Legal Highlights for Real Estate – June 2023

The look-through approach should be derived from provisions on the beneficial owner and taking into account double taxation avoidance agreements.

In the latest tax ruling dated May 10, 2023 (ref. 0111-KDIB1-1.4010.835.2022.1.AND 10-05-2023), the Director of the National Tax Information questioned the applicant’s position regarding the tax implications of dividend payments in the Corporate Income Tax (CIT) using the “look-through approach.” It was determined that the applicant is not properly entitled to apply for the WHT exemption under Article 22(4) of the CIT Act.

The Director of the National Tax Information disagreed with the applicant, arguing that the company identified by the applicant as the beneficial owner of the dividends, does not directly hold shares in the dividend-paying company. Therefore, the requirement of direct shareholding specified in Article 22(4), point 3) of Polish CIT Act is not met.

As a result, according to the interpretation of the Director of the National Tax Information, the withholding tax exemptions for dividend payments under Article 22(4) of the CIT Act cannot be applied when using the “look-through approach.”

However, it is worth noting that the “look-through approach” enables preferential taxation of international payments in accordance with the double tax treaties between Poland and the country where the beneficial owner of the payment is located. Even if the payment is made through an intermediary who is not the beneficial owner and is located in another country, preferential WHT regime is possible. This concept is based on the understanding of the beneficial owner, rather than directly on legal provisions.

The definition of a beneficial owner can be found both in the OECD Model Convention, although it lacks a precise definition, and in numerous double tax treaties where Poland is a party.

Considering this negative tax ruling, taxpayers who wish to apply the “look-through approach” must consider the provisions from which this concept is derived and the specific provisions of double tax treaties that will apply in the particular case.

Changes regarding the 6% Tax on Civil Law Transactions (TCLT) in the Polish Senate

Legislative changes affecting the taxation of investors in the real estate sector constitute a significant aspect of the planned reform of the Polish housing system. The anticipated regulations encompass the introduction of a Tax on Civil Law Transactions (TCLT) for buyers of the sixth and subsequent residential properties or shares in such properties. According to the new provisions, the TCLT rate will increase to 6% rate for transactions involving properties situated on the same plot, regardless of any Value Added Tax (VAT) taxation. It is important to emphasize that these changes will exclusively apply to separate residential units.

Within the proposed legislation, a tax relief in the form of a 2% exemption from PCC is also planned for the first acquisition of a secondary market dwelling. These benefits will pertain to the sale of the ownership right to a separate residential unit, a single-family dwelling, a cooperative ownership right to a residential unit, or a single-family house. The condition for availing this relief is that the acquirer is an individual or a group of individuals who previously did not possess any of these rights or shares, except when such shares do not exceed or did not exceed 50% and were acquired through inheritance.

Another significant aspect of the proposed reform is the abolishment of perpetual usufruct rights, enabling the acquisition of full ownership of land currently subject to this type of use by enterprises, individuals, and housing cooperatives. This change introduces substantial facilitations and opens new possibilities for investors.

All of the aforementioned changes, including the “Secure Credit 2%” program, constitute an integral part of the long-anticipated reform of the Polish housing system, as announced by the government. Currently, the presented regulations are undergoing the legislative process in the Senate, where they are subject to discussions and debates aimed at ensuring their optimal implementation and effectiveness.

The Ministry of Finance announces new reporting obligations for large taxpayers

The Ministry of Finance is preparing to introduce new reporting obligations for the largest taxpayers, which will come into effect from 2025. According to the plans, companies falling within this category will be required to develop detailed tax strategies, create reports on their implementation, and subject these documents to an audit.

The purpose of these changes is to enable tax authorities to assess the level of transparency in the a in companies’ operations and link the granting of tax preferences to this factor. The Ministry of Finance presented the planned regulations as part of its June 2023 consultation. It is worth noting that this is currently only a draft, and no decisions have yet been made definitively. The details of the concept were presented during the first consultation in this regard, while the next meeting is scheduled for September this year.

According to the plans of the Ministry of Finance, taxpayers will be required to develop tax strategies in accordance with the existing regulations and prepare reports on their implementation. These documents will be subject to regular verification by independent auditors, with the regulations specifying the criteria for the independence of these auditors in detail. Subsequently, tax authorities will assess the tax transparency of companies based on these documents and assign them an appropriate degree of transparency. There is a possibility of publicly disclosing these results.

The granting of tax preferences will be dependent on the assessment of the level of transparency. The planned changes in this regard are expected to come into effect from January 1, 2025.

The granting of tax preferences will be dependent on the assessment of the level of transparency. The planned changes in this regard are expected to come into effect from January 1, 2025.

The Ministry of Finance has released a draft of explanations regarding the tax on shifted income just a few days before the payment deadline.

The Tax Clarifications on the Tax on Shifted Income (the “Clarifications”) are intended to apply to the current state of the law as of January 1, 2023, but the draft also includes an appendix referring to an earlier state of the law. It is worth recalling that the 19 percent tax on shifted income was introduced in early 2022 as part of the Polish Deal. Subsequently, as of January 1, 2023, the provisions regarding this tax were clarified.

For the first time, taxpayers are required to account for this tax for 2022, in a CIT-8 return, and the filing deadline has been exceptionally extended to June 30 of this year. The CIT/PD information is required to be attached to the return, and the relevant tribute must be paid by the same date, according to the regulations.

In an appendix to the draft of Clarifications, the Finance Ministry points out important differences between the current state of the law in 2022 and the one in effect on January 1, 2023. The draft of Clarifications also addresses the issue of depreciation deductions, which affect the tax base for tax on shifted income.

The Ministry of Finance has taken the initiative to hold public consultations on changes to the Tax Ordinance.

The purpose of these changes is to improve transparency and efficiency in the tax area and facilitate contact between taxpayers and tax authorities. The consultations will last until August 31, 2023, and any interested person will have the opportunity to participate and express their opinions.

In the latest draft of the amendment to the Tax Ordinance, the Ministry of Finance envisages a number of significant changes regarding the interpretation of the law, tax audits as well as tax procedures. We outline below the most significant changes.

• Fees for issuing tax rulings will be increased, potentially up to 2800 PLN per application, subject to specific criteria. Exceptions will be made for non-business individuals, who will pay lower fees.
• The validity period of tax rulings will be limited to five years. Previously, tax rulings were valid indefinitely, but this change aims to prevent outdated rulings.
• More checking activities and customs and tax audits, elimination of tax audits. t.Extension of the blocking of bank accounts from 72 to 96 hours.Greater liability of board members of limited liability companies for tax liabilities.
• Issuance of partial decisions in transfer pricing cases will speed up the process of resolving internal capital group matters.

These planned changes are expected to come into effect from July 1, 2024, and feedback on the proposed draft can be submitted until August 31, 2023.