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Civil activities tax (stamp duty) – major changes in 2007 |
On 16 November 2006 the Polish government extended the taxation of
investment capital by the levying of PCC (civil activities tax) on
shareholder loans. Foreign investors this method of providing both
short–term working capital and long-term finance for a range of
activities from retail, distribution and production to property
development and asset management to be one of the simplest and most
flexible forms of finance that existed. But now that has changed what
lies in store?
 Marzena Richter, Staniszewski & Richter
Higher marginal rates of corporate income tax in lenders’ jurisdictions
mitigates ‘thin capitalisation’ in Poland, and the cash, legal and
currency flexibility all contribute to shareholder loans being the most
popular financing route followed.
As of 1 January 2007 the exemption from PCC, or civil activities tax,
for shareholder loans has been retracted. Under the new legislation
shareholder loans will be subject to a 0.5 per cent civil activities
tax, as this type of finance is to be treated as ‘equity finance’. The
idea is to treat the shareholder loan as a change to the shareholder’s
agreement. Such changes are always subject to civil activities tax.
Other loans which financed the commencement and/or the continuation of
business activities were also exempt and this has also been retracted.
Under the new legislation these loans will be subject to a 2 per cent
civil activities tax. The exemption for financial institutions remains,
however.
Conflict with EU directives
Prior to Poland’s entry into the EU, a revision made in
December 2003 and effected from 1 May 2004, exempted PCC on shareholder
loans. (Other loans for the commencement or continuation of business
activities had been earlier exempted from the tax effectively as of 1
January 2003). This was in line with EU entry requirements regulating
concepts such as the free movement of capital, goods, services and
labour. The resulting adaptation to EU directives led to significant
pre-accession revisions to taxation, commercial and competition
legislation.
In contrast to the Polish government’s move to tax investment the
European Commission has recently announced an initiative to remove all
forms of investment taxes within the membership. How exactly sovereign
governments will be compelled to withdraw from this means of raising
revenues remains to be seen.
In a bid for tax efficiency foreign investors determined to continue to
invest in Poland will have to resort to seek more complex financial
structures in order to minimise the tax burden on funds deposited in
Poland. Otherwise, depending on the economic sector of activity, they
will look to more benign fiscal regimes. In the property sector, for
example, apart from Poland, the two new EU states Romania and Bulgaria
and the Baltic states have also been experiencing a boom. Romania
certainly is successfully drawing foreign investors by offering
attractive fiscal incentives.
Effectively the Polish government has retracted on EU prescribed fiscal neutrality as regards the movement of free capital.
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Global view
As a result of inflationary pressures in Western Europe and
China and with the US financing two wars, as well as world wide price
increases in raw materials and energy, the current global economic
climate predicts that the only way for interest rates to go is up. In a
globally competitive economy the seamless fiscal environment that the
EU intends to create would certainly facilitate both tax efficient
structures and the management of investment income in the light of any
interest rate increases. The recent step that the Polish government has
taken is in the reverse direction.
Draconian penalty
Having lured foreign investors into a false sense of security the new
legislation has introduced a draconian penalty of 20 per cent on the
value of the loan for failing to settle the PCC (stamp duty) liability
before the inception of a tax inspection.
This is particularly dangerous to investors from economic environments
such as the UK, where this type of investment tax does not exist, and
they are therefore unaware of the associated risks. In the past,
shareholders have often introduced funds into the company prior to
formalizing the arrangement, unaware of the rigorous formal
requirements that a written civil code regime entails in the
documentation and taxation of this type of financing transaction. Even
prior to shareholder loans being exempted from the tax, shareholders
were prepared to pay the PCC often very late as they did not consider
making a loan to their Polish subsidiary as a high risk transaction.
Often the most prosaic reasons were to blame for late declaration of
PCC such as a lack of accessibility to non-resident foreign management
or shareholder executives’ time pressures.
Given the lack of publicity regarding the new legislation in both the
Polish professional and English speaking media there could be investors
who have recently (in 2007) extended loans to their subsidiaries and
not fulfilled the necessary PCC requirements. Arguing Vacatio Legis
with the tax office may mitigate their position but this offers
negligible comfort in such an uncertain and unstable fiscal
environment.
Inexperienced investors should not underestimate the Polish
government’s capacity for instituting and executing disproportionate
and draconian penalties. Action against the Polish government may be
sought at the European Court of Justice.
Joint and several liability
The revision to the law has also removed the concept of joint
and several liability of both parties from the PCC tax liability. The
new law now clearly identifies the borrower in the case of loans as
being totally liable for this civil activities tax. Therefore, in the
event of a tax inspection the Polish subsidiary will be the clear
target of any penalty.
Conclusion
It is unlikely that an additional investment tax will significantly
deter investors from entering Poland or will lead to the substantial
redirection of funds into competing Eastern European neighbours. How
successful the Polish government will be in collecting immediate tax
revenues from the booming commercial real estate market largely
financed by shareholder loans remains to be seen. The real threat lies
in investors losing confidence in the stability, rationale and clarity
of the Polish fiscal system and trust in the political climate as a
whole. It will only take one possibly creative but risky tax scheme to
fall prey to the new draconian penalty to shatter investor confidence.
© Marzena Richter, January 2007 |
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