Foreign controlled entities (CFCs) – tax on pass-through income

Pass-through income is defined as a specific type of tax-deductible expenses incurred by a taxpayer to a non-resident related party during the tax year. Taxes on pass-through income at a rate of 19% on the taxable base must be paid by taxpayers provided several conditions are met.

I. The taxpayer must make payments of receivables for certain purposes.

These include the costs of:

• consultancy services, market research, advertising services, management and control services, data processing, insurances, guarantees, warranties and services of a similar nature,
• fees and charges of any kind for the use or right to use rights or copyrights or related property rights, licences, patents, know-how
• the transfer of the risk of insolvency of the debtor under loans other than those granted by banks and credit unions, including commitments resulting from derivative financial instruments and products of a similar nature,
• debt financing related to obtaining funds and using these funds, in particular interest, fees, commissions, premiums, the interest part of lease instalments, penalties, charges for late payment of liabilities and costs of securing liabilities, including costs of derivative financial instruments,
• fees and remuneration for the transfer of functions, assets or risks.

II. The summary of the costs from the aforementioned categories incurred by a taxpayer in a tax year

The summary of the costs from the aforementioned categories incurred by a taxpayer in a tax year for the benefit of affiliated entities, tied within the meaning of Article 11a(1)(4)with the taxpayer and included in the tax year as deductible costs of that taxpayer, must constitute at least 3% of the balance of the taxpayer’s tax-deductible costs for that year.

III. Several conditions must be cumulatively met concerning the related party to which the payments are made:

• the income of the related entity derived from the aforementioned sources is, according to the regulations of its country of residence, subject to taxation at an income tax rate lower than 14.25%, or totally exempt or excluded from taxation with this tax,
• a further condition is that the related entity receives from the taxpayer or from other companies related to the taxpayer which are Polish tax residents at least 50% of the total revenue from the above-mentioned sources,
• additionally, it is necessary that the related entity, for whose benefit the costs are incurred, transfers at least 10% of the above-mentioned revenues to another entity:
• by including the expenditure thereon as an expense accounted for income tax purposes, or by deducting such expenditure or revenue from income, tax base or tax in any form, or
• where such income constitutes profits assigned for distribution, irrespective of timing, in the form of dividends or other income from a share in the profits of legal persons,
• in the case of distributions to entities that are residents in a Member State of the European Union or the European Economic Area, taxation only takes place if the entity concerned does not carry out substantial real economic activity in that country.

In order to determine whether the economic activity of the affiliated entity to which the payments are made is genuine, a particular account shall be taken of:

• whether the entity in the country of its registration has an establishment within which it carries out its economic activity, consisting in particular of premises, qualified staff and equipment for the exercise of its economic activity,
• whether the beneficiary of the payment is in a position to decide independently on the use of the funds received,
• whether the recipient of the receivable bears the associated economic risk of loss.

When assessing whether an economic activity is material, particular consideration shall be given to the ratio of the revenue received by the affiliate from its genuine economic activity in relation to its total revenue.

If you have any further questions or require additional information, please contact your business relationship person or use the enquiry form on the HLB Poland website.

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