No CFC for Tax Transparent Entity

This is the end of the 5-year CFC dispute.

The Supreme Administrative Court finally confirmed what we have argued for from the beginning: that income derived by a tax transparent partnership should be considered business activity income aid, in consequence, non-passive income on the grounds of the CFC regulations.

What was the background of the dispute? 

Some time ago the tax authorities came to the conclusion that it would be good to cut all the discussions and implement a specific regulation to the CIT and PIT law according to which income derived by a tax transparent partnership should be considered income from business activity.

It seems that the tax authorities forgot about this regulation when they implemented CFC provisions to the Polish tax system effectively as of 1 January 2015. Why? Because CFC targeted entities that generated so-called “passive” revenues. When the tax authorities understood the consequences, they started to claim that it is the characteristic of the underlying income which should be decisive under CFC law – should the majority of the entity’s revenues stem from interest or dividends, income from such partnership should be treated as passive one for CFC purposes. Where in fact ownership structures with tax transparent holding entities were CFC bulletproof for all these years.

In consequence, the taxpayers who took the safe approach and included income from partnerships in their CFC calculation should consider applying for the refund to the Polish tax authorities.

Judgment no II FSK 322/20 dated 25 September 2020 

Should you wish to discuss this, contact our expert: 

Łukasz Bączyk
Head of Tax, Board Member

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