A shake-up in tax law

A general anti-avoidance rule will most likely return to the Polish tax system in 2016.

At the end of 2015 the Ministry of Finance published a draft of changes to the Tax Ordinance which would introduce a general anti-avoidance rule (GAAR) into the Polish tax system, to prevent creation and exploitation of artificial legal structures to avoid taxation in Poland.

The draft defines tax avoidance as an action or set of actions taken primarily in order to achieve a tax advantage inconsistent under the circumstances with the subject and purpose of a tax act, if the taxpayer’s arrangement was artificial. Such “artificial” action or actions would not result in achievement of the intended tax advantage. The tax consequences would be determined on the basis of the state of affairs that would have existed if such “artificial” actions had not been taken or on the basis of the “appropriate” action—defined by the drafters as the action which the entity could have taken if it had acted reasonably, guided by lawful purposes other than achievement of a tax advantage inconsistent with the subject and purpose of the tax act.

When will GAAR be enacted and what period will it cover?

The proposed amending act has not yet been submitted to the Sejm. Currently the planned changes in the Tax Ordinance are at the stage of consultations. But it can be expected that the GAAR provisions will enter into force as early as the first quarter of 2016. Under the current wording of the proposal, the new regulations would enter into force 14 days after publication in the Journal of Laws.

The proposal does not specify which acts the new regulations will apply to. Thus it cannot be ruled out that the tax authorities will attempt to apply the GAAR to actions taken by taxpayers prior to entry into force of the new GAAR.

How has it been?

There was a GAAR in force in the Polish tax system in the years 2003–2005. However, the Constitutional Tribunal held that it was unconstitutional. The unconstitutionality of the previous GAAR was based in particular on interpretational doubts and uncertainties with respect to the wording of the provision. So for the past decade no GAAR has functioned in the Polish tax system.

What actions by taxpayers could be found to be artificial?

Under the proposal, an arrangement would be regarded as artificial if under the existing circumstances it would not have been applied by a rationally acting entity guided by lawful purposes other than obtaining a tax advantage inconsistent with the subject and purpose of a tax act. In evaluating whether the taxpayer’s arrangement is artificial, factors such as the following should be considered:

• Unjustified division of operations
• Involvement of intermediate entities without economic justification
• Elements leading to obtaining a state the same as or similar to the initial state
  Elements offsetting or cancelling each other out
• Economic risk exceeding the anticipated non-tax benefits to such a degree that it should be found that a rationally acting entity would not have chosen to act in that manner.

Under the proposal, an action is regarded as taken primarily to achieve a tax advantage if the other purposes of the action indicated by the taxpayer are found to be of little importance.

In the justification for the proposal, the Minister of Finance provided examples of schemes that could be aimed at impermissible avoidance of taxation, such as:

• Schemes using hybrid instruments resulting in double non-taxation of certain categories of income
• Schemes using tax-transparent entities, trusts, or foreign foundations operating solely for a single beneficiary
• Schemes using holding entities to reduce the taxation of dividends obtained by individuals in Poland.

Who will decide on application of GAAR and under what procedure?

• The GAAR could be applied only by the Minister of Finance through issuance of an administrative decision following a proceeding to determine whether the GAAR should be applied. In that proceeding, the Minister of Finance could seek an opinion from a body called the Tax Avoidance Council on the justification for applying the GAAR in the given case.
• It would also be possible to obtain an advance ruling against issuance of a decision applying the GAAR against the taxpayer. The application for issuance of an advance ruling would have to contain an exhaustive description of the actions covered by the application and would bear a fee of PLN 20,000.
• Application of the GAAR would also be excluded if the tax advantage from the use of artificial actions does not exceed PLN 100,000 during the taxpayer’s settlement period