A taxpayer's important interest warrants a reversal of the final decision to refuse to acknowledge an overpayment

By Rafał Mikulski

Ruling description

In a judgment handed down on February 16, 2015 (case no. II FSK 52/13), the Supreme Administrative Court permitted an amendment to the final decision to refuse to acknowledge an overpayment, despite the fact that it also concerned a tax liability.

A taxpayer applied for a written tax ruling regarding the PIT Act, claiming that the remuneration for an inventor paid in 2007 (in the wake of 10-year court proceedings) ought to be exempt from PIT. The Minister of Finance rejected the applicant's stance as incorrect, first classifying the remuneration as revenue from property rights, to be reported in the 2007 tax return, and finally, in October 2010 – after the tax ruling had twice been reversed by the court – as job-related revenue.

In the course of a dispute over the tax ruling, the applicant filed an application for the acknowledgement of an overpayment, seeking a ruling to the effect that the remuneration obtained in 2007 under a court settlement was exempt from PIT. By a decision, the head of the tax office determined the PIT liability for 2007 and refused to acknowledge an overpayment. This decision was upheld by the head of the tax chamber in February 2010. As the applicant had not appealed against the decision within the statutory timeframe, it became final and non-appealable.

After the dispute over the tax ruling came to an end, the applicant filed an application in January 2011 under Article 253 of the Tax Ordinance Act, seeking a reversal of, or an amendment to, the final decision to refuse to acknowledge an overpayment and citing the content of the individual tax ruling, according to which the revenue obtained in 2007 in connection with a court settlement constitutes job-related revenue, with the interest on the remuneration being exempt from income tax.

The first-instance and appellate tax authorities refused to reverse or amend the decision to refuse to acknowledge an overpayment. Likewise, the provincial administrative court saw no grounds for reversing this decision, stating that it determined a tax liability, and as such it could not, by operation of law, be reversed or amended. According to the Supreme Administrative Court, in order to assess Article 253 of the Tax Ordinance correctly, one should bear in mind that the decision determining a tax liability was issued as a result of an application for the acknowledgment of an overpayment. Thus, although decisions determining the amount of a liability were explicitly listed among decisions which could not be amended or reversed, if the proceedings primarily concern the acknowledgment of an overpayment and the amount of a tax liability is determined merely as an incidental matter, a special procedure can be launched for the purpose of eliminating the decision from legal transactions.

Comment

This is a highly favorable landmark decision for taxpayers who have received adverse decisions in overpayment cases. If a ruling on tax regulations is amended, it is possible to commence overpayment proceedings, even if the decision determines an overpayment and tax liability. However, such proceedings involving an amendment to, or a reversal of, a decision are subject to a special procedure remaining at the tax authority's sole discretion. In order for such a procedure to be launched, it is necessary to prove that the taxpayer has an "important interest"– in this case, an undue payment of tax.

Finance Minister's explanations concerning the new principles for restricting interest which could be classified as tax-deductible costs

By Tomasz Krasowski

The Ministry of Finance posted explanations on its website containing practical tips on the new principles for restricting interest which could be classified as tax-deductible costs.

The relevant amendments, which have essentially been in effect since January 1, 2015, consist in:

  • modifying thin capitalization regulations by extending restrictions also to loans granted by entities which are indirectly affiliated with the borrower and by changing the proportion of a permitted debt;
  • introducing an alternative regulation determining the method for deducting loan interest as tax expenses.

The Ministry's explanations contain a commentary on, among others, (i) the thin capitalization regulations which remained in effect until December 31, 2014; (ii) the thin capitalization regulations which have been in effect since January 1, 2015; (iii) the interim regulations; (iv) an alternative regulation determining restrictions concerning instances in which loan interest can be claimed as tax expenses.

Particularly noteworthy are the Finance Ministry's explanations about how to interpret interim regulations concerning interest on loan which was de facto provided to borrower before the effective date of the amended provisions, in particular in relation to borrowers whose tax year is not identical to the calendar year. The examples shown by the Ministry indicate how these regulations are likely to be interpreted by the tax authorities.

The amendments to the principles for restricting interest reported as tax-deductible costs may have a big impact on the effective tax rate of Polish companies financed by loans. The regulations which have been in effect since January 1, 2015 are essentially quite stringent. Nevertheless, an appropriate financing structure or alternative fund-raising methods might considerably mitigate the negative impact of the amended provisions.

The explanations of the Minister of Finance can be downloaded at: http://www.finanse.mf.gov.pl/documents/766655/6725129/Niedostateczna_kapitalizacja_2015.pdf

Withholding tax must be levied on payment obligations expired as a consequence of confusio

By Dariusz Stolarek

Ruling description

In its judgment of February 26, 2015 (case file no. II FSK 3296/12) the Supreme Administrative Court (NSA) found that withholding tax must be levied on license fee payments when the fees receivable under the license are contributed in kind to a limited liability company triggering the expiry of receivables due to confusio.

A Swedish company was considering an in-kind contribution to a Polish company of trademark and publishing license fees due to it from the Polish company. This in-kind contribution would trigger, by operation of the law, what is known as confusio, which arises when one and the same entity assumes both the creditor's right to receive licensing fees and the debtor's obligation to pay them.

The NSA disagreed with the company's position and dismissed the last resort (cassation) appeal filed by it. According to the NSA, the court of first instance correctly found that confusio arose in the case when the in-kind contribution was made and a shareholding stake in the company was handed over in return. The company wrongly assumed that this situation caused its obligation to pay the license fee to expire without the creditor's claim having been satisfied. As a result of this transaction, the Swedish company received a stake in the Polish company in return for the licensing fees, resulting in the expiry of these receivables. The NSA held that Article 26(7) of the CIT Act allows an obligation to be fulfilled in a wide variety of ways with the payment referred to in this regulation meaning the fulfillment of the obligation in any form, including payment, set-off or capitalization of interest. The NSA decided that the situation described in that case falls within the broad scope of the said regulation and also within the scope of the relevant double taxation treaty made between Poland and Sweden.

As a result, according to the NSA, the company is required to levy withholding tax on the licensing fees paid in the described manner.

Comment

The reviewed judgment serves to confirm the broad range of the concept of 'payment' of amounts due which may be subject to withholding tax in Poland. Confusio, when the roles of creditor and debtor reside in one and the same person, is one of the ways of causing the expiry of receivables which the court found to be equivalent to actual payment or set-off of amounts due referred to in Article 26(7) of the CIT Act.

Although the reviewed judgment concerns a case of confusio of license fees, it must also be seen as relevant in cases involving other payments subject to withholding tax, including in particular payments of interest accrued on loans. What this means is that withholding tax must be levied on, for example, debt-to-equity swaps through in-kind contributions of loans receivables towards the debtor's capital. The position taken by the NSA naturally implies that interest of this kind ('paid' through confusio) may, in principle, be deemed a tax expense for the debtor.

VAT taxation of in-kind redemption of shares

By Marcin Czajkowski

Ruling description

The Supreme Administrative Court (NSA) ruled on February 12, 2015 in case no. I FSK 1814/13 that there are no legal grounds for taxing non-monetary remuneration received for the voluntary redemption of shares in a company with VAT. The same position was taken by the Provincial Administrative Court (WSA) in Wrocław in its judgment of February 11, 2015 (case file no. I SA/Wr 2444/14).

Comment

Taxation of assets transferred in kind to shareholders in lieu of cash for the redemption of shares is a controversial issue, often giving rise to disputes with tax authorities. Administrative courts have so far failed to come up with a consistent stance on the matter (cf. e.g. the NSA rulings of May 10, 2012 in case no. I FSK 1010/11 or September 1, 2011 in case no. I FSK 1212/10), something the tax authorities like to point out when ruling against taxpayers, which they do in most cases.

The tax authorities hold that while the redemption of its own shares by a company is not in itself subject to VAT, the transfer of goods (such as real property) in return for the shares the company intends to redeem ought to be assessed for VAT since a transfer of this sort is tantamount to a delivery of goods against payment. The tax authorities also point out that a company effecting a transfer of this kind operates in the capacity of a taxpayer as any transfer of ownership of real property owned by the company must always be construed as a transaction made as part of its business operations (cf. e.g. the tax ruling no. ITPP2/443-1303/14/AP issued by the Director of the Tax Chamber in Bydgoszcz on December 22, 2014).

Nevertheless, administrative courts have recently ruled in favor of taxpayers on several occasions, finding that payment by companies of non-monetary remuneration in exchange for shares redeemed on a voluntary basis was made in circumstances which do not bear the hallmarks of business activity. Accordingly, transactions of this kind must be seen as remaining outside the scope of VAT. The NSA also stated in the ruling reviewed here that the tax authorities split voluntary shares redemption into two actions, a division that is artificial and unwarranted, whereas in fact payment of remuneration to a shareholder, whether in cash or in kind, is not a legal transaction distinct from the redemption of shares. This payment is a component element of a single civil law transaction a voluntary redemption of shares which must be seen as an integral whole, and no logical reasons are to be found in the VAT Act for dividing it up into smaller component elements. Positions to that effect were presented by the NSA in its judgments of December 9, 2014 (case no. I FSK 1853/13), April 25, 2012 (case no. II FSK 1950/10) and January 8, 2014 (case no. II FSK 169/12), among others.

In this situation, and especially bearing in mind the consistently unfavorable disposition demonstrated by the tax authorities in cases of this kind, businesses contemplating restructuring exercises involving voluntary redemptions of shares in exchange for non-monetary consideration must expect problems with the tax authorities over VAT payments. To make matters worse still, the non-monetary payment for the redeemed shares may be interpreted in terms of a sale of assets by a company that is subject to CIT (Article 14a of the CIT Act). Given this environment, taxpayers are well advised to consider alternative ways of transferring assets while minimizing their tax exposure.

Doubts relating to the settlement of private use of company cars

By Jacek Bajson

Ruling description

The head of the Tax Chamber in Katowice, in its tax ruling of February 2, 2015 (case file number IBPBII/1/415-905/14/ MZ) confirmed that a manager or an executive who received a company car to duly perform his/her professional duties does not receive income from driving the company car from its parking place to his/her place of work and back.

Comment

The provisions binding from January 1, 2015 provide for an amount of a free-of-charge benefit to which an employee is entitled for using a company car for private purposes. The amount depends on the engine capacity and is as follows:

  • PLN 250 per month for vehicles with an engine capacity of up to 1600 cm.
  • PLN 400 per month for vehicles with an engine capacity above 1600 cm.

The purpose of these changes was to simplify the manner of use of company cars for private purposes was settled, however, although these changes constitute a step in the right direction, they do not solve all the problems related to this particular issue. The settlement of expenses for fuel during private journeys raises one of many such doubts. Please note that the tax rulings allow to recognize a journey on the home-workplace and back run as a business journey. This is the case if an employer requires the employee to garage the company car close to his/her place of residence.

Similarly, if the nature of the employee's obligation shows that the employee travels to his/her place of work directly from his/her place of residence (e.g. sales representatives).

The tax ruling issued by the Tax Chamber in Katowice after the new provisions became effective confirms the present line of interpretation.

According to this interpretation, the trips from a place of garaging (e.g. a garage, guarded parking place or other) situated next to a place of residence to a place of work and back taken by the assigned company car, as required by the nature of the work, shall not constitute an employee's income from the employment relationship on condition that the said trips are made solely for business purposes and do not constitute exclusively a form of paying for the employee's journey to and from work. The said journeys are made to satisfy a business objective such as care for the entrusted company property expressed in the form of the employer's rules by parking a company car in a place ensuring its safety and, in view of the business tasks involved, and the permanent readiness (mobility) to perform professional duties.

As a side issue, please note that in the discussed case the rules of using company cars were specified in the company's internal regulations and the agreements specifying the use of company cars. The said documents impose on employees a number of obligations and regulate the rules of responsibility. In view of the complexity of the issues relating to the use of company cars for private purposes, internal corporate policy is, in our view, recommended.

Tax effects of exchanging shares between a company limited by shares and a limited partnership

By Maciej Sopel

Ruling description

The Supreme Administrative Court (NSA) ruled on February 13, 2015 (case file no. II FSK 3280/12) that an in-kind distribution of 100% of shares of a limited liability company made by a limited partnership does not satisfy the premises of the so-called exchange of shares, hence a partner of the limited partnership, i.e. a limited liability company, should recognize the income already at the time when the said distribution in kind was effected.

According to the facts of the discussed case the partners of a limited partnership planned to contribute 100% of the shares of a limited liability company (a subsidiary) held by the said limited partnership to another limited liability company (a holding company). The limited partnership was the sole shareholder of a holding company. The NSA ruled that the limited partnership does not satisfy one of the criteria for recognizing the transaction as an exchange of shares, namely the criterion of being subject to taxation on the whole of its income in the EU/EEA member states, irrespective of the place in which the income was generated. Taking into account the above, the court explained that the said condition is related to the tax capacity of the entity participating in the transaction (i.e. a limited partnership) and not by the object criterion (i.e. taxation of income generated by the undertaking operating in the form of a partnership).

Comment

The option of a tax neutral exchange of shares in the situation in which one of the companies participating in the said exchange is a transparent partnership seems controversial. Please note that the same court in the rulings of January 30, 2015 (case file number II FSK 3244/12 and II FSK 3245/12) given on the basis of identical facts involving, however, natural persons being shareholders of a limited partnership, ruled that the aforementioned operation will, on their part, satisfy the conditions of a tax neutral exchange of shares. The above clearly indicates significant discrepancies in the rulings handed down by the NSA. There are arguments which prove that the interpretation of law presented in the discussed ruling is over restrictive and does not take into account the systemic context.

Bearing in mind the above, in order to avoid a dispute with tax authorities, the undertakings which plan to exchange shares and conduct their business activities in the form of a tax transparent partnership should consider the transformation of a limited partnership into a company limited by shares or take advantage of alternative methods of obtaining planned capital structure.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.