When venturing out onto the international scene with our business, you must not forget about the obligations imposed on us by Polish tax law or Polish foreign exchange law. What exactly is foreign exchange law? Who is subject to it? When is it applicable and what does it concern? In this article, you will learn how to safely keep your assets abroad and what to pay attention to.
While conducting Interviews with new clients it is often revealed that many of them have already opened accounts in foreign banks, have been investing in foreign financial instruments, and have established an already functioning structure using a foreign holding company. They also purchase debts or grant loans to non-residents, as well as own real estate outside Poland. However, they have no idea about the reporting obligations towards the National Bank of Poland (the NBP) which rest upon them. Sometimes they even forget, completely unwittingly, about Polish tax obligations. Why is that so? Simply because in Poland the payer of the capital gains tax is a financial institution. The situation is different if your bank is a foreign one. But first things first….
What is foreign exchange law and why should it concern you in the first place?
The fact that entrepreneurs do not remember or even do not know about the obligations regarding foreign exchange, i.e., about submitting a foreign exchange declaration on the assets held abroad, is a direct result of the NBP not taking decisive action against Polish business-owners. Nevertheless, foreign exchange law itself stipulates rather high fines if the necessary information is not provided on time.
What kind of information is it, then?
Among other things, you should indicate on a special form, for instance, that you and/or your company:
- own shares in non-resident companies (i.e., you have set up a development company or a holding company in Germany or acquired shares in a video game company in the US);
- have funds in your bank and/or investment accounts maintained by foreign banks or credit institutions;
- have granted loans to non-residents (e.g., your foreign company);
- have taken out or received a loan from non-residents (a foreign company has granted it to you or your company);
- own real estate located abroad;
- possess securities issued by residents but acquired outside the domestic stock market;
- or at least 10% of the shares in your company belongs to a non-resident (i.e., a foreign investor or a foreign company holds shares in your company, even if the company belongs to you – in this case you should report that you own shares in a foreign company and that a foreign company owns shares in your Polish company).
The list of assets and liabilities which are mandatorily notifiable to the NBP is quite long. The full list of obligations can be found in the Regulation of the Ministry of Development and Finance of 9 August 2017 on the submission of data necessary for the preparation of the balance of payments and the international investment position to the National Bank of Poland.
Is every entrepreneur subject to these obligations?
The Foreign Exchange Law Act defines the reporting threshold which must be first reached to make you subject to reporting.
It amounts to:
- for natural persons: PLN 7 million – quarterly reports (26 days after the end of the quarter);
- for legal entities: PLN 10-300 million – quarterly reports (26 days after the end of the quarter);
- for legal entities: > PLN 300 million – monthly reports (20 days after the end of the month).
In addition, all residents who have exceeded the above-mentioned reporting thresholds, holding at least 10% of shares in the share capital of foreign companies at the end of the year, are obliged to submit an annual report (by 31 May each year). Additionally, in an inverse situation, i.e., when it is foreign entities that hold a minimum of 10% votes in Polish companies, the latter are obliged to submit an appropriate annual report to the NBP (by 31 May each year).
In the case of married couples with joint marital property, the reporting threshold applies to both spouses. The report is to be submitted by one of the spouses on behalf of both of them.
What if the damage has already been done?
Should you realize that you have in fact neglected your obligations towards the NBP, it is important to submit appropriate reports, both quarterly and annual ones, for all the outstanding quarters in which this obligation rested upon us.
Failure to fulfil such obligation is a legal wrong under the law. Therefore, it is important to submit to the appropriate tax office (serving as a law enforcement authority) a notification of the so-called voluntary disclosure, in which you notify the office of the failure to comply with the obligation, informing that the situation did not result from an intention to commit any prohibited act but simply from negligence, and declare when the outstanding obligation will be fulfilled.
Capital gains and interest tax – that is your problem now
As we have also noticed, when setting up foreign investment accounts, a lot of people do not know or forget about the need to conduct Polish tax settlement for the income from interest or other capital investments obtained through foreign bank accounts.
Having a tax residence in a given country means that you are obliged to have all your income taxed there – even the income earned abroad. So, if you live in Poland but have a bank account in Switzerland or Luxembourg, then a foreign bank will not file the report for you. You need to file the report on your native soil, in this case in Poland.
Interest is normally taxed in both countries (source country and country of residence). Thus, when interest is earned in your foreign bank account, you are obliged to disclose this income in a tax return with the right to a possible deduction of foreign tax. As a result of such tax settlement, the annual return often stipulates that additional tax needs to be paid.
Therefore, failure to report such income has two consequences (most often occurring in the financial aspect):
- liability for a fiscal offence (a fine)
- interest on tax arrears
It is foolish to hope that the income will not be detected by the tax authorities. Due to the constantly improving automatic exchange of information, tax offices can receive information of such income in a very short time. When setting up a foreign investment account, it is advisable to properly communicate the place of residence to the bank for tax purposes, as well as remember to provide the information about the income from such an account in the tax return drawn up by 30 April of the following fiscal year.
Preparing such a tax return may prove problematic. This is due to the fact that foreign accounts typically accumulate money in foreign currencies, which, sadly, need to be converted into the Polish zloty applying an appropriate exchange rate. Since tax return forms undergo changes year in year out, it may also be difficult to locate appropriate fields in which to enter the income data.
In addition, investments in various types of securities are often made through such accounts. The revenues obtained through such investments should be appropriately qualified. In some cases, the income is taxed, so it is necessary to correctly determine revenue acquisition costs. In other cases, it will be dividends where revenue is taxed. Sometimes the bank collects a tax which is actually deductible.
It can sometimes be quite a feat to prepare such a tax return on one’s own. In such situations, the help of a specialist is invaluable, and at times simply necessary. Our long years of experience show that entrepreneurs often commit such “sins”. No matter whether you have PLN 5 or 50 million in your wallet, these things cannot be neglected. It is no pleasure paying interest on the tax due and filing a voluntary disclosure. However, it is always better to appear in the tax office yourself than to be summoned to explain the reason why you have not submitted a tax return on income obtained outside Poland.