Costly parting of the ways with the Polish tax authorities: Tax on income from unrealised gains
A tax amendment is lying on the Polish President’s desk. It will introduce, among other things, a tax on income from unrealised gains. As announced, the regulations should enter into force at the beginning of 2019.
The EU’s Anti Tax Avoidance Directive (2016/1164) obliges Poland to establish anti-avoidance rules that have a direct impact on the functioning of the internal market.
One aim of the ATA Directive is to ensure that taxes are paid where profits and value are generated. One measure for achieving this goal is through unifying regulations on the taxation of unrealised capital gains, also known as an “exit tax.”
Polish legislators have taken steps to put this into effect by introducing a new exit tax into both the Corporate Income Tax Act and the Personal Income Tax Act. However, the exit tax will not apply to individuals if the total market value of the transferred assets does not exceed PLN 4,000,000.
The cost of moving is increasing
The essence of the exit tax is taxation of unrealised gains associated with the taxpayer’s transfer of assets or tax residency to another state. The exit tax will apply to situations where Poland loses the right to tax the increase in the value of certain assets that was effectively generated before the transfer.
More specifically, the exit tax will apply to the following situations:
- Transfer of an asset outside Poland, as a result of which Poland loses, in whole or in part, the right to tax the gain on the sale of the asset, while the transferred asset remains the property of the same entity (the act contains an open list of examples of such events)
- Change of tax residency by a taxpayer subject to unlimited tax liability in Poland, as a result of which Poland loses, in whole or in part, the right to tax the gain on the sale of an asset owned by the taxpayer, in connection with the transfer of the taxpayer’s registered office or management board (CIT) or place of residence (PIT) to another state.
The PIT Act also contains a provision stipulating that if an asset is not associated with a business, in the event of a change in tax residence referred to above, exit tax will only be levied on assets constituting:
- All the rights and obligations in a company or partnership that is not a legal person
- Shares in a company, stock and other securities
- Derivative financial instruments
- Participation units in capital funds
if the taxpayer resided in Poland for a total of at least five years in the ten-year period preceding the change of tax residency.
In the event of a change of residence referred to above, the exit tax will not apply to assets that, following the change of tax residency, remain associated with the foreign taxpayer’s establishment in Poland.
How much will it cost?
Income from unrealised gains is the difference between the market value of an asset, determined on the date of its transfer, or on the day before the change in tax residency, and its tax value.
The tax value is the value not previously recognised as a tax-deductible cost which would have been recognised by the taxpayer as tax-deductible cost if the taxpayer had sold the asset for consideration. The act also provides for situations where taxpayers do not determine the tax value of assets.
The CIT Act will impose only one rate of exit tax, 19%.
The PIT Act will impose two rates of exit tax:
- 19% of the tax base, if the tax value of the asset is being determined
- 3% of the tax base, if the tax value of the asset is not being determined.
Other regulated issues
- Moving by instalments
A taxpayer may apply to the tax office for payment by instalments of all or part of the exit tax, over a period no longer than 5 years, if the transfer of assets or the transfer of tax residency is occurring in an EU member state, or another EEA state that is a party to an agreement concluded with Poland or the EU “on mutual assistance in the recovery of tax receivables, equivalent to the mutual assistance provided for in Council Directive 2010/24/EU of 16 March 2010 on mutual assistance in the recovery of receivables involving taxes, duties and other levies.”
In the event of a real risk of not recovering exit tax, a tax authority may request the establishment of security and payment of a prolongation fee. To facilitate assessing whether a real risk exists, the law lists examples of material circumstances.
- Moving called off
The PIT Act provides an additional regulation enabling reversing the effects of moving outside the Polish tax authorities’ orbit.
If a taxpayer transfers an asset outside Poland and then, within 5 years from the end of the tax year when the transfer took place, transfers it back to Poland, the taxpayer may request a refund of the exit tax in the part relating to the asset.
Similarly, if a taxpayer changes tax residency and then, within 5 years from the end of the tax year when the change occurred, resumes the status of a person with unlimited tax liability in Poland, the taxpayer may apply for refund of the exit tax paid. The refund does not apply to tax associated with assets that remain tied to the taxpayer’s foreign establishment outside Poland.
- Temporary transfer of assets
In selected cases, exit tax will not apply to situations in which property is transferred outside Poland for a definite term of no more than 12 months.
- Extending the scope of exit tax
To dampen the ardour of taxpayers seeking ways to mitigate the effects of the new tax, the law provides that the exit tax provisions will apply, respectively, to a free-of-charge transfer of an asset to another entity in Poland, and the contribution of an asset to an entity other than a company, partnership or cooperative. In both cases, the effect must mean that Poland loses, in whole or in part, the right to tax income on the disposal of the asset.
Expatriations of assets and changes of residence are likely to become more expensive from 1 January 2019, although not for everyone. Businesses considering international restructuring should take into account the potential exit tax charge. Also, wealthy people who have accumulated significant savings and wish to settle in a pleasant corner of the planet and wave goodbye for good to the Polish tax authorities will have to consider the effects of exit tax. Nevertheless, it would seem that people with less property who are going abroad to earn money or moving for personal reasons may sleep peacefully.
Maksymilian Olejniczak, Wojciech Marszałkowski, adwokat, Tax practice, Wardyński & Partners