Tax on flipped income
The end of March is the deadline for most taxpayers to file their annual CIT return. The return may need to include tax on passed-through income. This is therefore the last moment to determine whether the company is obliged to pay it.
The obligation to pay this tax may fall primarily on companies paying remuneration for intangible services, interest and royalties to affiliates located in lower tax countries. This situation may arise primarily for companies belonging to international groups.
Analysis needed
Determining whether a company is liable to pay tax on flipped income requires the analysis of a wide variety of data, including the amount of expenses incurred for a related party, the size of the related party’s income and the effective taxation in its country of tax residence. For expenses incurred from 2023 onwards, the burden is on the taxpayer to prove that the conditions for taxation of the expenses with tax on passed-through income do not apply. This means that these determinations should be carried out with particular care. Appropriate documentation may also need to be collected.
Payment can be avoided
Payment of tax may be necessary even if the cost is incurred to an entity from an EU Member State. Under certain conditions, the taxpayer may be exempted from this obligation, which, however, requires proof that the related party has a substantial real economic activity in the country of residence.
Penalties for non-payment
Failure to pay the tax due will not only expose the company to tax arrears, but may also result in management criminal liability. It is therefore important to establish as soon as possible whether the company should pay tax on the flipped income.
Our support in the area of tax on flipped income may include, for example:
- analysis of related party transactions in terms of the rationale for taxation on flipped income;
- assistance in gathering evidence confirming the absence of grounds for taxation on flipped income;
- analysis of whether the related party meets the criterion of carrying out substantial real economic activity in the country of residence;
- preparation of guidelines for the assessment of expenses incurred from the point of view of their possible taxation – in the form of a decision matrix;
- calculation of the tax base and tax payable.
If you are interested in our offer, you are welcome to contact us.