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Tax Alert: Taxation of unrealized capital gains (exit tax)

Taxation of unrealized capital gains (exit tax)

On 24 August 2018 the Ministry of Finance published the project of the bill amending the Personal Income Tax Act, the Corporate Income Tax Act, the Tax Ordinance Act and several other regulations (hereinafter: “the Project”).

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The Project is intended to tighten up the corporate income tax system (hereinafter: “CIT”) and personal income tax system (hereinafter: “PIT”) by implementation of the exit tax.

The purpose of introduction of the exit taxation

According to the official justification to the Project, the purpose of the regulation is to adjust the Polish tax provisions to the EU law. The proposed amendments are intended to correspond with Article 5 of the EU Council Directive 2016/1164 dated 12 July 2016, (hereinafter: “the ATAD Directive”) which regulates the unrealized capital gains taxation in the case of transfer of taxpayer’s assets or permanent establishment out of a tax jurisdiction, as well as in the case of change of the tax residence of a taxpayer.

According to the ATAD Directive, the tax levied on unrealized capital gains is intended to ensure that if a taxpayer moves assets or its tax residence out of the tax jurisdiction of a state, that state is allowed to tax the
economic value of any capital gain created in its territory even though that gain has not yet been realized at the time of the exit.

The EU Member States are obliged to harmonize the domestic regulations with the regulations of the ATAD Directive concerning exit tax to be levied on legal persons. Nonetheless, according to the Project, it was decided that under the Polish law the exit tax is also to be imposed on natural persons (individuals). The Project contains specific regulations referring only to natural persons (e.g. the threshold of PLN 2 million for assets subject to taxation).

The regulation is aimed at preventing the erosion of tax base in the internal market and the transfer of profits outside the territory of the internal market.
 

The planned regulations

The exit tax is intended to be imposed on:

  • transfer of an asset (including an enterprise or an organized part thereof) outside the territory of Poland if as a result of the transfer Poland loses (wholly or in part) the right to levy tax on income potentially derived from the sale of the asset, provided that the transferred asset remains the property of the same person;
  • change of a taxpayer’s tax residence if, as a consequence, Poland lose (wholly or in part) the right to levy tax on income derived from the sale of an asset owned by the taxpayer as a result of the change of the country of residence (for natural persons) or the registered seat or the place of effective management (for legal entities) to another country.

The Project contains examples of situations considered as the transfer of an asset outside Poland and indicates that the regulation does not apply to the assets which will stay in a permanent establishment located in Poland.

In the case of natural persons, also the assets which are not related with business activity shall be subject to taxation (e.g. shares in companies) – this regulation concerning personal property shall be applied only if a taxpayer has been a Polish tax resident for at least five years before the change of the tax residence.

The exit tax basis shall be calculated as the surplus of the market value of the transferred asset, determined at the date of the transfer, over its tax value (as defined in the Project).

The tax rate shall amount to:

  • 19 percent – for the CIT and PIT taxpayers, if the tax value of an asset is determined;
  • 3 percent – only for the PIT taxpayers, if the tax value of an asset is not determined (i.e. if according to separate provisions tax deductible costs on the transfer of an asset cannot be recognized).

In the case of natural persons, only the transfer of assets with a market value exceeding PLN 2 million shall be subject to taxation (calculated in relation to an individual transaction or for several transactions conducted during a period of 1 year). In the case of CIT taxpayers, the exit tax is to be imposed regardless of the market value of assets.

According to the Project, taxpayers will be obliged to submit tax returns and report the amount of income subject to exit tax until the 7th day of the month following the month in which the income arose. At this point taxpayers shall also be obliged to pay the tax.
The Project also regulates the possibility of paying the tax in installments. The period of extended repayment cannot exceed 5 years.

According to the justification of the Project, the analyzed regulations are intended to come into force on 1 January 2019. The deadline for implementation of the ATAD Directive expires at 31 December 2019.
It should be noted that the Project will be subject to public consultations and further legislation process and thus the final provisions of the amendment could differ from the Project in its current wording.

Please contact us if you would like to obtain more information on the described regulations or discuss its potential impact for you or your firm.

 

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