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What do transactions with tax havens mean in practice?

The Minister of Finance published a notice dated regarding the list of countries and territories recognized in the EU register of jurisdictions unwilling to cooperate for tax purposes.
Łukasz Kaza
TAX Assistant
Tomasz Śliwiński
Senior TAX Specialist

On March 4, 2024, the Minister of Finance published a notice dated February 28, 2024, regarding the list of countries and territories recognized in the EU register of jurisdictions unwilling to cooperate for tax purposes adopted by the Council of the European Union, and which have not been included in the "national" list of countries and territories applying harmful tax competition.

What does this mean in practice for counterparts of entities domiciled in such a country ?

Important: Tax havens shall be considered as countries listed in the annex to the notice as well as in the EU register.

List from the attachment:

  1. Republic of Fiji
  2. Guam
  3. Republic of Palau
  4. Republic of Trinidad and Tobago
  5. Russia
  6. American Samoa

This list does not include countries and territories included in the register of countries and territories engaging in harmful tax competition under the provisions on personal income tax and corporate income tax (the so-called "national" list of tax havens).

The EU list of jurisdictions classified as non-cooperative for tax purposes was adopted by the Council of the European Union on February 20, 2024.

Tax haven

The term "tax haven" does not have a "legal" definition, therefore it should be defined by its colloquial meaning. Accordingly, the fundamental characteristics of a tax haven include:

  • Low or zero tax rates, especially in the scope of income tax
  • Lack of transparency in tax havens, which entails difficulties in "collecting" taxes
  • Lack of agreements on the exchange of tax information
  • A simplified tax system

Tax consequences resulting from transactions with tax haven entities

The inclusion of a country or territory in the EU list of non-cooperative jurisdictions for tax purposes leads to negative tax-related consequences for transactions carried out between Polish residents and entities included in the list.

  • As for transfer pricing, this results, among others, in the application, with regard to transactions with entities located in a tax haven, of different thresholds for the obligation to prepare local transfer pricing documentation, i.e.:
  • PLN 2,500,000 - in the case of a financial transaction
  • PLN 500,000 - in the case of a transaction other than a financial transaction

Transactions with these entities also disqualify benefiting from the exemption from preparing transfer pricing documentation while, at the same time, imposing an obligation to report ORD-U.

  • Changes also occur amongst withholding tax payers. According to the Ministry of Finance, in case of payments to entities domiciled in a tax haven, due diligence must be exercised to a greater extent in verifying the entitlement of recipients to apply preferences than in the case of payments made to other jurisdictions.

Shifted Profits Tax

Shifted profits refer to costs allocated as tax deductible costs incurred by the taxpayer in a given tax year, such as "passive costs" (ex. interest, licensing fees), paid by a taxpayer for the benefit of an affiliate entity with no registered office or management in the territory of the Republic of Poland. However, for the Polish entity making the payments subject to taxation, a series of conditions regarding the foreign entity receiving them must be met, relating to, among other things, the level of taxation or the structure of its revenues. As a result, a significant portion of analysis regarding taxation of shifted profits concludes that it is not applicable.

The situation changes dramatically when receivables are paid to affiliates with their headquarters, management or registered office in a tax haven. Regulations state that conditions specified in the Act relating to the recipient of receivables are "automatically" deemed to be met if the costs subject to the tax on shifted profits, i.e. remuneration for consulting services, insurance, management, inspections, fees for intangible assets or debt financing; classified as tax-deductible costs by the payer are paid to an entity based in a "tax haven".

In conclusion: In transactions with tax havens, there is a high risk of tax liability on shifted profits.

Controlled Foreign Companies (CFCs)

Under the Controlled Foreign Company (CFC) legislation, a Polish tax resident will be required to pay tax on a CFC if it holds shares in a foreign company based in a tax haven. The tax rate is 19% and is calculated on the basis of income earned by this foreign entity.

Important: A foreign controlled company with its registered office in a tax haven is in principle subject to taxation in Poland as a CFC.

Tax schemes (MDR)

Based on provisions regarding tax schemes, one of the general identifying features includes cross-border payments qualified as tax deductible costs by an entity with a Polish tax residence, if such payments are made to affiliate entities and the recipient is located in a country with either no income tax, or where the income tax rate is less than 5%.

Making payments to entities in tax havens may also constitute a specific identifying feature and lead to the creation of a tax scheme.

This specific feature involves the qualification of cross-border payments between affiliated entities as tax deductible costs, while the recipient of the payment is domiciled in a country applying harmful tax competition.

It is worth noting that in such cases it is irrelevant whether there is a tax benefit or any actions aimed at obtaining it. A tax scheme may even involve transactions of a minimal value – any payment classified as a tax deductible cost made to an affiliate entity domiciled in a "tax haven" constitutes a tax scheme.

The Minister of Finance announcement: https://isap.sejm.gov.pl/isap.nsf/download.xsp/WMP20240000185/O/M20240185.pdf

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