The regulations on so-called indirect tax haven transactions have received a new wording. The President has signed on October 21st, 2022, a law introducing changes to the documentation obligation for indirect tax haven transactions. The regulations on indirect tax haven transactions have raised many doubts since their introduction. According to an explanation published on the website of the Ministry of Finance, the law amendments aim, among other things, at improving the provisions and are intended to eliminate the interpretation doubts and ambiguities that have arisen and to improve the clarity of the provisions.
The existing wording of the rules on tax haven transactions
According to the existing legislation on tax haven transactions, the following are obliged to prepare local transfer pricing documentation:
- taxpayers and companies that are not legal entities carrying out a transaction other than a controlled transaction with an entity having its place of residence, seat or management in a territory or country applying harmful tax competition, if the value of this transaction for the tax year exceeded PLN 100,000 (so-called direct tax haven transactions);
- taxpayers and companies that are not legal entities carrying out a controlled transaction or a transaction other than a controlled transaction in which the beneficial owner has a residence, seat or management in a territory or country applying harmful tax competition and the value of the transaction for the tax year exceeded PLN 500,000. (so-called indirect tax haven transactions).
It should be pointed out that, in the case of indirect tax havens transactions, the beneficial owner is presumed to be resident, established or managed in a territory or country applying harmful tax competition, if the other party to the transaction, settles during the tax year or financial year with an entity established or managed in a territory or country applying harmful tax competition. In establishing these circumstances, the taxpayer is obliged to exercise due diligence.
Taxpayers are therefore faced with the daunting task of identifying the actual owner, which in many cases may have proved impossible and led to an additional documentary burden.
Repeal of the obligation to apply the arm’s-length principle and the documentation obligation to indirect tax haven transactions
The amended regulations provide for the repeal of the obligation to apply the arm’s length principle and the documentation obligation, which were expressed in Article 11i(2) and Article 11o(1a) and (1b) of the CIT Act (analogous regulations in the PIT Act). According to the explanatory memorandum to the amended law, these provisions would not effectively achieve their intended objectives in practice and would be disproportionate to the purpose they were intended to serve. Moreover, the possibility of achieving them seems doubtful.
In connection with the repeal of the aforementioned provisions, the amended law provides for the new wording of Article 11o(1) of the CIT Act, according to which the obligation to prepare transfer pricing documentation arises, in the event of exceeding the documentation thresholds specified in the CIT Act, with respect to direct haven transactions performed with:
- an entity having its place of residence, seat or management in a territory or country applying harmful tax competition, or
- a foreign permanent establishment located in a territory or country applying harmful tax competition.
This change should be assessed positively, as it can be seen that in this case the Ministry of Finance has acceded to the demands made by industry organisations, entrepreneurs and experts. The Ministry of Finance itself also acknowledges that the difficulties in identifying the real owner of the receivables and the application of the presumption of residency in a tax haven would not lead to a reflection of the actual relationship and would thus limit the usefulness of such data.
Raising the documentation thresholds for direct tax haven transactions
Amendments have been also introduced in relation to direct tax haven transactions. Currently, a documentation obligation arises if a taxpayer makes a transaction with an entity from a tax haven and the value of the transaction exceeds PLN 100 000. The amended law provides for the introduction of different documentation thresholds depending on the type of transaction between entities.
Two documentation thresholds are envisaged:
- PLN 2 500 000 – for a financial transaction;
- PLN 500 000 – for a transaction other than a financial transaction.
These provisions are to be applied respectively to companies forming a tax capital group. The explanatory memorandum to the law amendments indicates that the existing transaction materiality threshold needed to be adjusted to economic conditions that have changed over the years. Setting the thresholds at the aforementioned levels is intended to contribute to the reduction of documentation obligations, particularly with regard to financial transactions. The explanatory memorandum indicates that the currently applicable threshold of PLN 100 000 does not in practice generate sufficiently significant shifts of income to tax havens to justify the imposition of a documentation obligation.
Retrospective applicability of the amended provisions
An important issue is the possibility to apply the amended rules retroactively, which is provided to taxpayers by the Article 22 of the Amending Act. According to the amending act, the new provisions will be able to be applied to transactions commenced and not completed before 1 January 2021 and transactions commencing after 31 December 2020.
It should also be noted that, according to the amended law, in the case of controlled transactions and transactions other than controlled transactions with a foreign permanent establishment located in a territory or in a country applying harmful tax competition, the provisions in the new wording will apply to transactions commenced and not completed before 1 January 2023 or commenced after 31 December 2022, to the extent of that part of such transactions which are performed in a tax year beginning after 31 December 2022.
Pursuant to the transitional provisions, the regulations on indirect haven transactions entered into force on the day following the announcement of the Act. Given that the regulations were enacted quite late, some taxpayers have probably already made the relevant analyses with respect to indirect haven transactions. However, it should be pointed out that the amendments go in the right direction and may contribute to reducing the doubts that still arise.