CFC - Foreign Controlled Company

The recommendations made by the OECD (Organization for Economic Co-operation and Development) on taxation of foreign controlled companies were implemented in both the Polish Personal Income Tax Act and the Corporate Income Tax Act from January 1, 2015. In spite of this, the matter remains a source of doubt and confusion among our clients. The following systematization of issues related to this matter should be helpful to entrepreneurs whose activity has an international aspect in its structure.

A foreign controlled company is defined as:I. A company with its registered office in any of the following countries:

1) Principality of Andorra;

2) Anguilla - Overseas Territory of the United Kingdom of Great Britain and Northern Ireland;

3) Antigua and Barbuda;

4) Sint-Maarten, Curacao - countries forming part of the Kingdom of the Netherlands;

5) Kingdom of Bahrain;

6) British Virgin Islands - Overseas Territory of the United Kingdom of Great Britain and Far East Ireland;

7) Cook Islands - Self-Governing Associated Territory with New Zealand;

8) Dominica Community;

9) Grenada;

10) Sark - Dependent Territory of the British Crown;

11) Hong Kong - Special Administrative Region of the People's Republic of China;

12) the Republic of Liberia;

13) Macau - Special Administrative Region of the People's Republic of China;

14) Republic of Maldives;

15) Republic of Marshall Islands;

16) Republic of Mauritius;

17) Principality of Monaco;

18) Republic of Nauru;

19) Niue - Self-Governing Associated Territory with New Zealand;

20) Republic of Panama;

21) Independent State of Samoa;

22) Republic of Seychelles;

23) Saint Lucia;

24) Kingdom of Tonga;

25) US Virgin Islands - The United States Nation-restricted Territory;

26) Republic of Vanuatu.

  1. A company that has its registered office (management) in the territory of a state with which the European Union (EU) has not concluded an agreement on the exchange of tax information, and that Poland has not concluded a double tax treaty with.

III. A foreign company that jointly meets three conditions:

  1. The Polish taxpayer has continuously for a period of less than 30 days - either directly or indirectly had a stake of at least 25% in its capital, or 25% in its managing or control bodies, or 25% of shares related to the right to participate in it’s profits.
  2. At least 50% of revenue in the tax year comes from passive income. 
  3. At least one of these (passive) revenues is exempt, and taxed according to rates at least 25% lower than in Poland, or is excluded from taxation (except for dividends paid out between companies from EU countries assuming 10% participation in capital for a period of two years).

In the case of recognition of a foreign entity as a foreign controlled company, the tax rate is 19% of the tax base, which is the income defined as the surplus of revenues over the costs of obtaining; regardless of the type of income, and without the possibility of counting losses from previous years. This is less dividends and amounts received by the taxpayer, and amounts obtained from the paid disposal of shares in this company - in proportion to the time and number of shares held by the taxpayer.

In the case of companies described in points I and II, the principle of the proportion of time, and the number of shares does not apply, which means that in order to establish the amount of the liability, it is assumed that the taxpayer had held all the rights to participate in the company's profits (100%) throughout the tax year.

 

If however: 

- the company's revenues will not exceed EUR 250,000 in the tax year

or

- the company described in point III (EU company) carries out a real economic activity in the state of registration through its own local substance (resources) in the form of an office, qualified personnel, furnishings, etc. that is commensurate with the scope of the activity, and used to run it independently, and which is not detached from economic reasons, then

the tax shall not be collected.

 

Michał Pluta

Legal Consultant

KAIMAKLIOTIS & CO LLC 

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