The Phantom Company Problem
Recent amendments to Poland’s foreign-controlled-entity rules have produced an unexpected consequence: taxation may now extend to foreign foundations and shell companies that generate no income but simply hold assets. The implication is stark—if you’re a Polish resident and a beneficiary of a company outside Poland, you may owe Polish taxes on that company’s income, regardless of whether any money has actually moved.
This will come as an unwelcome revelation to owners of holding companies in Cyprus or Malta, trading companies in Dubai or Hong Kong, or shell companies in the Marshall Islands, or limited-liability companies in Delaware—structures designed, in many cases, as little more than safe-deposit boxes for wealth.
The Polish regulations operate in concert with the international framework known as the Common Reporting Standard (CRS), which requires financial institutions worldwide to collect information and report it to relevant tax authorities. The system, developed under the auspices of the Organisation for Economic Co-operation and Development as an Automatic Exchange of Information (AEOI) tool, has a simple premise: banks must determine where their customers should pay taxes. They use data they already possess and may request whatever’s missing. If a customer is tax-resident in a country other than the one where his or her bank accounts are held, the bank provides this information to local tax authorities, who may then exchange it with the tax authorities of the country where the customer resides.
This is how the Polish tax authorities will learn about your foreign banking relationships—not only those conducted in your own name but also those relating to companies, trusts, and foundations that you control or from which you benefit. You needn’t even personally serve as a proxy for the account. Under C.R.S., the bank will report you as a beneficiary, and the Polish tax authorities will attempt to tax you under the C.F.C. rules on that basis.
Who Falls Under the C.F.C. Tax?
A C.F.C. is a foreign entity in which a Polish tax resident, alone or jointly with related parties or other Polish tax residents, participates to a certain extent in the profit or capital, or exercises voting rights or effective control.
Following a series of amendments—including those introduced through the Polish Governance reform—the term “controlled company” was replaced by “controlled entity.” From 2019 onward, the C.F.C. regulations covered a considerably broader group. A foreign controlled entity may now be a legal person; a capital company in organization; an unincorporated organizational entity other than an unincorporated company; an unincorporated company, if treated as a legal entity in its country of tax residence and subject to tax on all its income; a foundation, trust, or other legal entity or relationship of a fiduciary nature; a tax capital group or company within such a group (provided that such a company, were it outside the tax capital group, would itself pay tax abroad at an effective rate of no more than 14.25 per cent); structurally or legally separated parts of foreign companies or other entities, whether incorporated or unincorporated; or a foreign permanent establishment of a foreign entity in any form.
The catalogue is comprehensive to the point of exhaustion.
The Mechanics of C.F.C. Taxation
When a controlling shareholder or beneficial owner of a foreign entity’s profits is a personal- or corporate-income-tax taxpayer who is a Polish tax resident, that person is obliged to calculate and pay C.F.C. tax on the foreign controlled entity’s income. The C.F.C. tax rate is nineteen per cent, and the tax base is the income earned by the foreign entity during the period of its tax year in which it was controlled by a Polish tax resident.
Entities deemed to be C.F.C.s must also prepare and deliver to the tax office an annual return on their C.F.C. income—PIT-CFC or CIT-CFC, as applicable. The deadline for submission of the return, as well as for payment of the tax, is September 30th of the year following the tax year covered by the return.
The Shell-Company Provision
The legislature’s expansion of C.F.C. subject matter aimed to prevent tax avoidance through so-called shell companies—entities with substantial assets but little income, or, conversely, entities with large revenues but small assets.
For a shareholder of an entity falling into this C.F.C. category, the obligation is particularly stark: pay a nineteen-per-cent tax on eight per cent of the market value of its assets. In other words, the tax base becomes income understood as eight per cent of the market value of the foreign entity’s assets.
The eight-per-cent rate applies when the establishment’s profitability is less than thirty per cent of asset value. It’s a presumptive-income approach—taxation without actual income, a kind of tax on financial potential.
The Comparative-Tax Test
For a company to be considered a C.F.C., the tax actually paid by that company in its country of residence must be at least twenty-five per cent lower than the income tax that would be payable by that company—using a nineteen-per-cent rate—if that entity were a Polish taxpayer. Before the amendment, the threshold was fifty per cent. The change effectively doubled the reach of the rules.
Record-Keeping Requirements
Those controlling C.F.C.s must maintain a register of their foreign controlled entities and C.F.C. records through which the amount of the C.F.C.’s income can be determined. The deadline for having complete records is no later than when the C.F.C. return is filed with the tax office—September 30th of the following year. The C.F.C.’s income must be determined in accordance with Polish tax regulations, which means applying Polish accounting principles to foreign entities operating under entirely different legal and financial frameworks.
The Substantial-Economic-Activity Exception
One significant carve-out remains: a foreign controlled entity carrying on substantial and genuine economic activity is excluded from C.F.C. rules. The activity should be carried out in a European Union or European Economic Area country, and the foreign entity must be subject to taxation on its entire income in that jurisdiction.
The prerequisite of actual economic activity is evaluated through several factors: Does the entity have adequate premises with equipment? Does it employ qualified personnel? Is there commensurability between the scope of activity and the premises, personnel, or equipment actually possessed? Does the foreign controlled entity independently perform its core economic functions using its own resources, including on-site managers?
These are subjective judgments, and the burden of proof falls on the taxpayer.
The Consequences of Non-Compliance
Failure to comply with record-keeping obligations—including keeping required records in a manner that makes it impossible to determine the C.F.C.’s income—creates risk of a tax investigation or audit. The tax authorities may assess the C.F.C.’s income based on the object of its business or the type of transactions undertaken, which can result in tax arrears with interest.
Beyond civil penalties, taxpayers may face criminal and fiscal liability for breach of C.F.C. rules, failure to calculate and pay the tax, failure to file the C.F.C. return, or failure to provide C.F.C. documents and records to the tax authority upon request.
The Broader Context
For a decade, I’ve tracked the evolution of foreign-controlled-entity regulations—what we call C.F.C. rules—with the wary attention one might give a legislative experiment conducted in real time. From 2013 to 2016, I criticized the framework’s underlying assumptions. From 2016 to 2018, I catalogued its loopholes, which were considerable. By 2018, most of those gaps had closed. The net now catches even companies domiciled in countries with nominally high tax rates that, in practice, collect little—Estonia, for instance—or return taxes to shareholders through elaborate mechanisms, as Malta does. Still, the rules remain baroque in their complexity, prone to frequent revision, and troublingly indifferent to basic principles of legislative clarity.
The practical reality: given the numerous difficulties in properly classifying a foreign entity as a foreign controlled entity, the necessity of constantly monitoring changes in the law, and the complicated process of creating and updating C.F.C. documentation, professional legal assistance has shifted from advisable to essential.
The era of the passive offshore structure—the foreign entity as mere receptacle for wealth—has effectively ended. What remains is a regulatory regime that presumes guilt, demands extensive documentation, and extracts tax on the basis of asset value rather than actual income. The Polish C.F.C. rules have become less a tool of tax administration than an exercise in forensic accounting, where the penalty for imperfect compliance can be severe and the standards for perfect compliance remain frustratingly unclear.
Foreign controlled Entities – publications of Skarbiec Law Firm
For a decade, I’ve tracked the evolution of foreign-controlled-entity regulations—what we call C.F.C. rules—with the wary attention one might give a legislative experiment conducted in real time. From 2013 to 2016, I criticized the framework’s underlying assumptions. From 2016 to 2018, I catalogued its loopholes, which were considerable. By 2018, most of those gaps had closed. The net now catches even companies domiciled in countries with nominally high tax rates that, in practice, collect little—Estonia, for instance—or return taxes to shareholders through elaborate mechanisms, as Malta does. Still, the rules remain baroque in their complexity, prone to frequent revision, and troublingly indifferent to basic principles of legislative clarity.
Robert Nogacki
