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TAX OPTIMIZATION VS TAX PLANNING. How to pay reasonable taxes as well as what is allowed, and what is disallowed?
TAX OPTIMIZATION VS TAX PLANNING. How to pay reasonable taxes as well as what is allowed, and what is disallowed?
12/06/2023 dr Anna Maria Panasiuk - Wealth Advisor

Between the worlds of entrepreneurs and tax advisors, a debate continues invariably about the possibility of paying lower taxes. Tax optimization is a forbidden phrase for advisors and is frowned upon by tax authorities. Any analysis, the sole or main purpose of which would be a tax benefit must be reported to the head of the National Revenue Administration on the basis of the Mandatory Disclosure Rules (MDR). Tax optimization is thus associated with illegal tax avoidance and practically becomes synonymous with tax evasion. This has always been an illicit practice. 

For as long as I can remember, there has been a discussion about where the line between tax evasion and tax planning is, and the discussion rages on to this day. Except that nowadays it is appropriate to talk about it. In the real world, when you do business and plan expenses, you also have the right to plan your taxes. For it is one thing to choose flat-rate taxation for your company, and another one to choose 19% flat tax. After all, you do it with a calculator in your hand. And it is perfectly legal. 

So how to legally approach the issue of the level of tax burdens on our business or our investments? That is what I am writing about today.

Tax optimisation, which entrepreneurs and wealthy people enquire about, does not result from the intention to evade taxes. Rather, from the planning of financial flows and taking advantage of tax benefits and tax reliefs available in systems in Poland and other countries. As a result, people achieve a decrease or reduction in incurred costs, including tax deductible costs. 

Tax optimization or tax planning in international operations 

In the case of dynamically developing companies, scaling internationally, or investors operating in several markets with their projects, they can and even need to look at their situation holistically. They need to consider how to build their structure in an international perspective. 

On the one hand, such a structure, e.g.: a holding company, is supposed to facilitate asset management or improve business goals implementation. On the other hand, tax optimization (understood as legal tax planning) may be a sort of additional bonus. This is due to the fact that the policies of individual governments in which we develop our business are different. We still have tax competition between countries in Europe. For many countries, the foundation of national budget is the income of small and medium-sized enterprises, and it is in them that they see budget revenues. That is why we expect tax regulations which are favourable to the entrepreneurs moving their headquarters or management board to these countries. 

Other countries build their image on the basis of reliefs for the richest. In these countries, in addition to tax benefits, one can expect extensive systems of services regarding wealth management and protection. A good example is Switzerland and the UK. Thus, knowing your goals and being ready to relocate while operating internationally can actually make it possible to get some tax benefits for your projects. And it would be strange if you did not take tax costs into consideration when relocating your business just like you take into account the costs of employment in a given country. Similarly, when relocating your family, you take into account the quality of life and education, upkeep costs, purchase of real estate, and in doing so, you also take tax costs into account. This is fully understandable and entirely legal planning, also tax planning. 

Is this tax optimisation? Many people consider the term “tax optimisation” to be synonymous with “tax planning”. This practice, however, has nothing to do with tax avoidance, and certainly nothing to do with tax evasion. 

What do you need to look out for and what is this tax optimisation all about?

Choosing a jurisdiction with a corporate and tax law which best meets your specific needs is not easy. We can all agree that taxes are now a more controversial issue than ever. And tax authorities in individual countries receive increasing legal powers to investigate, punish and prosecute entrepreneurs and their companies. Considering this, we are all the more surprised by the fact that many advisors do not have sufficient experience in matters of law and international taxes. They might have it, but they continue to abuse their customers’ trust, exposing them to the risks associated with the use of unauthorized tax optimisation.

So be careful, because as a result, it is your company, your business or you yourself that may be at risk of paying high taxes and fines, not the advisor you work with. What I want to say is that you should be careful about the so-called tax optimisation services(!). These may lead to some behaviours which are often at the border of legality. As a result, they expose your business to not only administrative risks (taxes), but sometimes even penal threat. And this is exactly what must not be done. Such an activity is beyond the limits of tax planning, which is within the limits of the law. 

Examples of improper tax optimisation (or, actually, tax planning)

As a warning, I would like to point out that there have been really a lot of situations recently in which we pulled Polish entrepreneurs out of trouble. We sort out the problems they got themselves into because of the ignorance and unintentional actions of random advisors, who were maybe guided by tax optimization. 

For example, only in January and February 2023, ten entrepreneurs came to us, of which as many as eight doubted whether their structure was properly run. In some cases, instead of the expected lack of taxation, the tax risk reached as much as 40%. We are not dealing with any tax planning here. In my opinion, this is tax avoidance through the use of unauthorised tax optimisation structures. However, the way they are used cause unknowledgeable entrepreneurs to take risky steps to avoid paying taxes without even knowing it. 

We do not recommend the practice of building a business through the prism of tax optimization only. Neither do we recommend entrusting the creation of international structures to amateurs. At the end of the day, ask yourselves what the point is in throwing your business into confusion and distracting yourselves from business goals, in Favor of considering notifications and the threat of penalties from tax authorities. Remember that you and your business are responsible for potential unauthorized tax optimization. 

New international rules on the flow of information about beneficiaries

Pay attention to the restrictions which occur. Around the world, many countries have pledged to change the definition of banking secrecy laws. This fact should also be borne in mind. Automatic exchange of information between banks have been introduced. This means that sooner or later information about transactions will reach the country of the respective tax residence. Tax optimization is becoming all the more hazardous. It is asking for trouble. 

Of course, the diversity of tax regulations in individual countries should be taken into account. In this respect, we have the right to use the services of tax advisors. This is all the more necessary because regulations vary greatly between countries. In addition, there are no regulations changing more dynamically than the tax regulations. Therefore, it is normal that you should devote your attention to tax issues, which also include tax planning. What you need to be careful about is not to cross the thin line which leads to illicit tax optimization. Why do I write about “illicit” tax optimization? Many entrepreneurs use the term tax optimization without full awareness of it. They really mean tax planning, which is the correct, permitted and legal process in any organization, business, and now also in families that have assets spread out in various locations around the world.

Tax optimization and corporate taxes

In Poland, there are many beneficial solutions for individuals, for example investors. We have the least expensive solutions in Europe, which allow us to actively carry out investments, including the Alternative Investment Fund which offers a number of tax exemptions (we have written about AIF many times in our publications). In May this year, a new institution, the Polish Family Foundation, appeared. I encourage you to read the eBook where we discuss the Polish Family Foundation in a practical way, as well as those issues which are very rarely discussed. 

However, this does not change the fact that if you run your projects internationally and care about diversification (even the risk of capital investments in one country), there are many countries that offer incentives for investors to attract them by reducing their tax burden. For example: Luxembourg, Cyprus or Switzerland. In these countries, you can establish international holdings, just as you can in Poland. Therefore, when choosing a location, you look not only into tax issues. You also look at the “brand” of the new location for your business, the cost of employment, legal services, and even your personal preferences – whether you want to do business worldwide there (and from there). 

Tax optimization and individual taxation

Many countries offer new programs to attract professionals (Italy, Portugal, Spain – please read the eBook on tax residence in Portugal and Spain) or wealthy people (Cyprus, Switzerland, UK). However, in order to benefit from the programmes operated by these countries, you need to become their tax resident. In this case, we are not talking about tax optimization, and yet we could. For keeping a calendar, so as not to exceed 183 days in one place, is nothing more than a fully conscious (and legal!) action, whose purpose is, after all, not to pay taxes in a country where we do not want it. Why? Because their rates are high there. 

That is why, in the entire thicket of questions and statements from advisors, “it depends“– before you start talking about optimizing personal taxes, or rather tax planning, ask yourself:

  • Are you ready to live with your family in a different country than Poland, if yes then where and for how long? Do you have any preferences for the climate?
  • How often do you have to be physically in your home country (where you hold citizenship and where you are a tax resident)?
  • Make an inventory of the assets and their estimated value.
  • Make a summary of future plans, maybe you are considering taking over, merging or reorganizing your business, or investing in further projects, IPOs, EXIT. Purchasing assets, real estate? Cryptocurrency transactions? In which countries do you operate and where do you invest? 

Only after answering these questions can you think about topics related to the change of tax residence. Then you can start tax planning and looking at the whole picture in the long-term perspective, obtain tax optimization for your plans. How much you want to change your life and tie it to, for example, another country is very important here. 

Tax optimization (tax planning) is possible; let us focus on what is important and legally permissible

Wealth brings about responsibility. In a world of globalisation and increasing interconnection between countries and regions, as well as broadening the range of investment portfolio components and companies operating internationally, you need to be aware of the importance of cross-border obligations. Obtaining favourable tax conditions is the result of your plans and the available benefits generated by governments that want to attract specific groups of entrepreneurs or investors. 

However, it is important to remember about the regulations mentioned in the article aimed at uncovering symptoms of tax avoidance. As well as the fact that their prosecution is becoming ever more effective. So, moving house for your business today is not about starting a company, hiring a director and renting an office abroad while you are still sitting in Poznań or Łódź and managing your business from there. If you have assets, run a business internationally, plan various investments – then, quite obviously, their location requires planning, including tax planning! And proper planning will allow for achieving substantial benefits. 

Therefore, tax planning in this day and age is a necessity and it is safeSafe, as long as you operate within the legal boundaries, most often accompanied by a business justification.

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