On 31 May 2021, the Ministry of Finance officially posted on its website information concerning the planned introduction of VAT group regulations in Poland. At the same time, a draft amendment to the Act on Value Added Tax ("VAT Act") was published for pre-consultation.
A VAT group, in its simplest terms, consists in settling the tax on goods and services by a group of connected companies acting as a single VAT payer. This solution could bring many advantages to the group participants from both a financial and administrative perspective. In particular, this solution will be interesting for entities providing financial services exempt from VAT which have no, or have a limited, right to deduct input VAT. Transactions made within the VAT group will not be subject to this tax and, consequently, there will be no problem with the deduction of VAT on intra-group purchases - for example, the purchase by a bank of an IT service or an administrative support service from a VAT group company will not be subject to this tax and will not result in any additional cost of non-deducted VAT on the part of the bank. In relation to external contractors, the VAT group will act as a single taxpayer, so any excess input tax refundable to one of the group members will automatically reduce the VAT due on the sales of the other group members (there will be no need to overpay VAT and wait for a refund ex officio). For the above reasons, as well as due to a significant reduction of the administrative burden related to VAT settlements by the companies belonging to the VAT group (one JPK_VAT [JPK: Uniform Control File] for the entire group, instead of separate files for each of its participants), this solution could prove to be very interesting for a wide range of entities from many sectors of the economy.
Importantly, the formation of a VAT group will not be obligatory for taxpayers which fulfil the conditions necessary for its establishment, but will be a purely optional solution and a particular group of entities will decide whether they wish to act as a single VAT taxpayer or continue to settle this tax separately by each entity within the group.
The Ministry of Finance has been working on the introduction of VAT groups to the Polish regulations for many months now. In November last year, the European Commission announced that Poland was consulting the EU VAT Committee on planned legislation concerning this issue. These consultations are necessary due to Article 11 of the Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax ("VAT Directive"), according to which, after consulting the advisory committee on value added tax (the VAT Committee), each Member State may regard as a single taxable person any persons established in the territory of that Member State who, while legally independent, are closely bound to one another by financial, economic and organisational links. The Ministry of Finance originally planned the introduction of VAT groups for the beginning of 2021. However, due to the numerous comments from the VAT Committee to the draft regulation submitted by Poland, this deadline could not be met.
According to the information provided by the Ministry of Finance, the VAT Committee has approved the revised version of the planned Polish regulations, the draft of which has just been made public. The new regulations should come into effect at the beginning of 2022. After the introduction of this regulation, Poland will join the group of 18 EU countries whose legislation already provides for the possibility of creating VAT groups.
Below we present the most important assumptions of the planned regulations.
Who will be able to participate in a VAT group
The Ministry of Finance has assumed two stages of implementation for the VAT group regulation in Poland. Since the first period is to be a pilot one, the drafter intends to allow only entities forming a tax capital group ("TCG") for corporate income tax purposes ("CIT") to establish VAT groups in order to verify the functioning of the new regulations with respect to large and proven entities. According to the plans, from 2023, the possibility of forming a VAT group would be extended to other groups of taxpayers.
The planned new Article 15a par. 1 of the VAT Act indicates that a VAT taxpayer (as a VAT group) can be a group of taxpayers who are closely connected by financial, economic, and organisational links and which will fulfil certain conditions as set out in the legislation.
According to the basic condition, a VAT group can be formed by taxpayers forming a TCG with their registered office in the territory of the country. The VAT group can also be formed by entities forming the TCG with branch offices of entities with their registered office outside the territory of the country in the scope in which they are permanent places of business activity in the territory of the country.
Therefore, in order to form a VAT group, it will first be necessary for the participants of the VAT group to form a TCG and therefore meet the conditions stipulated in the CIT Act. In accordance to the provisions of this Act, the TCG is a CIT taxpayer if all of the following conditions are jointly met:
1. a TCG can be formed only by limited liability companies or joint stock companies with their registered office in Poland if:
(a) the average share capital for each of these companies is not less than PLN 500,000,
(b) one of the companies (the parent company) holds a direct 75% interest in the share capital of the other companies (subsidiaries),
(c) the subsidiaries do not hold shares in the share capital of any of the other companies forming the group in question,
(d) these companies have no arrears in their payments of taxes constituting income for the state budget;
2. an agreement on the formation of a tax capital group:
(a) has been concluded by the parent company and the subsidiaries in the form of a notarial deed, for a period of at least three tax years,
(b) has been registered by the head of the tax office;
3. after the formation of the TCG, the companies forming this group meet the conditions listed in points 1(a) - 1(c), and in addition they:
(a) do not enjoy any tax exemptions under the relevant special provisions,
(b) apply market conditions in transactions with entities not belonging to the TCG.
4. for each tax year, the TCG will achieve a revenue share of at least 2%. However, in accordance to Article 38na of the CIT Act, this condition will be deemed to be satisfied in the tax year ending no later than 31 December 2021 if in 2021 the TCG suffered negative economic consequences due to COVID-19.
In addition to the TCG meeting the conditions required by the CIT Act, for the formation of a VAT group, the conditions of close financial, economic, and organisational connections between the participants of this group must be met. The proposed regulations clarify the issue of linkages as follows:
1. Taxpayers are considered financially connected if one of the entities forming a VAT group holds a direct 75% share in the share capital of the other entities.
2. Taxpayers are considered economically connected when:
(a) the main activities of the group members are of the same nature, or
(b) the activities of the members of the group are complementary and interdependent, or
(c) one of the members of the group carries on activities which benefit wholly or largely the other members of the group.
3. Taxpayers are considered organisationally connected when:
(a) legally, or in fact, directly or indirectly, they are under common management, or
(b) they organise their activities in whole or in part in concert.
These financial, economic and organisational links must exist at the time the VAT group is formed and continuously for the duration of this group.
Manner of formation of a VAT group
Members of a VAT group will appoint from among themselves a representative to represent the VAT group with respect to the obligations arising from the VAT Act, as well as from the provisions of the Tax Ordinance and the Act on Registration and Identification of Taxpayers and Payers.
The formation of the VAT group will require a written agreement to be concluded between its members on the formation of the group. This agreement will contain: the taxpayer’s name with the designation "VAT group" or "GV" [VAT Group], an indication of the participating entities and their share capital with the shareholders holding at least 5% of the shares in these companies, an indication of the representative of the group, a determination as to the duration of the agreement equivalent to the term for which an agreement on the establishment of the TCG created by the entities that formed the VAT group has been concluded.
The competent tax office for the registration and taxation of the VAT group will be the same head of tax office which is competent for the taxation with CIT of the TCG formed by the entities which created the VAT group. After the registration of the VAT group as a taxpayer, the group will be included in the list of VAT taxpayers kept by the Ministry of Finance. At the same time, the individual companies that formed the VAT group will be deleted from this list.
The VAT group will lose its taxpayer status if it no longer meets the above described conditions required to obtain this status or if the term for which the agreement on the establishment of the group was concluded expires. It will be possible to extend the period of the VAT group’s operation by concluding a new agreement which must be notified to the head of the tax office 30 days before the expiration of the previous agreement. For this purpose, it will be necessary for the participants of the VAT group to continue to meet the described conditions for the formation of the group.
Method of settlements and advantages of a VAT group
The VAT group mode of operation will provide a number of tangible advantages to the members of the group, namely:
1. the supply of goods and services between the VAT group members will not be taxable, so it will be neutral from a VAT perspective, involving:
(a) no VAT invoices issued within the VAT group,
(b) no problem of VAT deduction by an exempt service provider for the purchase of goods and services from a VAT group entity,
(c) no need to submit separate JPK_VAT files (records and VAT returns) by individual participants of the VAT group,
(d) exclusion of the need to use the split payment mechanism and verification of accounts on the so-called "white-list of VAT taxpayers" in any intra-group settlements.
2. VAT group settlement can have a beneficial effect on the liquidity of group members by reducing the VAT due on taxable sales by a single group member by the excess of input VAT occurring in another VAT group member. This will eliminate the need to wait for a refund from the tax office and the additional administrative involvement that is often associated with the verification of the legitimacy of a refund by the tax office.
3. As a consequence of registering a VAT group as a single taxable person:
(a) the supply of goods and services by a VAT group entity to an external entity will constitute a performance provided by the group;
(b) supplies of goods and services to a member of the VAT group by a non-member will constitute a performance provided for the group;
(c) similarly, supplies of goods and services by a branch office forming a VAT group to its place of business or branch office located outside the territory of Poland will be deemed to be made by the VAT group and supplies made to a branch office forming a part of the group by its head office or a branch office from another country will be deemed to be made to the VAT group.
As mentioned above, transactions between entities forming a VAT group will not constitute taxable transactions which will significantly reduce the administrative obligations of group members related to intra-group invoicing and VAT settlements. These obligations will not, however, be completely eliminated since the planned legislation requires group members to keep electronic records of the supplies of goods and services between group members. These records will be forwarded to the tax authorities upon their request and will have to include: the name and VAT ID [Polish NIP: tax identification number] of the purchaser, the date on which the supply of goods or services was made or completed, the name (type) of the goods or services, the measure and quantity (number) of goods delivered or services rendered, and the total amount due. The necessity of keeping these records by entities from the group could be perceived as an unnecessary burden reducing to some extent the undoubtedly significant benefits resulting from the new regulation. However, this solution is intended to be in correlation with the provision of Article 11 of the VAT Directive, according to which the Member State introducing a VAT group into its legislation may adopt any measures needed to prevent tax evasion or avoidance through the use of a VAT group. In the opinion of the drafters of the Polish legislation, keeping electronic records of intra-group transactions will provide just this type of a safeguard against tax avoidance through the use of a VAT group.
To sum up the presented description of the planned new institution in the Polish VAT system, which will be VAT groups, this regulation should undoubtedly be evaluated as beneficial and necessary. Its introduction seems to be necessary in order to increase the competitiveness of Polish VAT regulations in relation to other EU countries where most VAT groups have been successfully operating for years.
It is to be hoped that once the necessary consultations have been completed, the legislative work of implementing the VAT groups will proceed smoothly so that the regulations will enter into force as soon as possible.
A particular drawback will be the planned initial restriction of applying the VAT group only to entities forming a TCG for CIT purposes. At the moment there are only slightly over 60 TCGs operating in Poland. However, perhaps the attractiveness of VAT settlements resulting from the establishment of a VAT group will encourage other capital groups to consider the possibility of establishing a TCG and a VAT group at the same time.