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Planned modifications in income taxation of controlled foreign companies (CFC) | SSW Tax Alert

In the course of the ongoing work on amendments to income tax legislation (PIT and CIT Acts), which would come into effect as of 1 January 2018, we wish to bring your attention to the planned changes concerning the taxation of controlled foreign companies (CFC).

The amendment, in the form being currently under consideration, provides for numerous significant changes, in particular it increases the threshold for the share held in the company by the Polish shareholder from 25% to 50% and decreases the revenue level from which a company will qualify as a CFC (from 50% to 33%) as well as modifies the list of such revenues.

What is crucial from the point of view of current practice is that the amendment does away with the income taxation exemption for those CFCs whose revenues in the fiscal year do not exceed 250.000 Euro. This means that the volume of CFCs covered by the obligation to present annual tax returns to Polish tax authorities may grow significantly.

Furthermore, the amendment introduces a reference to the effective tax rate, instead of the currently used nominal one, as the criterion for recognition as a CFC. Consequently, companies which have their registered office in a country with a high nominal tax rate but generate exempt income or take advantage of different sorts of deductions may be considered to be CFCs. Also worth noting is the revised methodology for the calculation of the tax rate below which a company will be considered a CFC.

If the expected changes enter into force, the need for reporting and taxation of CFC income may cover those taxpayers who were not covered by such obligations to date, if only because of the current revenue threshold.

Additionally, the assessment of the effective tax rate applicable to individual CFCs, independently of the nominal tax rate prevailing in the country where the company is registered, will become crucial.

When in doubt as to the classification of your companies as CFC, please contact us.

Patrycja Goździowska - Partner, Tax Advisor

Tomasz Wickel - Partner, Attorney at Law