Tax Radar (Poland) - October 2024

News of the month

Supreme Administrative Court (NSA) submitted a preliminary ruling question to the Court of Justice of the European Union (CJEU).

The question addresses the compatibility of Article 86(10b)(1) of the Polish VAT Act with Directive 112 and core principles of VAT, namely neutrality, effectiveness, and proportionality.

The NSA has asked whether Articles 167, 168(a), and 178(a) of Directive 112, along with the principles of tax neutrality, effectiveness, and proportionality, should be interpreted as precluding national legislation like Article 86(10b)(1) Polish VAT Act. This Polish provision restricts a taxpayer's right to deduct input VAT in the period in which the material conditions for deduction are met, if the taxpayer has not yet received the invoice for the transaction during that period - even if the invoice is received before filing the VAT return for that period.

This ruling could have significant implications for the timing of VAT deductions, influencing both taxpayers and administrative practices.

Court judgement of the month

According to the judgement of the NSA on October 9, 2024 (Case No. II FSK 45/22), for an expense to be recognized as a tax-deductible cost, there must be a direct connection to the taxpayer’s business activities. In the case reviewed, such a connection exists only in relation to the subsidiary. The parent company's expenses for promoting and encouraging distributors to increase business activity are linked only to the subsidiary’s revenues. If the parent company expects to increase income from the sale of the subsidiary's shares, this is considered an indirect connection. Expenses incurred by the parent company that benefit the subsidiary cannot be recognized as the parent’s own tax-deductible costs.

Practical example:

Let's say Company A is the parent company of Subsidiary B. Company A spends money on marketing campaigns to encourage distributors to promote Subsidiary B’s products, hoping that increased activity will eventually boost Company B’s sales. If Company A’s aim is to raise its own revenue by later selling shares in Subsidiary B at a higher price, this is considered an indirect benefit. Because these expenses primarily benefit Subsidiary B’s business, they cannot be treated as direct tax-deductible costs for Company A.

Tax authorities ruling of the month

On October 7, 2024, it was announced that the Head of the National Revenue Administration (KAS) refused to issue a protective opinion (Ref. DKP2.8082.7.2023/4) regarding the transformation of a Dutch cooperative into a limited liability company (B.V.) and its merger with Company Y, with the effective management planned to be based in Poland.

The Head of KAS determined that the primary goal of these actions was to achieve a tax benefit, which conflicts with the purpose of the Corporate Income Tax (CIT) Act. The fact that Company Y’s registered office would remain in the Netherlands without assets or management implied an artificial arrangement. Additionally, this restructuring added complexity to the XYZ Group’s structure instead of simplifying it. Therefore, KAS denied the protective opinion, finding that the intended steps aimed to avoid taxation.

Practical example:

Imagine a multinational group, XYZ Group, with Company X, a Dutch cooperative, as part of its structure. XYZ Group plans to restructure by converting Company X into a Dutch limited liability company (B.V.) and merging it with Company Y, which is effectively managed in Poland. However, while Company Y is registered in the Netherlands, it has no significant assets or management presence there - only a legal address.

The main purpose of the restructuring could be perceived as minimizing tax obligations in Poland by technically keeping the company’s legal base in the Netherlands. The lack of genuine economic substance may disqualify the structure, attributing tax consequences based on the actual nature of the activities undertaken.