The taxation of Controlled Foreign Corporation’s income

Michał Gawlak

Michał Gawlak

Partner / Attorney-at-law

The first chamber of Polish parliament (Sejm) received a bill of an act amending the personal and corporation income tax law, which stipulates incorporation of a new solution to the Polish law, allowing to impose a tax on the income of Controlled Foreign Corporations (CFC).

Introduction of the CFC mechanism is intended to combat the existence of tax frauds between the related entities. It consists in imposing tax on an income of a certain related entity, that is other country’s resident, and attributing this income to the income of a domestic entity. In consequence, the domestic entity is obliged to include in its tax base the income of controlled foreign corporations, that have their seats or management boards in a country with a lower level of taxation.

The bill stipulates applying the 19% taxation rate to the income of dominant companies. In order to use the abovementioned mechanism, the CFC company needs to fulfill certain conditions. First of all, it should be in possession of at least 25% of shares in the dominant company’s share capital and its yearly income should exceed 250 000 EUR. Secondly, there should be a lower level of taxation in an CFC country and at least half of its income should be characterized as passive income, that is coming from dividends, loans, copyright etc. Moreover, the CFC companies are not allowed to conduct actual business activity.

The mechanism will be applicable if at the foreign company’s country the income is subject to taxation at a rate lower than 75% of Polish CIT rate (the corporation income tax), that is lower than 14,25%.

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    Michał Gawlak
    Partner / Attorney-at-law
    CGO Legal CGO Finance