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Blickpunkt Osteuropa

Blickpunkt Osteuropa

Poland is fighting fraud through new law regulations


Polish government is exacerbating the fight against the gray economy. Ministry of Finance and Ministry of Development has joined forces to prepare a new set of regulations aimed at further sealing a tax law in Poland. Ongoing legislation process is focused on requirements related to transport of sensitive goods such as fuel. Government Bodies want to introduce a new Act on registration and monitoring of road transport in Poland. The Act will specify a catalog of sensitive goods, which transport across the country will be controlled.

Under the new rules a monitoring system consisting of a Customs Service register of transported goods and dedicated mobile communications system will be introduced.

The carrier of the goods will have to register on the customs electronic platform. He will also receive a GPS device that will allow tax officials to keep track of the goods route. The route will not only be monitored, but also saved.

Prepared regulations besides carriers control introduce severe sanctions in case of any irregularities in the carriage of goods – for example, penalty amount of 46 percent of net value of transported goods.

The proposed Act focused on transport is another solution by which Polish government wants to fight the gray economy mainly in the fuel market. The first was entered into force on 1 August 2016 so called fuel package.

Solutions that are to come into force in Poland were already successfully introduced in Hungary and Portugal.

Serbia: Amendments to Montenegrin Corporate Income Tax Law


In brief

Montenegrin Parliament adopted in August 2016 amendments of the Corporate Income Tax Law which come into effect on 1 January 2017. The amendments introduced rules regarding tax deductibility of certain expenses, electronic filing of tax return, assessment and mechanism for taxation of capital gains realised by non-residents on sale of Montenegrin capital goods, revised penalties for non-complying with the provisions of this law, as well as broader definition of income realized by non-residents subject to withholding tax.

Montenegrin Parliament adopted in August 2016 amendments of the Corporate Income Tax Law (hereinafter: the Law). The amendments became effective as of 1 January, 2017. It seems that key driver for amendments was the intention to improve certain areas previously regulated in an insufficient manner. We list the major changes for your further consideration below.

Submission of tax returns:

Taxpayer is obliged to electronically submit CIT return through the portal of Tax Authorities. The aim of this amendment is reduction of administration and time spent by the taxpayer on complying with the provisions of the law as well as reduction of the possibilities for making errors in respect to data entry.

Please note, that in order to submit CIT return electronically, taxpayers should possess digital certificate issued by the certification body- AD “Pošta Crne Gore“.

Taxation of non-residents

The adopted amendments to the Law introduced specific rules for assessment and mechanism for taxation of:

  • capital gains of non-residents in transactions with other non-resident entities or resident and non-resident individuals;
  • Montenegrin sourced income realised by non-residents on the basis of lease of movable and immovable assets from a person who is not obliged to calculate, withhold and pay withholding tax (i.e. non-resident entities or resident and non-resident individuals).

The non-resident is obliged to file the tax return, via their Montenegrin tax representative (tax agent), within 30 days from generating income. Tax liability will be determined based on decision issued by the Montenegrin Tax Authorities.

Withholding tax

Amended Law provides more detailed definitions of the income earned by a non-residents on the basis of dividends, royalties, interest, fees for consulting, market research and auditing services, which is subject to withholding tax on payments to non-residents.

Withholding tax will also be payable on income earned by:

  • a non-resident on the basis of performing entertainment, artistic, sport or similar program in Montenegro;
  • a non-resident or resident individuals on the basis of repurchase of used products, semi-final products and agricultural products from a manufacturer which is registered for VAT purposes.

Assessment of CIT base:

  • Salary costs, severance payments related to retirement of employees, costs related to technological surplus and other payments related to termination of employment are recognized as deductible in the tax period in which they are paid (not in the period in which they are accrued).
  • Impairment of assets -expenses incurred on the basis of impairment of assets are not deductible for CIT purposes. Impairment expenses are deductible in the period in which assets are disposed of or damaged due to force majeure.
  • Write-off of receivables – amendments relate to conditions which need to be fulfilled so write-off of receivables can be treated as CIT deductible. Namely, write-off of receivables can be considered as CIT deductible only if such receivables were previously included in taxpayer’s revenues, if they are written-off as uncollectible in taxpayer’s books, if the taxpayer can provide a proof of filling a lawsuit or that enforced proceedings were instigated or that receivables were reported in the bankruptcy or liquidations proceedings and if such receivable is older than 365 days.
  • Expenses deductible up to the amount of 3.5%of total revenues – The list of expenses deductible up to the amount of 3.5% of total revenue is expanded and encompasses expenses incurred for social purposes, reduction of poverty, protecting persons with disabilities, child and youth social care, elderly care, protection and promotion of human and minority rights, the rule of law, civil society and volunteerism, Montenegro’s Euro – Atlantic and European integration, art, technical culture, promotion of agriculture and rural development, sustainable development, consumer protection, gender equality, the fight against corruption and organized crime and fight against addictions.

Expenditures for abovementioned purposes are recognized regardless whether they are made in cash, goods, rights and services.

Expenses incurred in this regard will be deductible for CIT purposes only if they are made to legal entities, which are engaged in provision of the aforementioned services in accordance with specific regulations, and if received funds are used by such entities exclusively for the above mentioned purposes.

Penalties

Fines ranging from EUR 550 to EUR 16,500 are introduced for failing to calculate CIT in accordance with provisions of the Law.

Should you require any clarification or any further information regarding the above changes in the tax legislation, please do not hesitate to contact us via e-mail or phone.

Hungary: Changes to environmental protection product fee regulations from 1 January 2017


Economic operators can expect several changes to tax laws from 2017, including changes to the environmental protection product fee. These changes, however, will be introduced as a standalone amendment, rather than as part of the “omnibus” amending regulations. Accordingly, on 5 December 2016, Act CXXXIX of 2016 was published in Issue No. 191/2016 of Magyar Közlöny (the official gazette of the Hungarian State), which includes the amended provisions of Act LXXXV of 2011 on the Environmental Protection Product Fee (“Product Fee Act”) effective from 1 January 2017.

Notable changes to the Product Fee Act: extension of the scope of the flat fee imposed on motor vehicles; clarifications to the rules on chain transactions; changes to the fee payment obligation for paper-based advertising materials; and simplifications to the rules on individual waste management. Other changes include removing flexible cooler bags from the product category of plastic shopping bags, and abolishing the obligation to pay the product fee on goods recycled from products subject to the product fee that have become waste in Hungary. Below is a summary of the key changes mentioned above.

As a result of extending the scope of the flat fee for motor vehicles, from 1 January 2017, this type of fee payment will be applicable to buses classified under customs tariff number 8702, and to commercial vehicles classified under customs tariff number 8704.

Concerning chain transactions, the following clarifications have been made:

  • The first domestic buyer may assume the product fee liability from the party liable to pay the product fee if at least 60% of the products are exported.
  • For packaging materials (excluding materials that are part of the packaging of goods), the first domestic buyer may assume the product fee liability not only in the case of resale, but also in the case of own use.
  • Taxpayers adding goods to stock may also assume the product fee liability from 1 January 2017.

For paper-based advertising materials, the rules on product fee payment will become more stringent: from 1 January 2017, paper-based advertising materials will also qualify as such if the customer makes no declaration to the print shop that makes the paper-based advertising material concerned.

The rules on individual waste management will be simplified. Previously, individual waste management included (among others) own waste collection from the end-customer; from 1 January 2017, the product fee-related rules will be much more lenient. From 1 January 2017, in the case of individual waste management, it will no longer be required by law to collect waste generated from products subject to the product fee from end-customers, nor will it be required for individual waste managers to collect such waste on their own.

The definition of “plastic shopping bag” will also change as of 1 January 2017. Flexible cooler bags previously classified as plastic shopping bags will no longer be included in this category from 1 January 2017. They will be reclassified under plastic packaging materials, which means that the applicable product fee will be significantly reduced, from HUF 1900 to HUF 57 per kg.

In accordance with the general objectives of the Product Fee Act (i.e., reducing pollution and environmental damage, saving natural resources, and promoting renewable energy sources), there will be additional cases from 1 January 2017 in which economic operators will not be required to pay the product fee. For example, this applies to cases in which the goods subject to the product fee that are to be released for circulation in Hungary, used for own purposes or added to stock are recycled from products that have become waste in Hungary.

Latvia: SRS ruling on taxation of board member’s income


In July 2016 the SRS published a ruling on how income received by someone sitting on a company’s management board is taxed under section 8(2.9) of the Personal Income Tax (PIT) Act. This article explores the approach the SRS takes in analysing the taxpayer’s issue.

Background

X Ltd has two officers: the chairman of the board and a board member who is also the company’s CEO. The chairman receives no remuneration for his work, but the board member is remunerated by three companies: X Ltd, U Ltd (X’s parent company), and C Ltd.

X Ltd asked the SRS to issue a ruling on whether X qualifies for the exception available under section 8(2.10)(1) of the PIT Act (i.e. the right to exempt a board member’s income from wage tax).

Provisions of the PIT Act

Section 8(2.9) of the PIT Act states that a company’s board member is considered to have received taxable income equal to the statutory minimum monthly wage (€370 in 2016) for the current month in which the company has no employee or board member receiving remuneration that equals or exceeds the minimum wage, if the company’s revenue for that month exceeds five minimum monthly wages (€1,850 in 2016).

Section 8(2.10) of the PIT Act states that section 8(2.9) does not apply where a board member in a company meeting the criteria listed in section 8(2.9) receives board remuneration in another company for the current month that equals or exceeds five minimum monthly wages, and if the two companies are members of the same group within the meaning of the Corporate Income Tax Act.

The SRS analysis and findings

The SRS measured X’s revenue for the first five months of 2016: it exceeded €30,000 in total and was €1,850 or more for each of the months. The SRS found that the board member’s monthly gross remuneration was €145.11 from X Ltd, €1,425.03 from U Ltd, and €435.32 from C Ltd.

The SRS examined whether X, U and C qualify as members of the group under section 12(7) of the Corporate Income Tax Act. The SRS found that X and U are related companies within the meaning of the Act, but X and C are not.

The SRS found that X may escape section 8(2.9) of the PIT Act only if the board member of U and C (group entities) is a board member also in X, with his total board remuneration for one month exceeding five minimum monthly wages.

However, C does not qualify as a member of the group, and so the board member’s remuneration from C was ignored for the purpose of applying the provision of law in question.

The SRS found that X cannot take the exception available under section 8(2.10)(1) of the PIT Act because the board member’s remuneration from X and U combined is less than €1,850 (145.11 + 1,425.03 = 1,570.14).

The SRS also mentioned that the National Social Insurance Act (Section 1(2)(m)) treats a company’s board member as an employee if the company’s revenue for the current month of the tax year exceeds the minimum monthly wage prescribed by the Cabinet of Ministers multiplied by a coefficient of 5 and if the company has no employee or all its employees pay social insurance contributions on an income that is below the minimum wage in that month.

Latvia: Tax implications of investing in public infrastructure items


Companies that launch property development projects or pursue other lines of business in an area with no infrastructure (no roads, no streets, no lighting, no water main, etc) are often forced to build the necessary items of public infrastructure, because municipalities do not have enough funds. Later, to reduce the cost of managing that public infrastructure, the developer requests that the municipality should take ownership of those items and carry out their further management and maintenance. This article explores the tax implications of such activities.

The Municipalities Act states that a municipality’s functions include providing local residents with utility services as well as improving and cleaning the municipality’s administrative area, including building, refurbishing, maintaining and lighting the streets, roads and squares. So it makes perfect sense to transfer any items of public infrastructure built with private-sector money to the municipality for their further management.

Initial questions arise when it comes to legally documenting the transfer of the public infrastructure item to the municipality, because there is no legal form of transaction that would precisely reflect the intentions of the parties and lead to public infrastructure items built by the private sector being passed to the municipality for their further management and maintenance. Since municipalities are not prepared to reimburse the cost of building such public infrastructure, these items are transferred to municipalities without consideration under a deed of gift. However, generosity is not a motive for such private-sector activities: a gift is the only form of transaction that provides for the transfer of an asset without consideration.

Also, the corporate income tax (CIT) and value added tax (VAT) legislation is silent about how public infrastructure development costs should be recorded in the company’s books.

Since the company has invested in public infrastructure items for commercial and not personal reasons, in practice accounting for the cost of developing a public infrastructure item depends on the company’s line of business. These costs are either accrued in inventories under current assets if the company’s core business activity is property development and disposal, or in PPE (with depreciation being included in the value of services rendered) if a public infrastructure item has been built for the company’s own business that is not property sales (e.g. a logistics centre or a shop). Any input VAT paid on the construction of a public infrastructure item is deductible, even though the infrastructure can be used by the public and no consideration has been received for that use.

What are the VAT and CIT implications if a public infrastructure item is transferred to the municipality without consideration (i.e. donated)?

VAT implications

The SRS has not reached a consensus on whether the gift of a public infrastructure item to the municipality in these situations qualifies as a deemed taxable supply (personal consumption) within the meaning of the VAT Act. In our view, if we evaluate the economic substance of the transaction, it is not a deemed taxable supply and should not attract VAT (if the company has invested in a property that qualifies as “used” at the time of transfer to the municipality, the supply should not be recorded as exempt, either).

Passing the public infrastructure item to the municipality raises the next question: Does the deducted input VAT need adjusting? In our view, it does not matter that a public infrastructure item is transferred to the municipality without consideration, because the transfer to the municipality for further management and maintenance does not restrict its further use and does not change its significance in the company’s business. Accordingly, the deducted input VAT needs no adjusting. The SRS has mostly agreed with this view.

Latvia: Risk analysis in transfer pricing documentation


The latest version of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, which came into force in autumn 2015, substantially widens the range of requirements for analysing risk as part of the functional analysis in a company’s transfer pricing documentation. This article takes a look at details.

Risk analysis

Section D1.2.1 of the OECD guidelines states that the process for analysing risk in a controlled transaction should comprise the following six steps:

  1. Identify economically significant risks with specificity;
  2. Determine how specific, economically significant risks are contractually assumed by the associated enterprises under the terms of the transaction;
  3. Determine through a functional analysis how the associated enterprises that are parties to the transaction operate in relation to assumption and management of the specific, economically significant risks, and in particular which enterprise or enterprises perform control functions and risk mitigation functions, which enterprise or enterprises encounter upside or downside consequences of risk outcomes, and which enterprise or enterprises have the financial capacity to assume the risk;
  4. Determine whether the contractual assumption of risk is consistent with the conduct of the associated enterprises and other facts of the case by analysing (i) whether the associated enterprises follow the contractual terms under the relevant principles; and (ii) whether the party assuming risk, as analysed under (i), exercises control over the risk and has the financial capacity to assume the risk;
  5. Where the party assuming risk under steps 1–4(i) does not control the risk or does not have the financial capacity to assume the risk, apply the guidance on allocating risk;
  6. The actual transaction, as accurately delineated by considering the evidence of all the economically relevant characteristics of the transaction as set out in the guidance, should then be priced, taking into account the financial and other consequences of risk assumption, as appropriately allocated, and appropriately compensating risk management functions.

Practice

We have noticed that certain SRS officers who specialise in transfer pricing reviews are already adopting this OECD approach during tax audits and issuing information requests focused on managing various risks.

This means that Latvian taxpayers should control all expenses they incur in their dealings with related companies to ensure that those expenses are deductible for corporate income tax purposes.

For example, corporate groups often have a dedicated purchase company or a purchase department within a group company that selects suppliers, negotiates terms that are favourable to the group, and takes care of ordering, buying and transporting goods for a Latvian taxpayer. Corporate groups typically organise centralised purchases to reduce the group’s total expenses and negotiate favourable terms of purchase, including a bulk discount on goods ordered for the whole group.

However, if the Latvian taxpayer is not involved in the process of selecting suppliers, has no right to reject or change a supplier, and is unable to independently analyse or control purchase prices, there is a high risk that the SRS will find that the expenses the Latvian taxpayer incurs in making purchases beyond his control are not deductible for Latvian tax purposes and should be borne by the group entities that exercise control over those expenses. To mitigate this risk, the Latvian taxpayer’s functional analysis should accurately describe all activities that are associated with control over the Latvian company’s business operations in general and costs in particular.

Amendment to the Polish CIT and PIT Laws – accepted by Sejm


In brief

On 22nd July Sejm accepted a bill amending income tax laws. The amendment introduces new lower CIT rate at 15 % for so-called small taxpayers, as well as a number of important changes relating to catalogue of categories of non-resident income subject to taxation in Poland, exclusion of deferral of taxation of share exchange , where one of primary aims of this transaction is tax avoidance, rules of taxation of in-kind contribution of assets (other than going concern)and application of withholding tax exemption for interest and royalties depending on whether the recipient is beneficial owner thereof.

In detail

Lower CIT rate for small taxpayers and taxpayers commencing activities

Under the amendment, a new 15 % CIT rate (as opposed to standard 19%) will be introduced for ‘small taxpayers’ (reporting gross sales for the preceding tax year of no more than EUR 1 .2m). Lower CIT rate will also be applicable to the taxpayers commencing business activities in the first year of these activities. However, the preferential rate will not be applicable in the year in which activities are commenced and in the subsequent year where the taxpayer (i) was formed as a result of merger, demerger or transformation (except transformation between limited liability company, joint-stock company and joint- stock partnership), (ii) was formed by entities that contributed in-kind a going concern or assets exceeding the value of EUR 10ths, (iv) was formed by entities that contributed in-kind assets received as a result of liquidation of other taxpayers.

Catalogue of non-resident income subject to taxation in Poland

Amendment introduces to the CIT Law and expands in the PIT Law a catalogue of income categories of non-resident taxpayers which are deemed earned in the territory of Poland, hence subject to taxation in Poland.

Besides income related to business activities carried out in Poland and Polish real property, such categories will include income from receivables settled by entities resident in Poland, regardless of the place where the agreement is concluded or performance is executed. Income earned in Poland will also include income from securities and derivatives quoted on Polish stock exchange, as well as direct or indirect transfer of shares in a company, partnership or investment fund whose assets are composed in at least 50% of real state or rights to real estate located in Poland. Also, dividends, interest and other payments subject to withholding tax will be deemed earned in Poland.

The proposed catalogue is exemplary, i.e. it does not exclude classification of other income categories as earned in Poland. It should be noted that Double Taxation Treaties concluded by Poland may in practice result in specific income being not taxable in Poland.

No deferral of taxation for share exchange lacking business justification

Deferral of taxation with respect to share exchange will not be applicable where one of the primary aims of the transaction is tax avoidance. This will be deemed to be the case where share exchange does not have business justification.

Taxation of in-kind contributions

The amendment changes rules on recognition of taxable revenues related to in-kind contribution of assets other than a going concern.

Taxable revenues will no longer be equivalent to the face value of the shares issued in exchange for the contribution. Instead, in practice, taxable revenue will correspond to the market value of the contributed assets. This change eliminates existing controversies regarding taxation of in-kind contributions. At the same time, it could negatively affect execution of intra-group restructurings.

New requirements regarding withholding tax exemption for interest and royalties

The condition for application of exemption from withholding tax of interest and royalties – paid to associated companies from the European Union – will be that the interest recipient is beneficial owner thereof.

In order to apply the withholding tax exemption, the Polish payer will have to obtain a written statement which– besides other items – will confirm that the recipient company or permanent establishment is the beneficial owner of the payment.

Annihilation of shares in case of demerger

Amendment addresses also certain ambiguities relating to demerger of companies where the number of shares in a company being demerged remains unchanged while the face value thereof is decreased.

Status of amendment and entry into force

After Sejm acceptance the bill will be passed through the Senate and subsequently referred to the President for signature.

The changes to the legislation will generally become binding as of 1 January 2017, while CIT taxpayers whose tax year will begin before that date would still be subject to ‘old’ regulations until the end of such tax year.

Hungary: Amending act LXVI of 2016


On 15 June 2016 the Act LXVI of 2016 amending certain tax laws and related legislation and Act CXXII of 2010 on the National Tax and Customs Authority was published in issue no. 87 of Magyar Közlöny (the Official Gazette of Hungary). The most important provisions of the amending act are summarized below. In addition to next year’s tax changes, the amending act contains several provisions that will come into effect later this year. We point out these provisions in this newsletter.

Changes related to tax proceedings

Special taxpayer classifications

According to the amending act, from 1 July 2016, the total tax difference charged to taxpayers classified as “reliable” will have to be reduced by the total tax difference credited to these taxpayers during the current year and the preceding five years. Public limited liability companies can also be classified as reliable if they have been in operation for less than three years. The amendment provides that companies undergoing involuntary deregistration and taxpayers who have amassed unpaid default fines exceeding 70% of their tax payments also be slotted into the “risky” category.

From 1 January 2017, the tax authority will transfer VAT refunds to public limited liability companies within 30 days.

Tax audit of binding rulings

From 1 July 2016, a new type of tax audit will be introduced: binding rulings will be fact-checked to find out whether the events underlying a binding ruling actually occurred, and if so, whether the ruling in question is binding on the tax authority. During the audit, the tax authority may only request documents specifically mentioned in the binding ruling as records that, if issued, kept or retained, prove that the underlying events actually occurred. Regarding binding rulings becoming final and binding before 31 December 2015, the taxpayer may also initiate the proceedings.

Another change during the year is that the expert opinion of the Hungarian Chamber of Auditors must be attached to requests for a binding ruling pertaining to IFRS accounting.

Publication obligation under the block exemption regulation

From 1 July 2016, in accordance with Article 9 of Commission Regulation (EU) No 651/2014 (“block exemption regulation”), the Member States concerned must ensure the publication of relevant information on each individual aid award exceeding the HUF equivalent of EUR 500,000. According to the amendment, for aid in the form of a tax advantage, the required information on individual aid amounts in the specified ranges must be published within one year from the date the tax declaration is due, and must be available for at least 10 years from the date on which the aid was granted.

Self-revisions after the limitation period

According to the amending act, from 1 July 2016, taxpayers will be able to submit self-revisions even after the right of tax assessment has lapsed, in accordance with a court decision, in order to meet their tax obligations. Based on the self-revision, the tax authority may conduct an audit within one year. For periods already closed by an Audit, the related tax obligation may be corrected by means of a re-audit at the taxpayer’s request.

 

Czech Republic and Monaco will exchange tax information


The agreement between the Czech Republic and the Principality of Monaco for the exchange of tax Information specifies the type of information that both countries are obliged to provide in the event of a request. The agreement also sets out the procedural requirements under which the exchange will take place.

At the issuing of the request, the information that is deemed relevant for determining, assessing and collecting taxes on corporate and personal income, property taxes, secure payment of these taxes or information for an investigation and prosecution of tax offenses may be provided.

Information will be provided on the basis of a formal request addressed to the other country, regardless of whether the conduct for which the information is requested is considered criminal or not in the country receiving the request.

However, the party receiving the request can also refuse to provide the information in the case that it would reveal confidential communications relating to the provision of legal advice between a client, an attorney, solicitor or other recognised legal representative.

The agreement, which is valid from the beginning of March, may also be applied to facts arising prior to the agreement taking effect.

Bulgaria: The new Union Customs Code


In brief

On 1 May 2016 the Union Customs Code (UCC) will become applicable. The UCC (Regulation 952/2013) introduces simplification and alignment of customs procedures, new rules regarding customs valuation, changes to the rules regarding Authorised Economic Operator concept, compulsory application of BTIs in import declarations, amendments to non-preferential origin rules as well as other amendments that may have an impact on your business.

Customs procedures

Under the UCC, the customs procedures are simplified and aligned. The following customs procedures will be applicable:

Release for free circulation

(Re) export

Special procedure that will include the following:

  • Transit: external transit and internal transit
  • Storage: customs warehousing and free warehousing
  • Specific use: temporary admission and end-use
  • Processing: inward processing and outward processing.
  • Alignment of customs debt

 

Under the UCC, a standard approach is introduced and the customs debt will be established at the moment of release for free circulation (instead of rules per procedure that are applicable now).

New Inward Processing regime (IPR)

The new inward processing relief will replace the current inward processing regimes (suspension and drawback) and Processing under Customs Control (PCC). Тhe inward processing with application of the refund system will no longer be available. Instead, the inward processing procedure is transferred into a real/full suspensive regime. Under the new inward processing regime, duties levied for products that are released for free circulation in the EU, will be calculated based upon the processed products (comparable to the current PCC regime). However, upon (prior) request it can also be allowed to calculate the duties on the basis of the raw materials and components used for processing (the current IPR). Compensatory interest currently applicable under IPR suspension will no longer be levied.