CRIDO TAXAND FLASH APRIL

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ISSUES OF THE MONTH CRIDO TAXAND FLASH APRIL 2014 No obligation to adjust tax deductible costs if liability is settled by factor Regardless of the reason underlying the issuance of a correction

1 ISSUES OF THE MONTH CRIDO TAXAND FLASH APRIL 2014 No obligation to adjust tax deductible costs if liability is settled by factor Regardless of the reason underlying the issuance of a correction invoice, tax revenue should be adjusted in the initial period in which it was recognized Transfer of ownership to trademark as remuneration for compulsory or automatic redemption of shares is out of scope of VAT Inconsistent approach of Courts to application of thin cap regulations towards cash-pooling agreements Tax authority cannot verify the value of shares acquired upon in-kind contribution Indirect link between marketing activities and deriving revenue is sufficient to recognize corresponding expenses as tax deductible costs Partly depreciated leasehold improvements may constitute tax deductible costs No obligation to adjust tax deductible costs in case of payment in installments Income of SKA s shareholder, including income from sale of protection right to trademark by SKA, is business activity income Instructions on business restructuring of related entities announced by the Ministry of Finance 1

2 No obligation to adjust tax deductible costs if liability is settled by factor Judgment of PAC in Gliwice of 14 April 2014 (I Sa/Gl 1372/13) Argument: Taxpayer intended to conclude factoring agreement. Factor would finance supplies towards taxpayer with payment deadlines exceeding 60 days. Settlements between taxpayer and factor would take place at a later stage. The Court agreed with the taxpayer that this way of settling liabilities does not result in mandatory adjustment of tax deductible costs (article 15b of the CIT Act). The PAC stressed out that tax regulations do not indicate that the debtor is required to settle the invoice himself the purpose of its implementation was to counteract payment gridlocks. Implication for entrepreneurs: Taxpayers can avoid mandatory costs adjustments resulting from article 15b of CIT Act by concluding factoring agreements. Regardless of the reason underlying the issuance of a correction invoice, tax revenue should be adjusted in the initial period in which it was recognized Judgments of SAC of 11 April 2014 (II FSK 1127/12) and of 25 April 2014 (II FSK 4/13) Argument: The judgment concerns taxable moment in CIT in case of issuing correction invoice for sale of electricity. The correction did not result from the seller s fault, but occurred due to receipt of actual energy consumption data. The court noted that the CIT Act (in contrast to the VAT Act) does not include specific provision regarding taxable moment in case of issuance of correction invoices. Thus, the adjustment of revenue should be made in the period in which the initial invoice was recognized for tax purposes. In similar case SAC pointed out that correction invoice resulting from the return of goods should be referred to the period in which initial revenue was derived. Implication for entrepreneurs: Correction of invoices is a common market practice. However, it is not clear if taxpayers can settle correction invoices for CIT purposes similarly as for VAT purposes, i.e. in the period in which the adjustment was made. Judgments are not favorable for taxpayers on their basis taxpayer are forced to make burdensome CIT correction of past settlement periods. Such negative approach is recently presented also by the tax authorities. 2 CRIDO TAXAND FLASH APRIL 2014

3 Transfer of ownership to trademark as remuneration for compulsory or automatic redemption of shares is out of scope of VAT Judgment of PAC in Warsaw of 10 April 2014 (III SA/Wa 2730/13) Argument: The company is not acting as VAT taxpayer when paying out remuneration for redemption of shares towards its shareholder. In this respect the company is obliged to adjust input VAT. This is because of the fact that due to transfer of trademark towards shareholder it ceased to be used for the purposes of the company s VATable activity. Implications for entrepreneurs: Regardless of the fact that according to the standpoint presented by PAC in Warsaw the transfer of trademarks as remuneration for redemption of shares remains out of scope of VAT, the taxpayers should remember about input VAT adjustment. However, it should be noted that the majority of the administrative courts classify such activity as being subject to VAT. Inconsistent approach of Courts to application of thin cap regulations towards cash-pooling agreements Judgments of PAC in Warsaw of 9 April 2014 (III SA/Wa 2589/13) and PAC in Poznań of 2 April 2014 (I SA/Po 1014/13) Argument: PAC in Warsaw did not agree with the tax authority that thin cap provisions apply to interest paid by company to pool leader within cash-pooling agreement. The Court emphasized that the nature of cash-pooling differs from the loan the borrower (under loan agreement) is always obliged to return the particular amount of money, whereby cash-pooling participant has no obligation to return the received amounts. PAC in Poznań presented different standpoint. It stated that being debtor towards pool leader should be treated as being financed by other company. Thus, thin capitalization provisions are applicable. Implications for entrepreneurs: Different standpoints of the Courts towards tax qualification of cash-pooling means that taxpayers should carefully analyze provisions of cash-pooling agreements in which they participate. Tax authorities continue to present the standpoint that cashflows within cash-pooling are subject to thin cap regulations, which means that taxpayers may not be authorized to recognize the whole amount of interest paid within cashpooling as tax deductible costs. However, it should be pointed out that the recently dominant approach of the Courts is beneficial for taxpayers - according to the majority of Courts rulings, cash-pooling agreements are not subject to thin cap regulations. 3 CRIDO TAXAND FLASH APRIL 2014

4 Tax authority cannot verify the value of shares acquired upon in-kind contribution Judgment of PAC in Wrocław of 9 April 2014 (I SA/Wr 2381/13) Argument: The dispute concerned acquisition of shares in exchange for in-kind contribution (real estate), in a situation whereby the significant part of the contribution was allocated to share premium. The court claimed that in such circumstances the tax authorities are entitled to verify market value of the subject of the contribution inkind. However, they have no right to question the value of shares acquired by the contributor. Implications for entrepreneurs: The Court s standpoint can be interpreted as another argument for claiming that only nominal value of shares acquired should be considered as contributor s tax revenue upon in-kind contribution with agio. Indirect link between marketing activities and deriving revenue is sufficient to recognize corresponding expenses as tax deductible costs Judgment of PAC in Warsaw of 3 April 2014 (III SA / Wa 2791/13) Argument: Company incurs expenses on promotional activities carried out in distributor s place. The company incurred the cost of difference between the initial price and the discounted price for coffee machines offered by the distributor. The main aim of this activity was to increase sale of capsules for coffee machines produced and marketed solely by the Company. PAC in Warsaw disagreed with the tax authority, who claimed that if an entity directly benefiting from marketing campaign is the distributor, the company would not be entitled to recognize these expenses as tax deductible costs. Implications for entrepreneurs: PAC judgment deserves approval the Court carefully analyzed the economic impact of marketing activities conducted by the taxpayer. According to the judgment, even an indirect relation between marketing activities and taxpayer s revenue is sufficient to recognize the costs for tax purposes. Partly depreciated leasehold improvements may constitute tax deductible costs Judgment of SAC of 28 March 2014 (II FSK 1022/12) Argument: Closing the unprofitable bank branch and termination of lease agreement may be economically justified. Thus, expenditures for leasehold improvements which were not fully depreciated in this respect may be recognized for tax purposes as loss from liquidation of fixed asset. The court stressed out that such losses could be questioned by the tax authority only if they relate to change of the type of business activity conducted. Implications for entrepreneurs: According to SAC rational behavior of the entrepreneur aiming at minimizing losses (such as early termination of the lease agreement) allows to recognize not fully depreciated leasehold improvements as tax deductible costs. This means that entrepreneurs should not suffer the negative tax consequences of their business decisions, if the actions undertaken are economically justified. 4 CRIDO TAXAND FLASH APRIL 2014

5 No obligation to adjust tax deductible costs in case of payment in installments Judgment of PAC in Warsaw of 24 March 2014 (III SA/Wa 2328/13) Argument: The court ruled that payment of price in installments cannot be treated as payment gridlock. A consent of both parties for installment sale prevents from classifying the unpaid part of the price as outstanding arrears. Debtor is obliged to make adjustments only if the installments themselves are not paid in time. Implications for entrepreneurs: PAC s judgment is beneficial for taxpayers. Court confirmed that provisions on mandatory tax costs correction do not apply to debtors who pay installments in a timely manner. In our opinion economic sense of such purchases is similar to lease agreements. Therefore both should be treated analogously for tax purposes. Income of SKA s shareholder including income from sale of protection right to trademark by SKA, is business activity income Judgment of PAC in Cracow of 19 March 2014 (I SA/Kr 71/14) Argument: Shareholder of limited joint-stock partnership (SKA) addressed a question concerning disposal of trademark which was not classified as intangible asset. According to the tax authority, shareholder derives income from sale of property right upon disposal of trademark. The court did not agree it stated that such income should be classified as business activity income. The PAC emphasized that on the basis of article 5b par. 2 of the PIT Act the whole income of SKA s shareholder should be classified as income from that source. Implications for entrepreneurs: It is worth to point out that the case refers to the period before change of SKA s tax regime. Judgment has implication for partners of all partnerships. On its basis revenues derived through partnerships should be always qualified as business activity income. Instructions on business restructuring of related entities announced by the Ministry of Finance The Ministry of Finance (MF) announced the expected instructions on business restructurings performed between related entities. MF s instructions clarify provisions of TP Decree amended in July The published instructions are in line with OECD Transfer Pricing Guidelines. According to the MF s instructions, restructuring may involve transfer of something of value or involve the termination (substantial renegotiation) of the existing arrangements. The above actions are usually followed by profit reallocation between related entities. The document presents detailed instructions for the tax authorities with respect to verifying the application of arm s length principle in case of business restructurings. Such verification should involve in particular: 1. review of the functions performed, assets engaged and risks borne by the parties involved before and after the restructuring; 2. analysis of the business rationale of the restructuring; 3. analysis of the expected benefits from the restructuring; 4. analysis of other realistically available options to the parties. 5 CRIDO TAXAND FLASH APRIL 2014

We would also like to remind that the tax authorities are entitled to conduct a tax audit with regards to both planned as well as already conducted restructurings.

processes. Due to the inexact definition of the term restructuring,

If such actions took place, tax authorities may classify them as restructuring and, consequently conduct tax audit with respect to transfer pricing.

6 We would also like to remind that the tax authorities are entitled to conduct a tax audit with regards to both planned as well as already conducted restructurings. The publication of the MF s instructions on business restructuring may mean that the tax authorities are going to focus on verification of the market conditions of the group s business restructuring processes. Due to the inexact definition of the term restructuring, the members of capital groups should carefully verify if they transferred something of value (e.g. an organised part of the enterprise, trademarks, real estate) or terminated/substantially renegotiated IC agreements (change of service provider or risk reallocation). If such actions took place, tax authorities may classify them as restructuring and, consequently conduct tax audit with respect to transfer pricing. In such circumstances we recommend preparing a document (i) presenting an analysis of the restructuring, (ii) explaining the business rationale and the anticipated benefits from the restructuring as well as (iii) proving the arm s length character of the settlements made between the parties within the restructuring. SHOULD YOU HAVE ANY ADDITIONAL QUESTIONS CONCERNING THE ABOVE ISSUES PLEASE CONTACT: Andrzej Puncewicz Partner Andrzej.puncewicz@taxand.pl Paweł Toński Partner Pawel.tonski@taxand.pl Crido Taxand Ul.Grzybowska 5A Warszawa crido@taxand.pl Crido Taxand Sp. z o.o. ul. Grzybowska 5a, Warszawa, crido@taxand.pl 6 CRIDO TAXAND FLASH APRIL 2014

CRIDO TAXAND FLASH JUNE

CRIDO TAXAND FLASH JUNE 2014 ISSUES OF THE MONTH In case of a receipt of subsidy, the related costs of tax depreciation shall be corrected in the month of receipt of the subsidy; In case of employment