Restrictions on artificial expenses in the form of hidden dividends to shareholders

Proposed amendments to the Corporate Income Tax Act introduced by the Polish Deal also include significant limitations on classifying certain expenses as tax-deductible costs, regarded as hidden dividends. This applies to cases where shareholders receive various types of benefits from the company, e.g. for services rendered or leases.
Author:
Rafał Zuchowicz
Senior TAX Specialist

The Ministry of Finance believes such practices are often used to artificially inflate tax-deductible costs, sometimes even bearing the hallmarks of acting to the company’s detriment. The ministry also admits that one purpose of introducing these regulations is to force businesses to contribute assets, especially in the form of real estate, to the company’s capital. Critics see the proposal as a manifestation of the state’s aggressive fiscal policy, interfering too much in how owners dispose of their property.

Tax-deductible cost 

Pursuant to the proposed new subparagraph, Art. 16(1)(15b) of the CIT Act, costs for benefits paid directly or indirectly to a shareholder or to an entity directly or indirectly related to the taxpayer or that shareholder would not be considered deductible costs if:

  1. The benefit or the obligation from which the benefit  arises would not have been provided on the same terms and conditions, in whole or part, to that entity or shareholder, or
  2. (b) If the benefit were not provided, the taxpayer would have had a net profit within the meaning of accounting regulations for the financial year in which the benefit was reflected in the financial result.

This would open up an additional avenue for the tax authorities to challenge the inclusion in tax-deductible costs of expenditures benefitting shareholders or entities related to them which burden the taxpayer in an artificial and unjustified manner. Such transactions would primarily include transactions concluded on non-market terms, transactions regarding assets previously sold to shareholders, payments unrelated to the taxpayer’s business operations, or transactions causing the taxpayer to become excessively indebted to related entities from the capital group.

Controversy surrounding the planned changes

This proposal is surprising, as it seems that the current regulations already provide tax authorities with sufficient oversight of benefits paid to shareholder (after all, oversight of intangible benefits has a long and rich history), not to mention Poland’s broad and indefinite general anti‑avoidance rule. Thus, additional reinforcement of the regulations combating hidden dividends may signal that starting from 2022, transactions of this type will become the subject of special interest of the tax authorities. 

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