Tax news for financial institutions
Summary of key tax developments for financial institutions in Poland.
The Polish Supreme Administrative Court (“NSA”) in its resolution of February 21, 2020 (case no. III FPS 2/21) finally confirmed that goodwill created as a result of the sale of an enterprise or transfer of business as a going concern (TOGC) should not be subject to Polish transfer tax (called tax on civil law transactions, TCLT, or PCC in Polish). In the past, Polish tax authorities took the view that economic goodwill recognized on the sale of an enterprise or TOGC should be subject to 1% TCLT / PCC as a purchase of a property right.
Taxpayers who paid tax on goodwill based on transactions that occurred after December 15, 2016, should be still entitled to claim a tax refund.
NSA in its ruling of August 17, 2021 (case no. II FSK 587/21; the full statement of reasons has been published only recently) confirms that insurance premiums paid by Polish entities to non-Polish tax residents are not subject to 20% WHT in Poland, regardless of the tax residency of the insurer or lack of a tax residency certificate.
In the past, Polish tax authorities argued that insurance or reinsurance premiums paid to foreign insurers or reinsurers should be subject to 20% WHT in Poland as remuneration for a guarantee-like service, unless all requirements to benefit from a double tax treaty are met. The condition to rely to a double tax treaty to benefit from withholding tax exemption was often difficult to meet (e.g., in the case of insurers / reinsurers located in tax havens or in territories not covered by double tax treaties concluded by Poland, limitations for the relief at source mechanism or problems with identifying the beneficial owner of payments).
The aforementioned ruling of the Supreme Administrative Court should reduce the risk of WHT on payments of insurance or reinsurance premiums.
On February 3, 2022, NSA issued an important judgement (case no. II FSK 1413/19) on tax straight-line depreciation of fixed assets.
The Polish Supreme Administrative Court upheld the judgement of the first-instance administrative court (of December 11, 2018, case no. III SA/Wa 566/18) to the effect that a Polish CIT payer is entitled to correct / amend its tax depreciation of fixed assets, practically at any time, even with an retroactive effect (limited by the statute of limitations). This is applicable to fixed assets (i.e. excluding intangibles) subject to straight-line depreciation at rates not higher than those specified in the Polish CIT Act (so it does not apply to other methods of depreciation, such as the declining balance method or individual depreciation rates). Retroactive correction of tax-deductible depreciation costs may result e.g., in a tax overpayment (if the adjustment leads to an increase in costs / decrease in taxable income) or the reduction of the tax loss (if the adjustment leads to a decrease in costs).
Until now Polish tax authorities took the position that changes in tax depreciation can be effective only in the future, after the taxpayer’s decision to change tax depreciation rates.
From January 1, 2022, Polish VAT taxpayers have an option to waive the VAT exemption for financial services (excluding insurance) provided to business clients (B2B). In consequence, any financial institution may choose to tax such services with standard output VAT. Key concepts are:
- it is voluntary, but if chosen (by notifying the relevant Polish tax office), it must be practiced for at least 2 years. Consequently, once a taxpayer opts out of VAT taxation on financials services (after 2 years), there is another 2-year “cooling-off” period before they can opt for VAT taxation again;
- it applies to all financial services (excluding insurance) and to transactions with all business clients (a taxpayer cannot choose VAT taxation for specific services or specific clients; it is all or nothing). Transactions with non-business clients should remain unchanged (i.e. they will continue to be VAT-exempted);
- as services are subject to VAT, an invoice should be issued to a business client without request (it is therefore also important to determine the taxable base in the correct amount);
- VAT on services provided to clients entitled to deduct input VAT should be neutral for these clients (i.e., the cost of the bank’s services should not change). At the same time, the Bank with taxable services should be entitled to deduct input VAT;
- on the other hand, services provided to clients not entitled to deduct input VAT (e.g., to other financial institutions, doctors, public sector, health care providers, etc.) will be more expensive in practice (because of the VAT amount).
To sum up, opting for VAT may be advantageous, but certain conditions need to be pre-checked.
As more and more employees tend to be working from home, also in another country, a risk of creating a taxable presence / a permanent establishment (PE) increases.
According to Polish corporate income tax regulations, the income earned in Poland by non-Polish tax residents should include, in particular,the income from all types of activities pursued in Poland, including through a PE located in Poland. There are some doubts as to whether a home office (working by an individual in his/her own home which is situated in a jurisdiction other than the jurisdiction in which the company’s registered office is located), can constitute a fixed place of business (PE) of the company for which the individual works. This issue is of significant practical importance during the COVID-19 pandemic.
In general, according to the OECD Commentary on the OECD Model Tax Convention on Income and on Capital, a PE must have a certain degree of permanency and be at the disposal of an enterprise for that place to be considered a fixed place of business through which the business of that enterprise is wholly or partly carried on. For a home office to be a PE for an enterprise, it must be used on a continuous basis for carrying on the business of that enterprise and the enterprise generally must require the individual to use that location to carry on the enterprise’s business.
In line with the practice of Polish tax authorities to date, it has been generally accepted that having an employee in Poland who works through a home office in such circumstances should not automatically trigger a PE risk. This position seems to be confirmed in the guidance on tax treaties and the impact of the COVID-19 pandemic issued by OECD Secretariat and published on January 21, 2021. The guidance reiterates the position set out in the Commentary to the effect that only where an enterprise has required its employee to use a home office to carry on the enterprises’ business, the home office should be considered a PE for the enterprise.
Nevertheless, it should be noted that, according to the Commentary, the home office may be at the disposal of the enterprise if the enterprise has required the individual to use that location (e.g, by not providing an office to an employee in circumstances where the nature of the employment clearly requires an office). We are aware of an individual tax ruling issued to a German tax resident which states that employees working from home on a cross-border and continuous basis over an extended period may give rise to a PE of the foreign employer.
To sum up, the situations where employees are allowed to work from a place located in a foreign country should be analysed on a case-by-case basis to verify whether a taxable presence / a PE is created.