I always tell my clients that what they should fear most from the tax system is not this or that tax rate, but the instability and carelessness in enacting and applying tax law provisions. Because one can eventually adapt to a given tax rate (e.g., by raising prices), but one cannot adapt to the unpredictability of the system – specifically, the people who create and operate this system.
But to the point. Since January 1, 2015, we have had CFC (Controlled Foreign Company) regulations with us – regulations that, under certain conditions, require including in the tax base of Polish tax residents the income of foreign companies and other foreign entities (including foundations). Regardless of the fact that these entities are taxpayers subject to taxation in their country of residence.
What are the CFC rules?
CFC rules aim to prevent tax base erosion through the use of entities in low-tax jurisdictions. Under Polish law, a foreign entity is considered a CFC if:
- The Polish tax resident holds directly or indirectly at least 50% of shares, voting rights, or profit participation rights.
- At least 33% of the entity’s revenue comes from passive income (dividends, interest, royalties, capital gains).
- The entity is subject to an effective tax rate lower than the difference between the Polish CIT rate and the actual tax paid abroad.
The practical consequence of CFC qualification is that the Polish shareholder must include the CFC’s income in their own tax base and pay Polish tax on it, regardless of whether any profit was actually distributed.
Recent changes
The latest amendments have significantly expanded the scope of CFC regulations, lowering thresholds and broadening the definition of passive income. This affects not only aggressive tax planning structures but also legitimate business operations conducted through foreign subsidiaries.
Entrepreneurs with foreign structures should urgently review their arrangements to ensure CFC compliance. The penalties for non-compliance include not only back taxes with interest but also potential criminal fiscal liability.
Paweł Osiński
Attorney, expert in international tax law and corporate structures