Poland: Changes to taxation of restructuring transactions

Poland: Changes to taxation of restructuring

Amendments to the tax law, effective 1 January 2020, introduce changes to the Polish corporate income tax and individual income tax regimes, such as extending corporate income tax obligations to limited partnerships and certain general partnerships, along with implementation of the solution commonly referred to as "Estonian corporate income tax" (a flat rate of tax on income in capital companies for certain taxpayers).

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The tax law amendments also address the taxation of restructuring transactions, thereby giving rise to multiple tax consequences and thus significantly affecting a taxpayer’s choice of method for carrying out such transactions as well as the amount of tax due.

Precluding deduction of losses on acquisition of an entity, enterprise or an organised part of an enterprise

The new provisions preclude the possibility of deducting the tax base with regard to the taxpayer's loss on acquisition of an entity, an enterprise or an organised part of an enterprise, including an acquisition made through an in-kind contribution or receipt of a cash contribution for which the taxpayer purchased the entity, enterprise or part of the enterprise, and as a result:

  • Following the purchase or acquisition, the scope of the core business activity actually conducted by the taxpayer became different, in whole or in part, from the scope of the core business activity actually conducted by the taxpayer prior to such purchase or acquisition
  • At least 25% the taxpayer's shares are owned by the entity or entities that did not have such rights at the end of the tax year in which the taxpayer incurred a loss
     

KPMG observation

These provisions will greatly affect the tax consequences of acquisitions, limiting the ability of the acquirer to settle its tax losses from previous years upon the acquisition of another company. This is because under the new rules, in order to settle a tax loss incurred in the previous years, the taxpayer that acquired (purchased) another entity, an enterprise or an organised part of an enterprise must demonstrate that the core business activity actually conducted remained unchanged upon the transaction. Thus, the legislative changes are intended to determine that the taxpayer's losses may be settled only if the business activity in relation to which they were incurred remains uniform with the currently conducted activity. However, the condition of uniform core business activity may be impossible to meet, given that in many cases, the business objective behind such a purchase or acquisition transaction is to extend the scope of activities previously carried out by the taxpayer.

Downstream merger

One of particular forms of merging companies, often used in restructuring transactions, is a “downstream merger” in which a subsidiary takes over its parent company (substantial owner or shareholder). The amendments effective 1 January 2021 limiting the settlement of a loss on acquisition will also affect the tax consequences for restructuring transactions involving downstream mergers. This is because it usually leads to acquisition of at least 25% of the shares in the acquiring company by an entity that until the moment of acquisition did not hold such rights. Thus, the acquiring company loses the right to settle the tax losses, even if the core business activity actually pursued by the acquiring company from that moment on remains uniform with the one conducted prior to the transaction, and regardless of whether the restructuring under which the acquisition transaction takes place is economically viable.
 

KPMG observation

The amendments may result in different treatment of regular acquisition transactions and downstream merger transactions in companies with regard to the possibility of settling losses by the company continuing the business.

New tax obligations of real estate companies

There are new measures introducing a definition of a real estate company to the corporate and individual income tax laws. Under the provisions effective 1 January 2020, a “real estate company” means an entity, other than a natural person, obliged to prepare a balance sheet on the basis of accounting provisions, in which:

  • As of the first day of the tax year, at least 50% of the market value of assets (directly or indirectly) is real estate located in Poland (or rights to real estate) having a value exceeding PLN 10 million for entities starting their business activity; or
  • With regard to other entities, as of the last day of the year preceding the tax year, at least 50% of the book value of assets (directly or indirectly) is real estate located in Poland (or rights to real estate) having a book value exceeding PLN 10 million (or an equivalent amount determined according to the relevant exchange rate), and in the year preceding the tax year, taxable revenues (revenues included in the net financial income) from the letting, subletting, lease, sublease and other similar contracts, and from the transfer of ownership to real estate or rights thereto, and from shares in other real estate companies, constitute at least 60% of total taxable revenues.

Moreover, the amendments add new rules for the settling income tax on the sale of shares, and rights of a similar nature in real estate companies. The obligation to settle the tax is shifted from the real estate company, provided that the seller is not a Polish resident. In such a situation, the real estate company (acting as the tax remitter) will be required to calculate the tax in the amount of 19%, collect it from the seller and then to make an advance payment to the appropriate tax office.
 

KPMG observation

To fulfil its tax-related duties, a real estate company must know the details of the transaction. Absent such knowledge, the real estate company will be obliged to settle the tax based on the market value of the said shares or rights. In the event of challenges in obtaining funds to cover the transaction tax from the seller, the real estate company itself will have to pay the tax. Taxpayers need to be aware that real estate companies and taxpayers owning (directly or indirectly) shares, general rights and obligations, participation units or rights of a similar nature that give them at least 5% of the voting rights or rights to participate in the profits of the real estate company will be required to provide information about entities holding (directly or indirectly) shares or rights in a real estate company to the tax administration, by the end of the third month after the end of the tax year. This may pose a challenge, given that information on the entities with at least 5% voting rights is frequently unavailable to real estate companies. Moreover, identification of transactions on which the tax is due may be difficult to determine for companies with extensive shareholdings (e.g. publicly traded companies).


The amendments also introduce a solution commonly referred to as a “real estate clause” to a growing number of income tax treaties for the avoidance of double taxation and signed by Poland. The treaty clause is to determine that profits obtained through the alienation of shares or similar rights in companies having real estate as the main assets will be taxed in the country where the real estate is located. For instance, under a Protocol to the income tax treaty with the Netherlands (signed on 29 October 2020), this type of real estate clause was introduced. Read TaxNewsFlash
 

KPMG observation

The real estate provision in the legislation may have significant implications for tax purposes, especially for restructuring transactions involving entities from a treaty-partner country, if the assets of one of these entities consist mainly of real estate.

Anti-avoidance clause

When assessing the tax consequences of transactions carried out by taxpayers, taxpayers also need to consider the applicable anti-abuse clauses (the General Anti-Avoidance Rule (GAAR)) and special clauses. The GAAR may be applied if the taxpayer uses an artificial legal structure with the primary or “important purpose” of obtaining substantial tax benefits, against the object of the tax rules. In addition to GAAR, Polish tax regulations include a number of specific “minor” anti-avoidance clauses that also may be invoked by the tax authorities to challenge the tax consequences of activities or transactions conducted by taxpayers, including restructuring transactions. Under one such clause, provisions on the tax neutrality of transactions relating to mergers, divisions, exchange of shares or in-kind contributions will not apply when the primary or one of the main purposes of these activities is tax avoidance or evasion.

Furthermore, the corporate income tax law includes a special clause to address and prevent the abuse of the use of tax exemptions on revenue derived from dividends and other revenue from shares in profits of legal persons, including interest and royalties. Under the clause, the use of an exemption on revenue earned in this way is precluded if it goes against the object or the purpose of a tax provisions providing for the exemption and/or if the primary or one of the main purposes of entering into the transaction(s) or performing certain action(s) is to obtain a substantial tax benefit, and if the taxpayer uses an artificial legal structure.
 

KPMG observation

Such anti-avoidance clauses need to be taken into consideration, especially by taxpayers willing to engage in restructuring transactions. In practice, such transactions are of particular interest to the tax authorities. Additionally, extending corporate income tax obligations to limited partnerships (and certain general partnerships) beginning 1 January 2021, means that transactions involving those entities—including restructuring transactions—may be closely watched by the tax authorities.


Read a December 2020 report [PDF 248 KB] prepared by the KPMG member firm in Poland

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