NEWSLETTER August 2016 Table of content TOPICS OF THE MONTH 1 Cash pooling agreement should be treated as loan agreement the tax consequences 2 Another judgments regarding obligation to withholding tax 3 The date of signature decides, not the date when postman comes 5 RECENT TAX RULINGS 7 Loaner car should be treated as a test one 7 Transformation allows to deduct higher costs of depreciation 7 Warranty granted by the related company affects income tax 7 The tax point for lease arises on the date when the rent is due 8 Disclaimer 8 Topics of the month
Cash pooling agreement should be treated as loan agreement the tax consequences Over the last several months, it has been possible to notice that the tax authorities and courts withdrawn from the previously prevailing standpoint, according to which a cash pooling agreement was treated as not a loan agreement. According to previous standpoint, prevailing up to mid-2015, a cash pooling agreement was treated as a joint liquidity management agreement, which was not subject to the specific provisions in the Polish Corporate Income Tax Act dated 15 Feburary1992 (Administrative Court in Poznan dated 28 August 2014, I SA / Po 315-316 / 14, Administrative Court in Warsaw 22 October 2014, III SA / Wa 1076/14) and in the first half of 2015 (the Administrative Court in Warsaw dated 30 January2015, III SA / Wa 1144/14; Administrative Court in Wrocław on 22 July2015, I SA / Wr 1112/15). The tax payers winning streak ended with two Supreme Administrative Court judgments both dated 30 September 2015 (II FSK 3137/14 and II FSK 2033/14), in which Court ruled that the transfer of funds between a cash pooling framework participants fulfills a loan law definition and in result must be treated as one. However, before the stipulated above judgments, courts standpoint was that in order to recognize a cash pooling agreement as a loan agreement, both parties (a lender and a debtor) must be concretized and its value must be clearly defined. In order to define the cash pool agreement as the loan agreement the courts recourse to the provisions of CIT and to the Polish Civil Code. According to the provisions of Article 16 para 7b by mean loan agreement, stated in para 1 subsection 60 and 61 of the same article and Article 15c (thin capitalization regulations), one should define every agreement according to which a lender transfers a certain amount of money to a debtor, and by which debtor agrees to return to lender the same amount of money. Although the provisions of the Polish Civil Code do not regulate the cash pooling agreement and as a result such a contract should be treated as an innominate agreement. However, in line with the current jurisprudence a cash pooling agreement defining feature is that one entity transfers the money to another entity in order to cover that other entity s liabilities. In return, the lending entity receives the money refund equals to the amount borrowed together with interest which should be treated as a remuneration. This correspond with the defining feature of a loan agreement, as in accordance with Article 720 para 1 of the Civil Code: by a loan agreement, the lender commits to transfer to the borrower the ownership of a specific amount of money or quantity of tangibles, and the borrower commits to return the same amount of money or the same quantity of tangibles of the same quality. In summary, according to standpoint presented by the Polish Ministry of Finance as well as Courts by a loan agreement should be treated any contract, in which the lender transfers 2
the ownership a certain amount of money to a debtor, and the debtor commits to return the same amount of money and pay interest, even if the obligations of the both parties are not stipulated clearly in the contract. Hence the lack of a loan agreement made between the participants, does not unable tax authorities to recognize such a transaction as a as a loan agreement. It should be emphasized that the way of defining a cash pooling agreement is of great importance from the point of view of the CIT and the Tax on civil law actions Act (CLAT). Equation of cash pooling and loans agreements in the interpretations issued by the Polish Ministry of Finance and in judgments of the Supreme Administrative Court, including the recent judgment of the Supreme Administrative Court dated 07 July 2016 (II FSK 993/16) resulted in imposing on taxpayers not only an additional reporting duties (preparation of transfer pricing documentation in line of Article 9a para 1 of the Act CIT), but also an additional tax burden. One of them will be a restriction arising from the provisions on thin capitalization for interest earned on the cash pooling. Accordingly, interest paid on such agreement, above the set limit should be excluded from tax deductible costs (Article 16 para 1 subsection 60 and 61 CIT). As a result of the Supreme Administrative Court opinion that for the money transfers within the framework of cash pooling applicable are both rule on thin capitalization and transfer pricing, in the interest paid under the cash pooling should also be subject to withholding tax (Article 21 para 1 of CIT). Summarizing recently released the Supreme Administrative Court judgment dated 07 July 2016 (II FSK 993/16), concerning the consequences of concluding cash pooling agreement, remains in line with recent jurisprudence. This negative approach regarding cash pooling agreements puts taxpayers in a potential tax risk according to CIT. Taxpayers may potentially have to deal with the problem of properly indicating parties of the "loans agreement" in order to be in line with the obligations imposed by the Polish Ministry of Finance and Courts. Such process will be not only time consuming but it will also increase the operating costs of affiliated companies within the same group. Another judgments regarding obligation to withholding tax On 7 of July this year the Supreme Administrative Court (further as SAC) ruled in four cases regarding withholding tax (case number: II FSK 554/16, II FSK 227/16, II FSK 254/16, II FSK 49/16). In each of those judgments SAC ruled in tax payer favor, agreeing, that in each described actual conditions, the Polish tax payer was not obliged to collect withholding tax on payments made for abroad entities. Two days earlier SAC ruled, in almost identical actual conditions, in favor for the Polish Ministry of Finance representative (case number: II FSK 137/15). According to tax authorities opinion, which was presented in every single of 3
mentioned above cases, nonresident entity income is taxable, and as a result the Polish entity is obliged to collect withholding tax if a place of residence for entity acquiring the services is in Poland. Moreover one can get the impression that according to the tax authorities, purchaser s place of residence is defining place where revenue is acquired. The most prevalent opinion in the Polish tax law doctrine stipulates that place of residence of acquiring entity cannot by its own define a taxability of a nonresident s income in that country, in those particular cases, Poland. As a result taxable can only be a nonresidential income arising from provided services, that were performed on the territory of Poland, or which is beneficial to acquiring entity on territory where it s place of residence is being located. This particular doctrine opinion, was subsequently supported in definitive standpoint of administrative courts. Particularly influential was SAC judgment dated 5 November 2009 (case no.: II FSK 2194/08). Similarly as in cases mentioned above, the main subject of dispute was around legal definition of a term, used by the law giver, from income, acquired on the territory of Poland regarding nonresidents with limited tax obligation. According to SAC this term must be interpreted broadly, including income arising from services provided on the territory of Poland, income from selling of goods, interests, dividends, royalty fees, rent fees and others. According to the Polish tax law doctrine this is known as taxability determinant, which must be stated expressly in a tax act provisions and must have restrictive meaning of potential taxability. Determinant of beneficial effect for acquiring entity, so often evoked by the tax authorities, was not stated in tax act by the law giver, as a result SAC took standpoint that by the Polish regulations income arising from services performed by a nonresident entity may not be taxable according to withholding tax provisions, if beneficial effect for acquiring entity cannot be link with the territory of Poland. SAC stressed out priority of a grammatical interpretation, according to which taxable may only be income of entity with limited tax obligation in Poland if it can be determined that income of that entity was acquired on the territory of Poland. According to the provisions of the Corporate Income Tax Act, it is with no substantial substance that services were commissioned by the Polish entity, and that the payment for commissioned services were paid from assets of the Polish entity. SAC did not agreed with the tax authorities argumentation that in this particular case there can be indicated an economic link with the territory of Poland, basing only on place of residence of the Polish entity and that payment was conducted from the territory of Poland. This determinant was not stated expressly in the tax act. Wording this determinant from exceeding meaning of purpose interpretation as it is expressed by the tax authorities - is not only contradict to prevalent doctrine opinion, but also not in line with Administrative Court judgment dated 24 July 2004 (case no. I SA/Gd 1979/99 ) and in SAC judgment dated 20 March 2000 (case no. FPS 14/99 ). Not opposing the mentioned above doctrinal and SAC standpoint, beneficial to tax payers, the Polish entity will not be obligated to collect withholding tax form payments to nonresident entity, for the services performed for that particular entity if benefit effect of that services will be taking place abroad. As an example the Polish entity will not be obliged to withheld tax if acquire services from abroad law firm, for the sole purpose of recovering unpaid liabilities from abroad entities, and the effect of those services is limited to 4
particular abroad country. SAC definitive standpoint allowed to suppose that, ambiguous term used by the law giver, have been clarified in judicial and doctrinal way. The judgment dated 5 July 2016 (case no. II FSK 137/15) must be seen as unexpected. In very similar actual conditions, SAC took completely opposite direction and ruled in favor of the tax authority. In this case an entity was planning to take action to start conducting business on Columbian market. In order to do so the Polish entity acquired services form Columbian law firm, which beneficial effect was with Columbian territory only. The tax authority, as always, provided they definitive standpoint, same as with other cases, it can be taxable in Poland as the Polish entity commissioning is placed in Poland and payment was conducted form Poland as well. SAC, in line with grammatical interpretation of the tax act provisions, indicated that as the law giver did not expressively stated any taxability determinants, tax payers is not allowed to do so in extensive meaning of interpretation. As a result the one and only taxable determinant regarding nonresident income arising from services for the Polish entity, is that source of income, meaning place of residence, is located in Poland. Moreover to look for more taxability determinant, not expressively stated in tax act, is not acceptable. Furthermore SAC stated that taxability determinates addressor is the law giver and him only. The tax payer is not entitled to restrictively interpreted tax act provisions. SAC indicated that is aware that with this judgment, it is changing beneficial to tax payers definitive standpoint. It is very difficult to predict if that particular judgment will create completely, not beneficial to tax payers, new approach in SAC verdicts. As for now it is currently waiting for the President to sign new amendments to tax acts regarding cases of withholding tax. What a shame that this amendments was not exploited by the law giver to put in the Polish act law definition of the ambiguous term, and in result ending dispute of it correct wording. The date of signature decides, not the date when postman comes In accordance with the ruling of the administrative court in Warsaw, issued on 12 July, 2016 (III SA/Wa 1735/15), a resolution in respect of extension of a deadline for VAT refund comes into force on the day of its issuance not on the date of its delivery. On the matter concerned, The Head of Tax Office, on the basis of the Article 87 paragraph 2 of the Act on VAT, issued a resolution in respect of extension of a deadline for VAT refund being the subject of application submitted by the Company. The Company appealed against a resolution claiming that it has not been delivered properly. According to the appeal, although resolution has been issued on 29 January 2015 but it has been delivered on 3 February 2015 thus after the 60 day deadline for VAT refund. The Director of the Tax Chamber upholded the resolution of The Head of Tax Office admitting that the date of issuance is the one which determines the moment when resolution comes into force, not the date of its delivery. The Company argued that preparation and signing of a resolution is not equal to introducing it into legal turnover. For supporting this standpoint, the ruling of 5
the administrative court in Warsaw, issued on 28 January 2016 has been cited (III SA/Wa 1026/15) and the thesis that both moments could be considered as relevant for resolution to come into force but it seems that recognizing date of delivery as the most important seems to be more appropriate as far as standards of democratic principal of law are concerned. Despite of decision cited by the Company, the administrative court in Warsaw, in mentioned in headline decision from 12 July (III SA/Wa 1735/15) admitted that the date of signing of resolution by the Head of Tax Office is more important for its validity than the date when it has been delivered to the taxpayer. The justification of this standpoint was that the time period necessary for the verification of the legitimacy of VAT refund application should not be shortened. Moreover, administrative court stressed that this approach could also limit possibility of fraudulent practice connected with avoiding of being delivered with a resolution. This decision has not come into force yet, but still some similar judgements have already been issued, like decision of Supreme Administrative Court from 5 July 2016 (I FSK 1943/15, I FSK 1468/15, I FSK 2081/15, I FSK 1539/15, I FSK 1893/15, I FSK 2208/15, I FSK 2039/15). Despite of many judgements acknowledging supremacy of the date of signing of resolution by the Head of Tax Office, it is hard to agree with this standpoint. In accordance with the Article 212 of the Tax Ordinance Act, the Tax Office is bound by the decision from the moment of its delivery, except for decisions issued on the basis of the Article 67d. Mentioned provisions should be considered as imposing some general rule according to which, all decisions and resolutions being issued by the Head of the Tax Office come into force with the date of delivery. Although there is some exception from this rule but it is expressly indicated in applicable regulations. Taking the above into consideration, it is clear that all legal consequences connected with the issuance of decision/resolution may be caused only by document which has been properly introduced into the legal turnover. At the same time, signature is not enough in this respect. It can be only the proof that document has been prepared in given date, on the basis of given factual and legal background but delivery is the factor which determines the moment of introducing it into the legal turnover. It seems that argumentation indicating that the time period which Tax Authorities have for the verification of the propriety of settlement should not be shorten can t also be treated as deciding in this case. It s a problem which should be solved on the legislative level and maybe amendments to applicable legal framework are worth to be considered with respect for the interest of all parties and basic rules of tax proceedings, especially the rule of the trust in legal bodies and the rule of active participation of all parties in the proceedings. Finally, subjecting the extension of a deadline for VAT refund to the moment of actual preparation of the resolution can be also considered as controversial from the legal point of view since e.g. it is hard to verify the real date of the preparation of resolution in this case. 6
Recent tax rulings Loaner car should be treated as a test one There is a clear link between the taxable activity of a car dealer and making available loaner cars for the dealer s clients. As a result, the input VAT related to costs of acquisition and usage of the loaner cars is fully deductible according to the verdict of the Supreme Administrative Court dated 26 July 2016 (case no. I FSK 113/15). In the Court opinion, making available loaner cars for the dealer s client improves the conditions of sale. That specific element of the offer may be considered so closely connected with the taxable sale, that the input VAT may by fully deducted. Transformation allows to deduct higher costs of depreciation Having a company (limited company or joint-stock company) transformed into a partnership allows partners to deduct full amount of depreciation costs. This benefit applies to the part of the initial value of an asset which was not covered by the nominal capital but share premium (agio). This favorable standpoint was confirmed recently by the Supreme Administrative Court in the verdict dated 9 August 2016, file no. II FSK 1717/14. The Court stated that in such a case, the limitation stipulated in Article 16 sec. 1 point 63 d of the Corporate Income Tax Act cannot be applied. Warranty granted by the related company affects income tax According to the verdict of the administrative court in Rzeszów dated 7 June 2016 (case no. I Sa/ Rz 349/16), granting the free of charge warranty by the related company results in the obligation to report the additional income on free of charge services by the granted company. 7
The tax point for lease arises on the date when the rent is due Any prepayments or advance payments for rent are neutral for VAT purposes. In such a case there is no obligation to issue an invoice as well. For particularly stipulated services, for instance lease, the tax point arises on the date when the rent is due or date when the invoice was issued administrative court in Kraków, 23 June 2016, case no. I Sa/Kr 528/16 Disclaimer KR Group reserves that the presented newsletter cannot be considered for tax or legal advisory services. 8
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