Tips on selecting a tax year
A company’s tax year, and thus its financial year, need not be the same as the calendar year. In certain situations it may even cover a period longer than 12 months. And changing the tax year can sometimes generate tax advantages.
For most businesses in Poland, 1 January is not just the first day of the calendar year, but also the first day of the tax and financial year. In the case of corporate income tax payers, the tax year, and thus the financial year, need not coincide with the calendar year. In some situations the tax year is not only different from the calendar year, but may cover a period other than 12 months. The adoption of a company’s tax year affects its tax settlements and accounting, but also serves as a tool for tax planning and internal planning.
The tax year is essentially the period for tax settlements and the balance sheet. Under the rule set forth in Art. 3(1)(9) of the Accounting Act, the financial year is the same as the tax year.
Change in tax year
Under Art. 8 of the Corporate Income Tax Act, the tax year of CIT payers is generally the calendar year. Nonetheless, CIT payers may adopt a different period of 12 successive months as their tax year—for example 1 November through 31 October. This requires a relevant provision in the taxpayer’s charter (e.g. articles of association), as well as notification of the tax office within 30 days after the end of the most recent tax year.
If these conditions are met, the first tax year following the change in tax year is the period from the first month following the end of the most recent tax year until the end of the newly adopted tax year. However, this period may not be shorter than 12 months or longer than 23 months. For example, if a taxpayer decides to change its tax year from the calendar year to a tax year of 1 November—31 October, the first tax year following the change will run from 1 January through 31 October of the following year—and thus in this case the first tax year following the change would last 22 months. The first regular new tax year would then begin on 1 November of the following year and run through the next 31 October.
The tax year will look a little different when separate regulations require the accounting books to be closed (and a balance sheet prepared) prior to the end of the tax year adopted by the taxpayer. Under Art. 12(2) of the Accounting Act, this may be the case when there are such events as a change in legal form, merger, division, conversion (with certain exceptions), or entering bankruptcy. In such case, the tax year is the period from the first day of the month following the end of the prior tax year through the date on which the accounting books are closed. The next tax year then runs from the date the accounting books are opened through the end of the tax year adopted by the taxpayer.
Moreover, if a CIT payer is established during the second half of the tax year and selects a tax year coinciding with the calendar year, it is possible to extend the first tax year so that it lasts from the establishment of the taxpayer until the end of the following calendar year. (For example, if a limited-liability company was established on 1 November 2013 and selected the calendar year as its tax year, it could decide that the first tax year would run from 1 November 2013 through 31 December 2014, and the second tax year would then run from 1 January 2015 through 31 December 2015). It is also possible for such an entity to change its tax year to one different from the calendar year.
Finally, there are detailed rules for companies that are members of a tax capital group. When a tax capital group is formed, for the individual companies making up the group the day before the beginning of the tax year of the tax capital group is the last day of the tax year for those companies. Subsequently, the day following the date on which the tax capital group agreement terminates or the date on which the group loses the status of a tax capital group marks the start of the tax year of the individual companies. This issue is of vital importance for tax settlements of companies which are members of a tax capital group, for example when it comes to determining the period in which a company in the tax capital group may recognise a tax loss incurred prior to joining the group.
Advantages from changing the tax year
The decision to select a tax year other than the calendar year may be dictated by numerous considerations, such as unifying the reporting periods within a capital group. Often, however, it is a tax planning instrument, for example in terms of the expiration of the period when a tax loss may be taken during participation in a tax capital group. But this is particularly relevant in the case of changes in income tax regulations. The amended rules for tax settlements apply from the beginning of the entity’s new tax year. For example, in the case of a taxpayer whose tax year runs from 1 December through 30 November, changes in the CIT Act entering into force on 1 January 2014 will not begin to apply until 1 December 2014. This allows time to prepare for changes and eliminate at least some doubts and burdens associated with applying new regulations, or even to obtain measurable financial benefits, e.g. through extended use of tax-favoured structures.
This mechanism was of practical use in the case of the amendments to the CIT Act that went into effect on 1 January 2014 limiting the use of a joint-stock limited partnership (SKA) for tax optimisation purposes. (Through the end of 2013, a SKA was transparent for income tax purposes, and the partners were the taxpayers, with a tax obligation on the part of a shareholder generally arising upon payment of a dividend.) With appropriate structuring, it was possible to establish a tax year for a SKA lasting until as late as 30 November 2015. A SKA which properly implemented its new tax year will not be regarded as a CIT payer until that date, but will continue to apply the prior rules. Nonetheless, for the safety of these companies and their partners, it is crucial that these actions were taken properly, particularly because the law required SKAs which were established or made changes more than 14 days after publication of the act to close their books on 31 December 2013, even if they had adopted a different tax year. Given the large number of new SKAs which were established in late 2013 and the numerous changes in their tax years (some unfortunately not implemented correctly), stepped-up controls by the tax authorities may now be expected.
Another example of the use of a modified tax year is extension of the period for expiration of the ability to apply tax losses. During the extended first tax year following the change, a company which has generated losses from its operations but has not had sufficient income to set it off against (or where the period in which it can apply the losses is ending) will obtain higher income, enabling it to apply tax losses from prior years to a greater degree.
A change in tax year, and especially the extension of the first year following the change, may also pay off when shifting to a system of paying simplified advances (based on the amount of tax in prior years), particularly when the projected income in the upcoming year will be higher than it is currently, thus affecting the amount of the advances that must be paid to the tax office.
Moreover, a change in tax year may be beneficial in a situation where, for example, a shareholder of the company has a different tax year. A change in that case may make the work of the accounting team easier and spread out the work of the team more evenly across the year.
There may be other benefits flowing from a change in tax year, but in every case it is necessary to be cautious and conduct a careful verification of the potential advantages as well as proper implementation.
The issue of the tax year has ramifications not only for tax and accounting purposes, but also for corporate purposes. The concept of the financial year, which is dictated by the tax year, is inextricably tied to expiration of the term of appointment of corporate authorities (e.g. Commercial Companies Code Art. 201) and the duty to prepare the financial report and business report for the prior year for approval by the shareholders (Commercial Companies Code Art. 228).
Joanna Prokurat, Tax Practice, Wardyński & Partners