On 28 June 2022, the Government Legislation Centre published a bill to amend the Corporate Income Tax (CIT) Act and certain other legislation (“Bill”). Part of this legislative proposal is to make major modifications to the reporting framework for what are called indirect transactions with tax havens. The changes follow up on earlier input from public consultations in which WTS&SAJA took part, including our proposals to limit documentation requirements for domestic transactions.

However, the direction of the proposed changes may come as a certain surprise for taxpayers as they had every right to expect the changes to be in line with the official transfer pricing guidance draft published on 21 December 2021.

Major proposals in the Bill:

  • The presumption of tax haven residence for beneficial owner is to be abolished (current Article 11o(1b), saying that the beneficial owner is presumed to be based in a tax haven if the other party to the taxpayer’s transaction makes settlements with a tax haven entity).
  • In indirect settlements with tax haven entities, there are value thresholds that trigger the documentation requirement depending on transaction type. For goods transactions and financial transactions the threshold would be PLN 2.5M, and for all other transactions it would be PLN 0.5M.
  • The documentation requirement for indirect transactions would apply solely to the recipient of the payment (payee) where both transaction parties are subject to domestic tax jurisdiction. In cross-border transactions the requirement will apply to the payer.
  • No documentation would be necessary for indirect transactions where the payee did not make settlements with the tax haven entity in relation to the payment during the tax year or financial year or is not related to the tax haven entity.
  • As a measure simplifying beneficial owner identification for the purpose of verifying if documentation requirement applies, it can be sufficient to obtain a statement of the payee that it is the beneficial owner of the payment or that the beneficial owner is not based in a tax haven (so far this option has not been authorised expressly by the law but only by draft tax guidance).

While the changes proposed in the Bill should be considered favourable as to their general direction, we wish to draw your attention to two controversial issues arising from it.

  • A taxpayer making a direct transaction with a tax haven entity (e.g. purchase of some goods) and an indirect transaction with a tax haven through a domestic entity (e.g. sale of the same goods) would have to prepare documentation for both transactions: the direct one and the subsequent domestic one.
  • A taxpayer that is related to a tax haven entity may be required to document domestic sales even if proceeds of those sales are not forwarded to the entity.

The changes proposed in the Bill will apply to all transactions with tax havens commenced and not completed before 1 January 2023. The Finance Ministry offers an option to apply the projected law for documentation purposes with respect to indirect transactions already for 2021. However, whether the option to elect between the 2021 regime and the 2022 regime can be  legally introduced is yet to be verified through intra-Cabinet consultations. Therefore, it is currently impossible to clearly resolve which law should apply to the documentation of indirect transactions with tax havens for 2021. In addition, given the publication date of the Bill and the course of legislative process, the new law cannot be expected to become effective earlier than in November.

Using the Transfer Pricing Forum, the Finance Ministry has started consultations on changes to various proposals in the Bill. WTS&SAJA are actively involved in these consultations. We will keep you updated on the progress of this legislation.

If this issue pertains to your business and you are interested in our assistance, please contact us.

This blog post is provided for general information purposes to keep you up-to-date with changes in tax law, tax rulings by authorities, case law of courts and interesting commentaries. Doradztwo Podatkowe WTS&SAJA shall not be held legally liable for any acts or omissions resulting from reliance on such information.