Foreign Controlled Entity (ZJK) has once again been extended

Thanks to the Polish Governance, the subjective scope of a foreign controlled entity (ZJK) has once again been extended. Due to the new criteria for separating ZJK, the regulation may apply to a wide range of Polish taxpayers who have a certain level of control in foreign entities and thus impose on them the obligation to tax undistributed profits of ZJK in Poland.

Definition of a foreign entity

Currently, the definition of a foreign entity goes far beyond the common understanding of the institution of an independent entity or company, as it also includes other legal relationships (e.g. foundations or trusts).

Pursuant to Art. 24a sec. 1 point 2 of the CIT Act, a foreign entity should be understood as, among others: a legal person, a capital company in organization, an organizational unit without legal personality, a company without legal personality, a foundation, trust or other entity or legal relationship of a fiduciary nature, a tax capital group or a company from a tax capital group (provided that certain criteria are met). The indicated entities may not have a seat, management board or registration in the territory of the Republic of Poland, but it is important that the Polish tax resident, alone or jointly with related entities or other taxpayers who are Polish tax residents, has, directly or indirectly, a share in the capital, voting rights in constituting or managing or the right to participate in profit, including their excpectation. The definition of a foreign entity will also be met when a Polish taxpayer obtains the right to acquire these rights in the future, including as a founder or beneficiary of a foundation, trust or other entity or legal relationship of a fiduciary nature. Moreover, the scope of the discussed definition also includes entities over which the taxpayer exercises the so-called factual control (it consists, among others, in exerting a dominant influence on the functioning of a foreign entity or making decisions in its matters).

Definition of a controlled foreign entity

A Polish tax resident is obliged to tax undistributed profits of a foreign entity only when it meets the definition of ZJK. A foreign entity may be considered as an ZJK if it meets the conditions of one of the five categories discussed below.

I The first criterion for separating ZJK is the seat criterion - it refers to foreign entities with a registered office or management board, place of registration or location in a tax haven,

II Another group of entities that may be considered as ZJK is related to the criterion of an international agreement. It refers to countries with which neither Poland nor the European Union has signed an agreement on the avoidance of double taxation or an agreement providing the basis for the exchange of tax information.

III Next, the Act refers to the criterion of the type of revenue (income) obtained and the amount of the taxpayer's share in the capital. Entities that cannot be qualified as ZJK on the basis of the seat criterion or the criterion of an international agreement become an ZJK after all the following conditions are met:

- the level of control or actual control (having a level of direct or indirect control - e.g. in terms of the number of shares or voting rights held in control bodies - at a level above 50% or exercising actual control over a foreign entity);

- structure of revenues - at least 33% of the revenues of this entity, achieved in the tax year, come from the so-called passive income. Currently, passive income consists of 13 categories, while the list of this type of income has been supplemented as part of the Polish Deal, e.g. with revenues from the sale of all rights and obligations in a company that is not a legal person, participation titles in an investment fund, intangible services, rental or revenues from copyright or industrial property rights included in the sale price of a product or service;

- the level of taxation - the income tax actually paid by this entity is lower by at least 25% than the CIT that would be due from it using the 19% tax rate, if this entity was a Polish tax resident (tax actually paid means tax not subject to refundable or deductible in any form, including to another entity).

IV Another group of entities was created by the legislator in order to combat tax avoidance by creating the so-called shell companies. The conditions that must be met by them jointly are as follows:

a) condition of control level or actual control (described above),

b) the condition of the level of taxation (described above),

c) revenue condition - revenues from passive sources are lower than 30% of the sum of the assets held:

- shares in another company, all rights and obligations in a company that is not a legal person, titles of participation in an investment fund, collective investment institution or other legal person, receivables resulting from holding these shares (shares), rights of a similar nature to these shares (shares), all rights and obligations or participation titles,

- real estate or movable property owned or co-owned by the taxpayer or used by him under a leasing contract,

- intangible assets,

- liabilities towards related parties;

d) the condition regarding the assets of a foreign entity - the assets described in point c above constitute at least 50% of the value of assets of such an entity (when determining this proportion, shares in another company not having its registered office or management board in the territory of the Republic of Poland and not having, directly or indirectly, shares in a company with its registered office or management board in the territory of the Republic of Poland).

V The last category of ZJK refers to the rate of return on assets held. In order to obtain the status of a ZJK in this category, a foreign unit must meet all of the following conditions:

a) condition of control level or actual control (described above),

b) income condition - the individual's income exceeds the income calculated according to the formula: (b + c + d) × 20%, in which the individual letters mean:

b - the carrying amount of the entity's assets,

c - annual unit employment costs,

d - accumulated (total) value of depreciation write-offs within the meaning of the accounting regulations;

c) income condition - less than 75% of the entity's income comes from transactions with unrelated entities having their place of residence, registered office, management, registration or location in the same country as this entity;

d) the condition of the level of taxation (described above).

Summary

The amended regulation, due to its complexity and scope of impact, raises considerable controversy and difficulties in practice. Taxpayers with even the smallest level of control in foreign entities should review the structures in order to check whether, as a result of the amendment, the discussed regulation does not apply to them. In case of any doubts, an experienced team of PKF experts provides advice and support in this regard.