CRIDO TAXAND FLASH JUNE

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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

1 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 under a civil law contract, the amounts deducted from remuneration (in this case - swimming pool passes) provided to contractors shall be recorded on a cash register; No TCLT (transfer tax) refund is due in case of revoked resolution of share capital increase already registered in court register; VAT consequences of granting interest-bearing loans by manufacturing company to related entities for the purpose of acquiring another related entity; Under tax ruling procedure tax authorities do not examine the difference between nominal value of shares and market value of the subject of in-kind contribution; A trademark (being at the moment of its purchase under registration procedure) may be depreciated for the tax purposes; Remuneration paid to SKA s GP for conducting SKA s business activity and representing SKA is subject to VAT Once obtained certificate of tax residence is valid as long as background of the case does not change; Thin capitalization restrictions do not apply to cash pooling agreements; The initial leasing charge incurred on account of lease agreement may be recognized as a tax cost at the moment when it is paid regardless of its different settlement for accounting purposes. 1

2 In case of a receipt of subsidy, the related costs of tax depreciation shall be corrected in the month of receipt of the subsidy Judgment of the Provincial Administrative Court in Gdańsk of 11 June 2014 (I SA/Gd 306/14) Argument: Correction of the depreciation write-offs from the fixed assets financed with subsidies shall be made in the month of the subsidy receipt. As a consequence, the standpoint presented by tax authorities according to which such a correction should be made for the past periods (i.e. for the period when such a depreciation write-offs were made) is not correct. The taxpayer should not be imposed with adverse tax consequences when his actions (here: making tax depreciation write-offs) - were in line with law. Implication for entrepreneurs: The judgment is positive for the taxpayers who received subsidies for the purchase of the fixed assets. In the court s view, taxpayers are not obliged to correct the tax depreciation write-offs for the past periods, but at the moment when the subsidy is received (similar standpoint was presented in the judgment of the Provincial Administrative Court in Gdańsk of 26 March 2014, I Sa/Gd 41/14). As a consequence, no tax arrears occur and no penalty interest should be due in this respect. In case of employment under a civil law contract, the amounts deducted from remuneration provided to contractors shall be recorded on a cash register Judgment of the Provincial Administrative Court in Łódź of 11 June 2014 (I SA/Łd 339/14) Argument: Mandatory who resell swimming pool entrance cards to his mandatories and, at the same time, reduce their remuneration with those cards value (deduction), is obliged to record these transactions using the cash register. The deduction cannot be treated as an equivalent to the payment made via post, bank or SKOK, which are exempted from such an obligation Implication for entrepreneurs: Exemptions from the recording on a cash register of the taxable actions were very strictly interpreted by the court. Thus, the taxpayers are obliged to record on a cash register any deductions from remuneration paid to their mandatories who are individual persons and do not conduct any business activity. No TCLT (transfer tax) refund is due in case of revoked resolution of share capital increase already registered in court register Judgment of the Supreme Administrative Court of 11 June 2014 (II FSK 1663/12) Argument: According to the Supreme Administrative Court, there are no grounds for TCLT refund, if a general meeting of shareholders revokes a resolution of share capital increase which had already been registered in National Court Register (NCR). The court agreed with the tax authorities that Article 11 section 1 point 4 of Tax on Civil Law Transactions Act does not cover situations when the company s share capital is registered in NCR and, afterwards, withdrawn after a few months due to the revocation of a respective general shareholders meeting resolution. Implication for entrepreneurs: Revocation of a resolution on share capital increase and applying for its withdrawal from the court register does not entitle the taxpayer to apply for TCLT refund. An entry which has been withdrawn from the NCR is not treated as not existing from the very beginning because tax obligation arises at the moment 2 CRIDO TAXAND FLASH JUNE 2014

3 when the resolution concerning increasing of the share capital is undertaken and the change is registered in NCR until the revocation of the respective resolution. VAT consequences of granting interest-bearing loans by manufacturing company to related entities for the purpose of acquiring another related entity Judgment of the Supreme Administrative Court of 11 June 2014 (II FSK 1292/13) Argument: Three interest-bearing loans granted to the related entities shall not constitute an extension of economic activity of a manufacturing company. As a consequence, the court ruled that the loans will not be included in the proportion determined for partial deductions of input VAT. According to the Supreme Administrative Court, the rationale is double. Firstly, the loan agreements involved assets in case of which the right to deduct input VAT was limited (loan funds have been gathered mostly from the shares issuance). Secondly, the transaction i.e. granting a loan to a related entity for the purpose of purchasing other related entity - was identified by court as an occasional and not constituting an extension of company s main business activity. Implication for entrepreneurs: The above judgement confirms that in the above-described case taxpayers do not permanently extent the scope of their business activity subject to VAT, thus such loans do not have to be included in the proportion stipulated under Article 90 of the Polish VAT Act. Under tax ruling procedure tax authorities do not examine the difference between nominal value of shares and market value of the subject of in-kind contribution Judgment of the Provincial Administrative Court in Poznań of 11 June 2014 (I SA/Po 1119/13) Argument: Under the procedure aimed at obtaining of the tax ruling, the tax authorities are not entitled to verify whether the difference between a nominal value of shares and the fair market value of contribution in-kind is significant. Such a verification, which may lead to determining a taxable revenue in other amount than the nominal value of shares can be conducted within a tax audit procedure. For the purpose of determining the taxable revenue in the value different than the nominal value of shares, it is not only a significance of the above-mentioned difference which should be considered, but also the reasons standing behind such a difference and the correctness of determining the value of contribution in-kind itself. Implication for entrepreneurs: Tax rulings cannot protect the taxpayer from the tax risk related to determining additional taxable revenue for the taxpayer in case of contribution in-kind. The difference between the nominal value of shares and the market value of contribution in-kind is an element of a background of a tax rulings which is not verified by the tax authorities under the tax ruling procedure. The disputed difference may be examined by the tax authorities only under the tax audit procedure. A trademark (being at the moment of its purchase under registration procedure) may be depreciated for the tax purposes Judgment of the Provincial Administrative Court in Poznań of 4 June 2014 (I SA/Po 1276/13) Argument: A limited partnership which purchased a trademark being under registration procedure at the moment of purchase is entitled to enter it into assets register in the month of its registration at the Patent Office. In such a case, 3 CRIDO TAXAND FLASH JUNE 2014

4 a purchase price of the trademark is treated as its initial value being the basis for tax deductible depreciation writeoffs. Implication for entrepreneurs: The court s standpoint is very positive for the taxpayers. It confirms that in case of purchase of a trademark being at the moment of its purchase under the registration process (i.e. it is officially registered when owned by the buyer) cannot be treated as developing the trademark in-house by the buyer. Consequently, the taxpayer may recognize as tax deductible costs the depreciation write-offs made from the trademark after the registration procedure is completed. Remuneration paid to SKA s GP for conducting SKA s business activity and representing SKA is subject to VAT Judgment of the Supreme Administrative Court of 3 June 2014 (I FSK 876/13) Argument: General partners who conduct SKA s business activity and represent SKA in exchange for remuneration act not only on behalf of SKA but also on their own business risk. It means that the relationship between the general partners and SKA may not be considered only as the founder-company relations and thus it shall be treated as rendering services which subject to VAT. Implication for entrepreneurs: The court s verdict has been based on the ECJ s judgment. It has ruled that the actions taken by a general partner who receives a remuneration for conducting SKA s business activity and for representing SKA, should be subject to VAT. Once obtained certificate of tax residence is valid as long as background of the case does not change Judgment of the Supreme Administrative Court of 27 May 2014 (II FSK 1563/12) Argument: Under the Polish tax law, the taxpayer is not required to apply for a new certificate of tax residence after each single transaction. A certificate of tax residence is valid as long as the data provided for in such a document remain unchanged. Applying for a new certificate for each transaction would be an excessive costly administrative burden for taxpayers. Implication for entrepreneurs: The Supreme Administrative Court has challenged the standpoint presented by the tax authorities that a certificate of tax residence issued as valid for indefinite time can be used only for one transaction or stays valid only for the day of its issuance. Thin capitalization restrictions do not apply to cash pooling agreements Judgments of the Provincial Administrative Court in Bydgoszcz of 20 May 2014 (I SA/Bd 418/14), the Provincial Administrative Court in Wrocław of 16 May 2014 (I SA/Wr 352/14, I SA/Wr 353/14) and Provincial Administrative Court in Warsaw of 13 May 2014 (III SA/Wa 32/14) Argument: Thin capitalization restrictions do not apply to cash pooling agreements because ratio legis for introducing thin capitalization restrictions was to discourage shareholders from financing their companies with debt. The nature of cash pooling agreements is to optimize cash management of a group of companies by offsetting cash deficits of some members using surpluses of the others. As a consequence, cash pooling system cannot be identified with loan agreements because cash pooling members do not agree in advance to transfer a specified sum of money to a specified member. 4 CRIDO TAXAND FLASH JUNE 2014

Implication for entrepreneurs: The above commented judgments may be a sign that administrative courts have developed a consistent approach in the area of cash pooling agreements.

The initial leasing charge incurred on account of lease agreement may be recognized as a tax cost at the moment when it is paid regardless of its different settlement for accounting purposes Judgment

it is paid even if it is settled by periodical write-offs for the accounting purposes.

5 Implication for entrepreneurs: The above commented judgments may be a sign that administrative courts have developed a consistent approach in the area of cash pooling agreements. Members of such cash pooling schemes are allowed to claim the interest paid to pool leader as tax deductible cost without taking into consideration the thin capitalization restrictions. The initial leasing charge incurred on account of lease agreement may be recognized as a tax cost at the moment when it is paid regardless of its different settlement for accounting purposes Judgment of the Provincial Administrative Court in Bydgoszcz of 13 May 2014 (I SA/Bd 227/14) Argument: The initial charge in the lease agreement may be recognized as a tax deductible cost at the moment when it is paid even if it is settled by periodical write-offs for the accounting purposes. Such a charge is independent, non-refundable and does not depend on the lease instalments which are paid during the time of a leasing agreement. Implication for entrepreneurs: PAC s standpoint confirms that accounting provisions are not decisive for tax settlement of initial leasing charge. The initial leasing charge, as an indirect tax cost, should be recognized on a oneoff basis and this rule cannot be limited by any non-tax regulations. 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 5 CRIDO TAXAND FLASH JUNE 2014

CRIDO TAXAND FLASH OCTOBER 2013

ISSUES OF THE MONTH CRIDO TAXAND FLASH OCTOBER 2013 Amendments to the VAT Act Limited partnership will not be CIT taxpayer Exit fee paid to related entity constitutes tax deductible cost Contractual penalty