law, tax and banking chapter 4 corporate taxation · business guide poland law, tax and banking...

Business Guide Poland � Law, tax and banking Chapter 4

Chapter 4 Corporate taxation

4.1 Taxable entities

Foreign entities from EU and EFTA (European Free Trade Association) countries enjoy all legal forms of business operations on the same princi-ples as Polish entities. Foreign entities other than the above are allowed to conduct business only as

• A limited partnership; • A limited joint-stock partnership; • A limited liability company (Sp. z o.o.) in which shares (stocks) are is sued in exchange for contributed capital; • A joint stock company (S.A.), which differs from a limited liability company (apart from the required minimum of equity capital and some other features) as there is a possibility of issuing bearer shares; all companies listed on the Warsaw Stock Exchange must be in joint stock form.

It is also possible for foreign entities bound by reciprocal agreements with Poland to establish a representative or a branch office. The limitations within certain areas of activity do not apply to EU and EFTA entities.

4.1.1. Company

Limited liability and joint stock companies. The Commercial Companies Code (�the CCC�) regulates all issues related to the establishment, activity and dissolution of these companies. The exist-ing legal framework allows companies ample flexibility in drawing up their company deeds (limited liability companies) or statutes (joint stock compa-nies). Certain regulations of the CCC are not obligatory and can be modified in the incorporation documents. The company deed or statutes, as well as all subsequent changes, must be prepared in the form of a notarial deed, otherwise they are null and void. A company is regarded as resident in Poland when its seat or management is located in Poland.

4.1.2 Place of management

In general, the provisions of the Corporate Income Tax Act state that tax-payers who have their head office or management in Poland are taxable on their worldwide income regardless of where such income may be gener-

Danske Bank / KPMG / Mazanti-Andersen, Korsø Jensen & Partnere February 2006

46


ated. The Act does not, however, supply a definition of �place of manage-ment�.

4.1.3. Permanent establishment

The question of whether permanent establishment applies depends on the provisions of a double taxation treaty. However, in general, in accordance with the majority of the double taxation treaties, �permanent establish-ment� means a fixed place of business in which the business of the enter-prise is conducted, either wholly or in part. This includes • A place of management; • A branch; • An office; • A factory; • A workshop; • A mine, oil well, quarry or other place of extraction of natural re sources; • A building site or construction or assembly project of more than 12 months� duration. Permanent establishments do not exist in any one of the following situa-tions: • The use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to an enterprise; • The maintenance of stocks of goods or merchandise belon ging to an enterprise solely for the purpose of storage, display or delivery; • The maintenance of stocks of goods or merchandise belonging to enterprise solely for the purpose of processing by another enterprise• The maintenance of a fixed place of business solely for the purpose of

an ;

of a fixed place of business solely for the purpose of

4.1.4. Branch

of

e scope of permitted activities for branches is wider than the scope of -

e

purchasing goods or merchandise, or for collecting information for an enterprise; • The maintenance advertising, for the supply of information, for scientific research or for similar activities of a preparatory or auxiliary character for an enter prise.

Foreign individuals and legal persons can establish representation in Po-land. All forms of representation, including fiscal and accounting regula-tions, are governed by Polish law. Foreign parties can establish two kindsrepresentation: branches and representative offices. Thactivities for representative offices. Branches may carry out economic activity to the full extent of the foreign enterprise�s activity (�full-trading branches�), whereas representative offices can operate only within thscope of advertising and promotion.


47


In principle, no prior permission is required to establish a branch, although

-

Appoint a person in Poland authorised to represent it; erson, certi-

�s founding act, deed or statutes with

ercial register with authenti-sis

ranches are obliged to

branch can employ both Polish nationals and foreigners. For taxation of

4.1.5. Representative office

blished when it is registered in the Record of

ments, among others, should be appended to the applica-

ention to set up a

epresentative offices are obliged to

y, in the language of the State of ori-gin, adding a Polish translation of the local legal status and the words

it can only be established if reciprocal treatment is permitted in the foreign country where the company is incorporated. Registration is made in the National Registry Court. Information is entered into the register on the basis of an application specifying the name, registered office, legal status andscope of activity of the branch. Moreover, a foreign entity should • • Append a specimen of signature of such an authorised p fied by a notary public; • Append a copy of foreign entity authenticated translation of it in Polish (in case the foreign entity operates on a basis of such certificate); • Append a copy of entry into the comm cated translation of it in Polish (in case it exists or operates on a ba of registration). B

Use the name of the foreign entity, in the language of the State of ori-• gin, adding a Polish translation of the local legal status and the words �branch in Poland� in Polish; • Keep separate accounting books in Polish, in accordance with Polish accounting laws; • Report to the Minister of Economy all changes material to the factual

and legal position o f the foreign entity in case of liquidation of foreign entity or loss of right to conduct the activity. Abranches, see 4.2.9.

A representative office is estaRepresentative Offices after an application has been made to the Ministry for the Economy.

he following docuTtion filed with the Minister of the Economy:

Founding Act of the foreign enterprise; • • A copy of entry into the local commercial register;

A statement by the foreign entity concer• ning its int representative office on the territory of Poland. R • Use the name of the foreign entit �representative office in Poland� in Polish;


48


• Keep separate accounting books in Polish, in accordance with Polish accounting laws;

f the foreign entity which may have an effect on the

representative office can employ both Polish nationals and foreigners. enerally, as a representative office may not conduct business activity in

-

4.1.6. Partnerships

of income received from the profits of the partner-

4.1.7. Limited partnership

with at least one partner assuming t one partner whose liability is limited to a

4.1.8. Holding companies

com-come tax advantages are nevertheless pro-

4.2. Taxation in Poland

taxable income, with the exception of stry and agricultural activities. This exemption

ing companies with for-gn participation) resident in Poland are automatically liable for corporate

have their place of anagement abroad, only pay corporate income tax on earnings derived

• Report to the Minister of Economy all changes material to the factual and legal position o Polish operation. AGPoland (only advertising and promotion purposes) it is, in principle, not taxable. Subsequently, non-compliance with this prohibition could give rise, from a tax perspective, to a permanent establishment. In this event the permanent establishment would be subject to domestic taxation on busi-ness profits as provided for by the double tax treaty (see our remarks onestimated profits under section 4.2.9. below).

Partnerships are treated as transparent entities. The individual partners are taxed on the basisship in accordance with the partnership agreement.

A limited partnership is a partnership unlimited liability and at leasspecified amount. It is not a taxable entity, but it is transparent for tax pur-poses.

Polish regulations do not include specific tax rules relating to holdingpanies. Specific corporate invided for Fiscal Groups (See our remarks in section 4.2.10).

Corporate income tax is levied on all income derived from foredoes not apply to greenhouses, poultry farms, etc. All limited liability and joint stock companies (includeiincome tax payments on their taxable income, irrespective of whether suchincome results from domestic or foreign operations. All foreign companies, that is, those resident or whichmfrom sources in Poland, subject to the provisions of an applicable double taxation treaty.


49


In the absence of a specific choice, the financial (fiscal) year is the calendayear. However, c

r ompanies are free to choose any month for the com-

encement of the financial year, provided that it runs for a period of twelve

ion number). Taxpay-

s conducting business activities are generally required to maintain ac-

The corporate income tax rate is 19% in 2006 and applies irrespective of ble income. This rate applies to income generated from 1

4or for non-calendar year taxpayers to income earned during

For tax calculation purposes, most income is taxable, including donations l estate and intangibles. Business costs ed as those incurred in order to generate

st

to be charged against income before tax up to 10% pre-tax income before donations.

The term �dividend� is identical to that used in the tax treaties, meaning in-s participating in profits, except for debt

e from other corporate rights assimilated

ch the company ying the dividends is resident. If 25% or more of the shares of the com-

-

mconsecutive months. It is possible to change the financial year as the tax laws provide a specific procedure for this purpose. All new businesses are expected to register with the appropriate local taxoffice and obtain an NIP number (taxpayer identificatercounting records to serve as the basis for calculating tax. Businesses are obliged by law to calculate taxes due during the financial year, to make ad-vance payments and to fulfil certain other duties.

4.2.1. Rates

the level of taxaJanuary 2006tax years beginning after 1 January 20064.

4.2.2. Computation of income

and revenue from the sale of reaand expenses are generally definrevenue. Management costs and other expenditure related to foreign-based services are not treated in any exceptional way, although there mube commercial substance and reality to the services provided so that the costs can be justified. Polish tax law allows donations (i.e. for public benefit organization and for religious cult purposes)of

4.2.2.1. Withholding tax rates

come from shares or other rightclaims. This also applies to incominto income from shares under the tax laws of the State in which the com-pany making the distribution of the dividends is resident. According to the latest ratified tax treaty between Poland and Denmark, dividends are taxed at 15% in the contracting State in whipapany are owned for a continuous period of at least 12 months by a parentcompany in the other State (and dividends are distributed during that pe-riod), the dividends are taxed at 0% in the contracting State in which the subsidiary is resident. An additional 5% rate is provided for pension funds and other similar institutions providing pension schemes in which individuals may participate in order to secure retirement benefits. The State in which the parent company is resident can then tax dividends according to


50


the tax law in that State, with a credit given for dividend tax already paid. The same terms apply to the situation between Finland/Norway/Swedenand Poland with the exception that a 25% ownership share leads to a 5% tax rate rather than the zero rate and no special provisions for pension funds exist. The term �interest� is identical to that used in the tax treaties, meaning icome from d

n-ebt claims of every kind, whether or not secured by mortgage,

d whether or not they give the right to participate in the debtor�s profits.

less the loan meets the criteria for the zero rate (the loan is insured or g

ty

eceived as consideration for the use of, or the right to e, any copyright on a literary, artistic or scientific work including cine-

mpany paying e royalty is resident. Under the currently binding tax treaty between Po-

t

s

ny of the certificate of residence of the payment recipient (that is,

neficial owner in the case of the UK-Poland and Denmark-Poland tax

anThis includes, in particular, income from government securities such as bonds or debentures, including premiums and prizes which attach to these. Under the Polish-Danish Tax Treaty, interest is taxed in the contracting State in which the company paying the interest is resident. The rate is 5% unguaranteed by a financial institution owned or controlled by a ContractinState; interest is paid in connection with the sale on credit of any industrial,commercial or scientific equipment, interest is paid in respect of a bond, debenture or other similar obligation of the government of a Contracting State, or of a political subdivision or local authority thereof, interest is paid to the other Contracting State, or to a political subdivision or local authorithereof). For Finland/Norway/Sweden and Poland, the withholding tax rateon interest is 0%. The term �royalty� is identical to that used in the tax treaties, meaning pay-ments of any kind rusmatograph films and works of art registered for radio and television sys-tems; any patent, trade or industrial mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, com-mercial or scientific equipment, or any information concerning industrial,commercial or scientific expertise or capability (know-how). Under the tax treaties between Poland and Finland/Sweden/the UK, royal-ties are taxed at 10% in the contracting State in which the cothland and Germany (in force from 19 December 2004) royalties are taxed a5%. Under the newly ratified Polish-Danish tax treaty, license fees are sub-ject to a 5% withholding tax. According to the Polish-Norwegian Double Taxation Treaty, royalties are taxed at 10% in the contracting State in which the company paying the royalty is resident. However, royalty paid as consideration for the use of, or the right to use, any copyright on literary, artistic and scientific work to a resident of the other contracting State itaxed at 0% in the other State in which the recipient of the royalty is resi-dent. Application of preferential rates is subject to the possession by the Polishcompabetreaties, and certificate of tax residence in the treaties with Finland, Swe-den and Germany).


51


4.2.3. Payments

Under the Polish Corporate Income Tax Act, reporting and payment obliga-tions are as follows. Taxpayers are obliged to provide the Tax Office with two basic kinds of tax returns: CIT-2 and final CIT-8.

g eceding months).

ade by the

f the

oar, without submitting monthly CIT-2 returns. If

l

l,

ber and 20 December (one tax return in December which cov-ers both November and December).

company.

The CIT-2 tax return refers to monthly advance payments (for the amount of the difference between the tax due on income earned from the beginninof the tax year and total advance payments due for pr

onthly advance payments for the preceding month should be mM20th day of the following month in reference to the current year. The amount of the advance payment for the last month should be the same as the advance payment of the preceding month, payable by the 20th day olast month of the tax year. It is also possible to apply a simplified method of advance payments. Whenmeeting the requirements of the specified provisions, it is possible to make advance payments amounting to 1/12 of the amount of tax due f r the year

eceding the current tax yeprthe taxpayer disclosed no tax due in the CIT-8 for the previous year, the tax-payer may make monthly advance tax payments amounting to 1/12 of the amount of tax due for the year preceding the current year by two years. If the taxpayer disclosed no tax due in this year either, the taxpayer cannot make advance payments in a simplified form. If the CIT-8 return for the pre-ceding year is related to a tax year shorter or longer than 12 consecutive months, the taxpayer may make monthly advance tax payments in a simpli-fied form proportionally to each month of the tax year to which the CIT-8 relates. If the taxpayer disclosed no tax due in this CIT-8 tax return, the tax-payer may make such payments provided that the amount of tax due re-sults from the CIT-8 submitted for the year preceding the current year by two years. The CIT-8 tax return should be submitted to the tax office by the end of the 3rd month of the following tax year, and the taxpayer should pay the corpo-rate income tax due by the same deadline. Taxpayers are also obliged to provide the tax office with a copy of the annuafinancial statements together with a copy of the shareholder�s resolution approving the financial statements. Such an obligation should be fulfilled

ithin 10 days following approval of the annual financial statements. w Taking the above into consideration, if we assume that the tax year is the calendar year, the deadlines for filing the company�s tax returns would be as follows: • CIT-2 tax returns: should be filed by 20 February, 20 March, 20 Apri 20 May, 20 June, 20 July, 20 August, 20 September, 20 October, 20 Novem

• CIT-8 tax return: should be filed by 31 March. Please note that specific reporting and payment obligations apply to divi-dends, interest and royalties paid to a foreign parent


52


A tax remitter must remit the appropriate amount of tax by the 7th day of he month following the month in which the tax was collected, to the ac-

s far as dividend payments are concerned, the tax remitter would have to

out nts, CIT-

0 and IFT-1/IFT 2R must be completed.

domestic authorities.

previ-ous years. The maximum period for which losses may be carried forward is five years, and only 50% of a loss can be offset in any one year.

g revenue are deductible, except where stated in law. The taxable base of dividends and other distributions received, as well as taxable income derived by for-

oss income.

Expenses incurred from purchasing land or perpetual usufruct rights

angibles. The-se are, however, subject to depreciation;

ontinued projects;

id, on liabilities;

l capital payments, on dividends and

contributions to various funds, unless the taxpayer is

tcount of the tax office responsible for taxation of foreign persons. Aprepare form CIT-6 (and form IFT-1 for natural persons/ form IFT 2R for legal persons as a foreign shareholders), which contains information abthe amount of income tax collected. For interest and royalty payme1 Please note that in order to apply a preferential Double Taxation Treaty withholding tax rate, the entity obliged to withhold the tax must have a �tax residence certificate� of the interest/dividend recipient, or place of resi-dence of the beneficial owner issued by the

4.2.4. Tax losses carried forward

Taxable income may be reduced by tax losses carried forward from

4.2.5. Deduction of costs

The general rule is that costs and expenses incurred in generatin

eign entities in Poland, is gr Expenses incurred for the purpose of obtaining revenue are deductible ex-cept where stated in law. Non-deductible expenses include • Dividends; • to land, except for payments for perpetual usufruct; • Cost of purchase and production of fixed assets and int • Cost of disc• Depreciation on cars for the part of a car�s value that exceeds the equivalent of EUR 20,000. • Car insurance premiums for the part of a car�s value that exceeds EUR 20,000. • Interest accrued, but not yet pa• Unrealised foreign exchange differences; • Interest charged on additiona other corporate distributions; • Allowances and required to contribute to such funds; • Fines and fiscal penalties; and • The cost of earning tax-free income.


53


A complete list of expenses not deductible for corporate income tax pur-

rporate Income Tax Act. The following e e le:

Provisions for bad debts, unless the debts were already included as

Interest on overdue taxes;

s-

e fu

gani-tion and for religious cult purposes) to be charged against income before

ation methods and rates are regulated by the Corporate Income Tax Act.

es are included in the list of deductible expenses in-

e tallations, pipelines

poses is provided in the text of the Coar xamples of items that are not deductib • taxable revenues and the debtor is bankrupt, or the debt cannot be collected despite having followed court procedures, or the costs of collection would exceed the amount due; • • Fines and indemnities arising from faulty goods and services; • Representation and advertising expenses (other than media adverti ing) in excess of 0.25% of the total amount of taxable revenue. However, expenses for mass media advertising or other public advertising

lly deductible. ar Furthermore, Polish tax law allows donations (i.e. for public benefit orzatax up to 10% of pre-tax income before donations.

4.2.6. Depreciation

Depreciation of fixed assets and amortisation of intangible assets and legal rights is also deductible for tax purposes; the calcul

Depreciation allowanccurred for the acquisition of income. Depreciation may be applied to fixed assets and intangible assets, and is based on the straight-line method. However, accelerated depreciation and the declining-balance method ar

llowed in exceptional cases (mining equipment and insaand drilling equipment, some machinery used in the chemical industry, building machinery). The depreciation rates for certain types of assets areas follows:

Type of asset Annual rate (%) Buildings 1.5 Structures 4.5 Mining machinery and equipment 20 General purpose machines and equipment

10

Computers 30 Vehicles 14-20 Tools and other equipment 20 Cash registers 20 Mobile telephones 20

The la inimum periods of amortisation of in-tangib • Computer software and intellectual property rights - 24 months;

w provides for the following mles:


54


• Licences for films, television and radio broadcasting - 24 months;

Costs incurred for completed research and development works - 12

intangible assets - 60 months.

me tax purposes include

Land and perpetual usufruct rights to land;

ill; and Works of art and museum exhibits.

ns provide sufficient assets, typically, are am-

formation of a joint stock com-ciated/amortised over a period

-

4, the thin capitalisation rules were extended to other finan-cial obligations under which a lender agrees to transfer to a borrower the ownership of a specified sum of money, and the borrower agrees to return

o the issue of debt securities, irregu-

a the company's share capital, as determined

oland has created some special economic zones with tax incentives for

en amended as of 1 January 2001.

• months; and • Other Please note that assets of a nominal value of up to 3,500 zloty may be treated as directly tax deductible. Assets which may not be amortized for inco •• Certain buildings and structures; • Certain non-purchased goodw• In certain circumstances, if technical consideratio

tangible grounds, these rates may be modified. Inortised over five years. Costs related to thepany as well as goodwill are generally depreof five years.

4.2.7. Thin capitalisation provisions

Thin capitalisation rules limit the deductibility of interest on loans and credits from certain related parties; the allowed debt to equity ratio is 3:1. As of 1 January 200

the same amount of money as well as tlar deposits and deposits. As of 1 January 2005 this also applies if both parties are Polish companies. Under the thin capitalisation rules, the deductibility of interest on a loan (a) granted by a shareholder holding at least 25% of the voting rights (or a group of shareholders who collectively hold at least 25% of the voting rights), or (b) between subsidiaries in which the parent company holds at least 25% of the voting rights, is limited to the portion of interest paid on loan not exceeding three times by the date of interest payment. Any interest paid in relation to a loan which exceeds this threshold is not deductible. After 1 January 2005 the thin capitalisation rules also applies to intereston loans granted by resident companies.

4.2.8. Tax incentives

Pcorporations in order to encourage regional investment. The Special Eco-nomic Zones Act and the Decree have be


55


Under the Law on Special Economic Zones, the following economic zones have been established: Mielec in 1995; Katowice and Suwałki in 1996; Kamienna Góra, Kostrzynsko-Słubicka, Legnica, Łódz, Starachowice, Tar-nobrzeg, Tczew, Wałbrzych, Warmińsko-Mazurska, Słupsk and Żarnowin 1997

iec ; and Kraków in 1998. Each zone has been established for a period

of 20 years. Persons qualifying for relief are legal entities and individuals performing business activity exclusively within a zone�s territory.

Zone Active up to year

Maximum tax exemp-tion of total

value on investment

Minimum in-vestment

(EURO)

Minimum pe-riod of em-ployment re-quired to ob-tain regional

(%) aid (years) SEZ .Euro-Park Mielec. 2015 50 100,000 5

Katowi Z cka SE 2016 50 100,000 5 Suwalska SEZ 0 2016 50 100,00 5 Legnicka SEZ 2017 100,000 50 5 Wałbrzyska SEZ 2017 100,000 50 5 Łódzka SEZ 2017 50 100,000 5 Kamiennogórska SEZ 2017 50 100,000 5

Kostrzyńsko-Słubicka SEZ 2017 50 100,000 5

Słupska SEZ 2017 50 100,000 5 SEZ .Starachowice. 2017 50 100,000 5

Tarnobrzeska SEZ 2017 50 100,000 5 Warmińsko-Mazurska SEZ 2017 50 100,000 5

SEZ .SUB ZONE

Pomorska.-

c. .Tczew.- SUB ZO-NE .Żarnowie

2017 50 100,000 5

Technology Park 2017 40 100,000 5 (Kraków)

The most important relief aspects are:

ion from c income tax up to a maximum of 50% ent input, and input for creating new employment. Property tax

exemption is also possible.

Complete exemptof investm

orporate

The total percentage share of the components of the costs eligible for sup-port cannot exceed 100%. The Minister of Economy is the competent au-thority for the issuing of permits to conduct economic activity in a zone. These permits are issued after receiving the opinion of zone-managing au-thorities.


56


No tax relief is available after the active period of a zone expires.

4.2.9. Branch tax

As a general rule, a foreign company will be subject to tax on the profits of a

The taxable income of foreign companies is calculated on the basis of nor-ules. If accounting records have not been kept in com-ish Accounting Act, taxable income must be calculated

nceo this, the parent company must hold 95% of

e capital in the other member(s) of the group and the group must achieve rofitability of at least 3% of gross revenue.

ning fiscal groups are not flexible and in practice,

Subordinate companies may not own shares in other companies

ility ratio of at least 3%; None of the group companies may have outstanding tax liabilities.

ng x co

registered )

rposes and pay these taxes on its own behalf.

orporate income tax due should be calculated, withheld and paid to the tax

u-

Polish branch and any other income from Polish sources.

mal corporate tax rpliance with the Polas a percentage of the turnover. The percentage depends on the type of activity conducted, as follows: • Wholesale and retail trading - 5% • Building, construction or transportation - 10% • Brokerage activities (if remunerated by commission) - 60%; • Barrister�s or expertise services - 80% • Other revenue - 20%.

4.2.10. Fiscal groups

Sigroups for tax purposes. To d

1 January 1996 it has been possible for Polish companies to form

thp

The regulations concerthey actually limit the development of this form of business operation. As aresult, very few fiscal groups currently exist in Poland. Generally speaking, the unpopularity of this form of operation is attributable

very restrictive conditions, such as to • Average share capital of 1 million zloty; • The parent company must hold 95% of the capital in the subsidiary; • within the group; • The group must achieve a profitab•

This tax grouping is relevant only to corporate income tax and withholdi

llected by payers ota f corporate income tax. It does not relate to any other taxes. Therefore, each member of the fiscal group must be separately for VAT, personal income tax (PIT) and social insurance (ZUSpu

Coffice on behalf of the group by a company which was defined in the fiscal group agreement as the group representative. However, there are no reg


57


lations stating which company should pay the amount of corporate income tax due, and in which proportion, in terms of cash flow. Moreover, there is no definition of how corporate income tax due from the fiscal group should

presented in the individual financial statements of group companies.

of

of a Double Taxation Treaty.

he e

income tax on the total income. Excess credit may be carried forward in-definitely. Dividends paid to members of a tax group are exempt. As far as

f Polish � Danish DTT are concerned please see our .1 above.

l e -

an with its seat in another EU country (apart

om Poland). The shares must have been held continuously for at least 2

nly a majority vote by the shareholders. If not, then the company deed itself has to be amended, for which the consent of two-thirds of the shareholders is

y deed provides for more stringent voting

p

,

beTherefore, it is not clear how net earnings available for distribution should be calculated.

4.2.11. Capital gains

Capital gains for companies are taxed as corporate income at a tax rate 19% (2006). Foreign shareholders may enjoy more advantageous provi-sions as a result

4.2.12. Dividends

Dividends received from a resident company in Poland are subject to with-holding tax of 19%. Such dividends are not added to the total income for trecipient; the withholding tax, however, may be credited against corporat

special provisions oremarks under 4.2.2

Starting from 1 May 2004, the income on dividends is tax exempt if all of the following conditions are met: The shareholder is taxed in EU on totaincome regardless of the place in which the income is generated; thshareholder owns at least 20% (in 2006) of shares (of the Polish company); the paying company is Polish resident; the receiver of dividends is

U UE company or its branch Efryears (such a condition is also met if 2 years period expired after the in-come from dividend is received). Such an exemption is applicable to in-comes that arose after Poland�s accession to the European Union.

4.2.13. Capital contribution

In limited liability companies, changing the nominal value of existing shares, or issuing new ones, increases the share capital. If the company deed pro-vides for possible increases in equity, then such increases require o

necessary, unless the companrequirements. Existing shareholders in a limited liability company have priority in taking uadditional shares from any such increase in proportion to the shares al-ready held. This also applies to joint stock companies with respect to stockunless pre-emption rights are restricted or excluded by the company deedor statute, or by shareholders� resolution.


58


In joint stock companies, capital increases are obtained by issuing new stock or by increasing the value of existing stock. However, this may onlydone after at least 9/10 of the declared capital has been paid in. For joint stock companies, increases in capital require revision of the joint stock company statutes. This, in turn, requires a r

be

esolution to be passed by at ast 75 per cent of the votes at a general meeting, unless the statutes

i- til

owever, since 1 January 2001, in the case of contributions in kind from

i-

leprovide for more stringent voting requirements. In general, capital contributions made to increase the share capital are nether taxable in the receiving company nor deductible for the contributingshareholder. Taxable income and tax-deductible costs would not arise unthe disposal of acquired shares. Hassets other than a business or its organised part, shareholders are liable for tax on the nominal value of shares acquired in exchange for such contrbutions in kind. Specific rules also apply to tax deductible costs in this re-gard. When the share capital is not increased (i.e. the company receives assetsfree of charge) the recipient of these assets will be taxed.


59


4.2.14. Capital reductions

A reduction in capital is possible with the approval by vote of the share-

the resultant capital may not be less than the minimum equity currently prescribed by law, i.e. 50,000 zloty.

y, a reduction in capital requires a revision of the

ay not be made to the detriment of the interests of creditors. The management board of a company is thus required to notify

Any creditors affected by the reduction must be sat-red. Profits are to be distributed to

n has been restricted by the company ed. Profits are to be distributed in proportion to the share held, unless e c til

are ca-al. m-

ca is treated as a dividend distribution provided that sha-s are redeemed.

h differ from normal market condi-

terprises and

ntities are deemed to be related if

in

holders. The amount and form of the decrease must also be specified and approved. However,

In a joint stock companjoint stock company statutes. This requires the passing of a resolution by 75% of the votes at a general meeting, unless the statutes provide for mo-re stringent voting requirements. Under no circumstances may the sharecapital fall below 500,000 zloty.

R ductions in capital me

all interested parties. isfied or their interests otherwise secushareholders, unless such distributiodeth ompany deed provides otherwise. Shareholders can cover losses, unsuch losses exceed the aggregate reserve capital and half of the shpit In such an event, shareholders must vote on whether or not the copany should be dissolved.

A pital reduction re

4.3. Transfer pricing

Transfer pricing concerns the situation where two or more related partiestrade with each other on conditions whictions, with the result that taxable income is transferred from one part to another. The transfer pricing rules in Poland generally follow those in the1995 OECD Transfer Pricing Guidelines for Multinational EnTax Administrations.

4.3.1. Requirement

E • A Polish resident entity either directly or indirectly manages or con-

trols a non-resident entity, or is a shareholder in that entity; • A non-resident entity directly or indirectly manages or controls a resident entity � or is a shareholder in that entity; or • The same legal or natural persons directly or indirectly manage or control both resident and non-resident entities, or are shareholders both entities.


60


Transfer pricing rules also apply if • A resident entity participates, directly or indirectly, in the management of another resident entity or its control or holds a share in the capital of another resident entity; • The same legal or natural persons participate at the same time, directly or indirectly, in the management of resident entities or their

control or hold a share in the capital of those entities; nti-

e

actors which may influence the comparability of controlled and uncontrolled transactions and should therefore be con-sidered in determining the arm�s length price. These are the distinguishing

ervices, functions performed by the entities, business strategies, markets in which entities operate, and con-

om-

olish tax law introduced regulations regarding Advance Pricing Agree-

• There are family, employment or property ties between resident e ties or between persons who perform management, supervisory or controlling functions in those entities or where any person combines managerial, supervisory or controlling functions in those entities. Holding a share in the capital of another entity means a situation where thentity, directly or indirectly, holds a share of at least 5% in another entity. The law recognizes certain f

features of compared property and s

tractual terms of transactions. If the price set for transactions between related entities differs from that which would have been agreed by independent parties under the same or similar circumstances, a transfer pricing adjustment may be made using the following transaction-based methods: comparable uncontrolled price, resale price, or cost plus method. If these methods cannot be applied, the following profit-based methods may be used: profit-split method and trans-action net margin method. The transaction net margin method consists of checking the net profit margin which is earned by the entity in the transaction or transactions with other related parties, and comparing this to margins earned by the same entity in transactions with unrelated parties, or to margins earned in cparable transactions by unrelated parties. The profit-split method consists of defining the total profits which related parties generate in connection with a given transaction and the allocation of these profits between the entities in such proportions as an unrelated party would allocate them.

4.3.2. Advance Pricing Agreement

Pments (applicable from 1 January 2006). In Poland, starting from 1 Janu-ary 2006 entities will be able to minimize tax risks through the use of APA�s. The tax office will be able to issue, on the taxpayer request, a deci-sion as to whether it finds a given method of determining the transfer price between related parties acceptable. Such an interpretation, on the basis of


61


an APA, will be binding in the case of other tax procedures (such as tax au-dits and tax-legal proceedings). The APA can be applied to transactions made both before and after the APA was applied for. APA�s will be issued by the Ministry of Finance. The APA regulations set out three different types of agreement, depending on the related parties applying: a) Unilateral Agreement � issued to a domestic entity will assure the accep-

to the same foreign entity,

thorities relevant to the foreign re-

transactions between the domestic entity and the foreign re-ted party is acceptable.

c) Multilateral Agreement � used where the agreements relate to entities ishing an APA needs the approval

-

e r

cal control office relevant to the applicant and its related parties. e period for which the APA can apply is 3 years. However, if the criteria

- it expires, the APA may be

PA of a value of the transaction that is e s

. Un 0

ities � the fee cannot be less then PLN 20 000 and

Bil

A

de to countries that employ practices detrimental to tax are subject to reporting obligations defined under Article 9a of the Cor-porate Income Tax Act. The parties involved must maintain relevant tax

such transactions, including the following infor-

tance of the chosen method of calculation of transfer prices between: � related domestic parties or,� a domestic entity related to a foreign entity or, � domestic entities relatedb) Bilateral Agreement � is issued at the request of a domestic entity after receiving the acceptance of the tax aulated party. It acknowledges that the approach and the method of establish-ing prices inla

from more than two countries and establof tax authorities relevant to each entity. The decision establishing the APA is delivered to the entity with which thetransactions will be made. In the case of bilateral and multilateral agreements, the decision is also delivered to the relevant tax authorities in thforeign countries as well as to the director of the tax office and the directoof the fisThused to evaluate such an agreement have not changed and the entity applies to prolong the agreement 6 months beforeextended for another 3 years. The Ministry of Finance imposes a charge for A applications. This is equal to 1%th ubject of the agreement. However, the following fee restrictions apply: 1 ilateral agreementsa) relating only to domestic entities � the fee cannot be less then PLN 500and more than PLN 50 000 b) relating to foreign entmore then PLN 100 000 2. ateral and multilateral agreements - the fee cannot be less than PLN 50 000 and more than PLN 200 000. The fee for extending the APA is equal to half the initial payment for APapplication.

4.3.3. Obligation to provide documents

Since 1 January 2001, related parties transactions or transactions for which payment is ma

documentation relating to mation: • Documents showing the function of the parties in the transaction (including assets engaged and risks borne); • An analysis of all expected costs relating to the transaction as well as the payment form and deadline; • An analysis of the profit calculation method and determination of the


62


transaction price; • An analysis of the business strategy and of other operations in this

adopted by the entity influenced the value of the

entity obliged to prepare the documentation of ex-pected benefits arising from the transaction in the case of agree-

mances of an intangible nature.

KPMG�s Tax Department in Poland has significant expertise in assisting

s common practice in

ent repare tax documentation has to be fulfilled (see

Branch allocation is permissible in accordance with Article 7 (Business Profits) of an appropriate Double Tax Treaty which is based on the OECD Model Tax Convention.

4.3.6. Reporting obligations

t

entity to the non-resident individuals. The Polish taxpayer is re-uired to make "best efforts" to obtain the information.

- to

a share in the capital that gives entitlement to at least 5% of the total voting rights.

respect if the strategy transaction; • An indication of other factors if such were used by the parties to de termine the transaction value; • An analysis by the ments, service agreements, and perfor

clients in performing functional analyses of related parties transactions in order to mitigate possible risks of such transactions being questioned by the tax authorities.

4.3.4. Management fees

The introduction of management fee agreements iPoland. In principle they are subject to general taxation rules. However, in the event that the total amount resulting from the agreement or actually paid in the tax year is higher than the equivalent of EUR 30,000 the above-m ioned obligation to pour remarks under item 4.3.2.).

4.3.5. Branch allocations

The rules which came into force on 1 January 2003 provide that if a Polish taxpayer has entered into a service contract with a foreign entity and thaforeign party engages non-resident individuals to provide those services, then the Polish taxpayer has a duty to report the remuneration paid by the foreignq The requirement to provide information applies if • The payment potentially affects the individual's Polish tax liability pur- suant to the provisions of a "double tax treaty" (i.e. the duties are performed in Poland). • The foreign entity participates (directly or indirectly) in the manage ment or control of the Polish taxpayer entity on whom the obligation provide information relates, or who possesses


63


4.4. Taxation in your resident State

ntities and natural per-

sons.

e principle only applies to natural persons. For

nal joint taxation

generated. The Act does not,

or

culates its tax on the ompany in the resident State and

r

in the resident State on account of the tax paid in the other State. However, the deduction of tax may be limited to the tax calculated on the foreign income.

t ranted in situations where the foreign

d is a method te in which the parent company is is restricted to that part of its

4.4.1. Global incomeWorldwide taxation principle

According to the global income worldwide taxation principle, residents of aState are taxable on their worldwide income in this resident State. Den-mark, Norway, Sweden and Finland all apply the global income worldwidetaxation principle to all their residents � both legal e

In Denmark, the global incomlegal entities, a limited territorial income principle applies, which entails that as a main rule, income from permanent establishments and real prop-erty is not included in the taxable income unless internatiois chosen. However, some exemptions apply. For instance, the global in-come principle is maintained in respect of international shipping and air transport activities. In addition, taxable dividends, interest and royalties from abroad are still included in the taxable income. In general, the Polish Corporate Income Tax Act states that taxpayers whose seat or management is in Poland are taxable on their worldwide in-come, regardless of where such income washowever, specifically define the place of management.

4.4.2. Tax treaty Denmark and several other countries have signed tax treaties with Poland to prevent double taxation situations. However, since a new bill has been adopted in Denmark (with effect from the income year 2005), the double taxation prevention between Denmark and Poland is mostly relevant in cases where international joint taxation is chosen.

4.4.3. The credit principle

Provided international joint taxation is chosen, the income from a Polish Danish branch will be taxed both in Denmark and Poland. Under the credit principle, the State of residence calbasis of the total taxable income of the cincome from the branch in the other State that may be taxed in that otheState under the provisions of a double tax treaty. The principle of credit then allows a deduction of tax to be paid

There are two main credit methods: �full credit� and �ordinary credit�. The �full credit� method involves the State allowing deduction of the total amount of tax paid in the other State on income which may be taxed in tha

tate. �Full credit� can only be gSmaximum tax rate equals the Danish tax rate, if the calculation of income is

e same in the two countries. The �ordinary credit� methothwhereby the deduction granted by the Sta

sident for the tax paid in the other Statere


64


own tax which is appropriate to the income which may be taxed in the other State. If international joint taxation is chosen, and for example, a Danish resident

ceives income from a branch in Poland, calculation of the credit could e examples below. The maximum credit is the

anish tax rate (28%) multiplied by the foreign income.

The amount of Danish tax to be paid is: Global income multiplied by Danish tax rate, less the amount of tax paid

m tax rate there is as high as the Danish rate and the calculation of the income is the same).

of DKK 1 million and the Polish anch makes a profit of DKK 1 million. The corporate tax rate is 30% in

llion = DKK 300,000.

d: DKK 190,000.

: 30% of DKK 1 million plus tax on the DKK 1 mil-lion earned in Poland, less tax already paid: DKK 300,000 + (30%* DKK 1 million - 19%* DKK 1 million) = DKK 300,000 + DKK 110,000 = DKK 410,000.

The corporate tax rate is 0% in Denmark and 19% in Poland.

retake the forms presented in thD

abroad (if the maximu

.4.3.1. Example 1 4

The Danish parent company makes a profitbrDenmark and 19% in Poland. Maximum credit: 30% of DKK 1 mi Tax to be paid in Polan Tax to be paid in Denmark

Total income: DKK 2 million.

Total tax: DKK 600,000.

4.4.3.2. Example 2

The Danish parent company realises a net loss of DKK 1 million and the Polish branch makes a profit of DKK 1 million. 3 Maximum credit: 30% of DKK 0 = DKK 0 Tax to be paid in Poland: DKK 190,000 Tax to be paid in Denmark: DKK 0 Total income: DKK 0 Total tax: DKK 190,000


65


4.5. Exit routes

o hs (joint

on announcement and from the date of the announcement to creditors.

n concluded, the liquidator is authorised to

pon liquidation, any excess distributed to shareholders over and above

4.5.2. Sale

ny with limited liability can always sell shares in a oland, and receive money or other goods in exchange

ation. Any other

n-legal entities can be liquidated after creditors have been paid.

lish companies are subject to cor-s who

Polish companies, since such gains are regarded as being the Double Taxation Treaty with

Denmark, capital gains on the sale of shares are only subject to tax in Den-

e

nder Polish tax law, losses remain in the company (i.e. they do not follow y

change of ownership; however, this does not apply to company takeovers.

4.5.1. Liquidation of a company

The commencement of the liquidation procedure must be registered with the Registry Court and announced in the Official Polish Legal Journal, to-gether with a notification to creditors to submit their claims - they must d

within three months (limited liability company) or within six montsostock company) of the public announcement). Shareholders may distribute the remaining assets in proportion to their participation in ownership only after the company has settled or safe-guarded the interests of creditors. This distribution can occur only after a period of six months (limited liability company) or one year (joint stock com-pany) from the date of the liquidati

Once the liquidation has beeprepare a final liquidation report and file it with the Registry Court along with a request to strike the company from the register. Uthe acquisition cost of the shares is treated as a dividend and is subject to19% withholding tax based on normally applicable rules, unless the provi-sions of a double tax treaty provide otherwise.

The owner of a compasubsidiary located in Pfor the shares. This transaction does not change other guarantees which the parent company might have given to other parties. Any profits from thesale will be subject to normal standard capital gains taxno

In general, gains on sales of shares in Poporate income tax at normal rates. This also applies to non-residentsell shares inPolish source income. However, under

mark for Danish residents

4.5.3. Recapturing losses

In general, tax losses for financial years beginning on or after 1 January of agiven year can be carried forward for 5 years. Up to 50% of the loss can butilised in one year. Tax losses cannot be carried back. Uthe business). The ability to utilise losses carried forward is not affected ba If a fiscal group is established, losses arising after the establishment date can be offset against the profits of other group members.


66


the rate of

counting (�the

t�)

ofit rmats, consolidation pro-

ive offices which conduct business activi-

nts of capital groups; Deferred taxation - the recognition of a deferred tax asset is manda-

f financial statements for previous periods discov-

ered in a subsequent period should be corrected via the opening bal-

ent is not regulated by the Act or by local standards, entities may apply IAS.

ts of

red in accordance with IAS.

epared and maintained in olish and in Polish zloty. Source documents in the accounting records may

slated into Polish. All source

4.5.4. Capital gains

Capital gains for companies are taxed as corporate income at 19% in 2006. With respect to foreign shareholders, more advantageous provisions may result from a Double Taxation Treaty.

4.5.5. General Accounting Legislation

Accounting

Polish accounting standards are governed by the Act on AcAc dated 29 September 1994, which regulates bookkeeping principles, timing and procedures related to inventories, asset and liability valuation,

and loss calculation, financial statements foprcedures and auditing requirements. Polish accounting regulations are binding on all legal entities including banks, insurance companies, pension funds, investment funds, trust funds, companies with the participation of oreign capital and representatf

ties. Changes to the Accounting Act (effective from 1 January 2002) include • Conditions under which a lease must be treated as a financial lease by the lessee and lessor; • Accounting for long-term contracts; • Accounting for mergers; • Consolidation of financial stateme• tory, with appropriate consideration given to valuation allowance; • Introduction of the concept of fundamental error - significant errors in the preparation o ance of retained earnings; • Costs incurred on the issue of new shares should reduce the reserve capital resulting from the difference between the nominal value of the shares and the share issue price; • Accounting for derivative financial instruments; and • In cases where an accounting treatm However, starting from January 2005, consolidated financial statemenissuers of the securities admitted for public trading and banks must be pre-pa All accounting books and statements must be prPbe in foreign languages and need not be trandocuments, accounting books and interim financial reports must, as a rule, be retained for a period of five years; however, annual financial statements must be retained permanently. Fundamentally, Polish bookkeeping rules do


67


not differ from those commonly employed worldwide (entries have to be documented, are made on a double-entry basis, chronologically and sys-tematically on a historical cost basis). Accounting records have to be maintained in the registered office (the tax

fice should be duly informed if they are kept by duly authorised third par-ies in another place).

re ap-

rma-

a-on this treatment.

ce with any given month. owever, the tax office must be notified if it varies from the calendar year.

le assets via stock-taking as

t-

gal

et. epr ent can also be carried out on a de-

t valuation of each assets item on a cost basis; fixed assets are

LIFO;

oft Companies are free to adopt any bookkeeping system they choose and aalso free to use all types of processing techniques, as long as (followingproval by the Management Board of the company) they provide all infotion necessary to prepare statutory yearly balance sheets and monthly andyearly income statements. However, corporate income tax and VAT legisltion place restrictions The financial year, which has to be consistent with the tax year, consists of twelve consecutive months and may commenH Companies should verify the inventory of tangibfollows (assuming the assets are safeguarded): • Fixed assets - once every four years; • Where perpetual inventory records are kept with respect to quantity and value, supplies of raw materials, finished goods and goods for sale should be verified once every two years. If perpetual records are kept only with respect to quantity or value, stock-taking must be carried out within the three months preceding the end of a year. If no perpe

ual records are kept, stock-taking should be undertaken on the last day of the year; • Cash, securities, investments and work in progress at year-end. Depreciation of fixed assets and amortisation of intangible assets and le

hts (patents, licerig nces, brand names and other legal titles) are usually calculated on a straight-line basis, by way of varying rates for different items. For accounting purposes, the method and rate of depreciation should be determined on the basis of the expected useful life of the assD eciation of machines and equipmclining balance basis. The following principles apply for the valuation of assets and liabilities and in the preparation of the income statement: • Assumption of the going concern basis; • Use of accruals and matching concepts; • Pruden valued at acquisition cost, net of depreciation, as increased by the value of interest incurred in relation to loans used for their construction. Raw materials supplies and goods for resale, finished products and work in progress are valued at the lower of cost or net realisable value; cost of inventories may be established either on the basis of a standard cost adjusted for variances, a weighted average, FIFO or


68


• Creditors and debtors are valued at their full amount; if paid in foreign currency the de

bts or accounts owing are to be translated into zloty in

accordance with the exchange rate at the balance sheet date. Bal-

Consistency between accounting periods and full disclosure of nting policies may

be changed at the beginning of a new year . the impact of such a change must be disclosed); and

• Disclosure of relevant items. Compared to accounting standards commonly used in other countries, the Polish system offers similar possibilities for creating provisions for losses and costs, as well as for writing down the value of stocks or receivables. However, accruals and provisions justified from an economic point of view and obligatory from an accounting point of view may not be fully tax-deductible. The Polish Accounting Act provides for accounting of deferred taxation where timing differences have arisen between the recognition of revenue or expense for accounting and tax purposes. A deferred tax asset may be rec-ognised only if it is certain that it will be recovered in the following financial years. It should be noted that from 1 January 2002, the recognition of a deferred tax asset is mandatory, with appropriate consideration given to a valuation allowance. Joint stock companies are obliged to create reserve funds of at least 8% of their profits after tax until such a reserve fund amounts to at least one third of the share capital. For further details about KPMG, please see section 5.4.

ances should be agreed annually and reserves should be established for doubtful debtors, while provision should be made for probable losses; • changes in accounting policy (where justified, accou


69