoices documenting the purchases of goods and services to be made by the company does not change as a result of the discount.
The issue of indirect rebates has never been entirely clear, which is also a direct result of the lack of regulation in tax legislation. Despite the lack of regulation, the practice is now well established in domestic transactions.
The judgment should have a positive impact on the undesirable practice of tax authorities in the form of attempts to force reduction of input tax deduction – while the entity granting the discount is not obliged to reduce the tax. The verdict should be assessed as a common-sense approach of SAC to the case.
5. Recognition moment of tax deductible during sale of shares
Director of National Tax Information issued a tax ruling dated September 8, 2021 (sign: 0111-KDIB1-2.4010.274.2021.1.SK) concerning corporate income tax in respect of the moment of recognizing a tax cost on the sale of shares.
The applicant, a Polish tax resident subject to unlimited corporate income tax liability in Poland, acquired shares in a joint stock company on December 31, 2008. In connection with the 2016 reorganisation agreement entered into as a result of the deterioration of his financial situation, he had, up to the date of the application, repaid only part of the amount for the purchase of these shares and, on 30 October, 2020, sold these shares to Z sp. z o.o. (llc) The payment of the remaining part of the purchase price for the shares was to be made after their sale to Z sp. z o.o. – most probably in 2021.
The applicant asked the tax authorities whether it would be correct to recognise as a tax deductible cost, in accordance with the principles set out in Article 15 (4) of the CIT Act, the amount representing the remaining, as at the date of filing this application, unpaid portion of the consideration for the acquisition of the shares only after its payment, which will take place after the further sale of these shares?
The key issue resolved by the tax authority was to assess when the costs incurred for the purchase of shares were recognized as deductible expenses.
According to Article 15 (1) of the CIT Act, tax deductible costs are costs incurred to earn revenue from a source of revenue or to retain or secure a source of revenue, except for expenses excluded under Article 16 (1) (8) of the CIT Act. However, under Article 16 (1) (8) of the CIT Act, expenses on subscription for or acquisition of shares or contributions in a co-operative, shares (stocks) and securities, as well as expenses on acquisition of participation titles in equity funds are not tax deductible costs. This paragraph also indicates in the next sentence that such expenditures are, however, tax deductible costs on the disposal of such shares and securities against consideration, including on the issuer’s repurchase of the securities, and on the repurchase or redemption of participation titles in equity funds, subject to section 7e.
According to the justification provided by the tax authority, the content of Article 15 (1) means that all expenses incurred are tax deductible, except for those specified in the CIT Act, provided that they are related to the conducted business activity. On the other hand, the incurred expenses affect or may affect the amount of revenue, preservation or protection of the source of revenue. Moreover, deductible expenses include both costs directly related to revenues earned and costs indirectly related to revenues if the taxpayer proves that they were incurred in a rational manner in connection with earning revenues or securing the source of such revenues.
The tax authority indicated that the Applicant’s position is incorrect because the expenses for the purchase of shares will become tax deductible at the time of their disposal. In the analysed case it will be October 2020, when the sale of shares to Z sp. z o.o. took place, and not at the time of payment of their purchase price, which is likely to take place in 2021 – which is already after the sale of the shares. Therefore, it is irrelevant in this case that the payment of the remaining amount will be made already after the further sale of those shares. The tax authority pointed out that the term “acquisition expenses” should be understood in such a way that the tax deductible costs include expenses which directly condition the acquisition of shares. Thus these will be such expenses without which an effective acquisition of shares would not be possible. Importantly, it is not necessary to incur such expenses in the sense of payment (cash basis) in order to recognize the tax deductible costs, because the CIT Act indicates that, as a rule, a sufficient prerequisite for recognizing such costs is the obligation to pay.
6. Maintaining a blog to provide advertising services may be within the scope of a business activity
On 11 August 2021 The Provincial Administrative Court (PAC) in Olsztyn issued a judgment (sign. I SA/Ol 473/21) in which it found that starting a business activity in the field of advertising and media by running a lifestyle blog where advertisements and sponsored articles will be placed for a fee is within the scope of business activity. Since this may lead to revenue from rental of advertising space or publication of paid articles, the generation of such revenue should be associated with the necessity to incur expenditures constituting costs under the principles set out in Article 15 (1) of the CIT Act.
The case concerned a future event in which a company operating as a courier broker, acting as an intermediary between the client and the courier, planned to start a lifestyle blog the purpose of which (as the company emphasised) would be to intensify its services and to advertise its existing business. The subject matter of the lifestyle blog is to be broad in order to attract the widest possible group of potential clients. Among other things, it is to cover fashion, travel, cooking, gadgets, cars and sports. The activities undertaken on the blog will include reviews of cultural events, tests of purchased products, reports from tourist trips, posting advertisements and writing sponsored articles.
The company argued that expenses related to the above activities, such as tickets, visits to restaurants and cosmetic restaurants, tourist trips or products for testing meet the definition of deductible expenses under Article 15 of the CIT Act. The director of the National Tax Information recognized the company’s position as incorrect, stating that the dissemination of lifestyle information does not bring any benefits to the business because the popularity of a blog is affected by the quality of the entries themselves and not by the expenses incurred for this purpose. Additionally, creating such entries with opinions and information is not connected with the company’s advertising activity conducted so far and planned, thus the company’s actions do not meet the conditions indicated by the legislator in art. 15 (1) of the CIT Act.
The company challenged this interpretation and the PAC in Olsztyn ruled in favour of the taxpayer. The court held that a blog is only a tool for purchase of advertisements, therefore the subject matter of the blog does not have to be consistent with the business activity. It is only meant to attract a wide range of recipients in order to find people willing to place advertisements on the blog or sponsor articles. The expenses used to make the blog entries more attractive are thus directly related to generating revenue from blog advertising. In the Court’s view, if the expenses incurred contribute to a review or article on a blog that offers rental advertising space, they may be considered expenses.
However, if the selected person watches a performance or consumes a meal and fails to post a review on the blog despite the obligation under his or her job, the expenses may be questioned by the tax authorities.