May you live in interesting times! This old (supposedly Chinese) curse can undoubtedly apply to our times. The changing international order, the pandemic and the associated growth of debt, which will undoubtedly increase (or rather, is has already increased) fiscalism, have made many of our clients interested in the possibility of changing the location of their vital centres, i.e. the so-called change of residence or, in terms of their business, redomiciliation.
I will not be pointing out the most popular jurisdictions, as their choice depends on a number of factors such as the type of business, family situation, personal plans, etc., all of which need to be taken into account in order to choose the optimal direction of redomiciliation.
In this article, I will focus on what needs to be taken care of when deciding on such a solution, because redomiciliation is a process that requires good planning. Let’s therefore assume that, with the assistance of an experienced advisor, you have already selected your new location, the above listed factors have been taken into account and you know where you wish to move your life to. Or maybe just the business? There is a big difference. We will return to this matter in paragraph 4 below.
- MOVING YOUR BUSINESS, WHAT DOES THAT MEAN?
By business we understand relationships, assets, contracts and many other conditions that operate within a specific legal framework – usually a company or group of companies.
In line with the rulings of the EU Court of Justice and the Polish Supreme Court, it is now possible to redomicile a company to another EU country, this results in a change of jurisdiction for the company to the selected EU country without the necessity to liquidate it. In other words, there is no need to liquidate assets and close the business in order to reopen it in another country. The effect of redomiciliation is therefore the transfer of an entire ACTIVE business to another EU country (i.e. transfer of ongoing business).
As a result of the redomiciliation, the company continues to operate in another country on the basis of the same assets. The closing balance sheet prepared for the company’s exit from for example Poland, is the opening balance sheet of the company in the new country. This allows a for a fairly smooth transition between jurisdictions in the EU. This describes the situation in broad terms. If we look at the detail however because there is no uniform regulation, it looks different in each country. The approach is based on the EU principle of free movement of capital, but when applying it the laws applicable in the relevant jurisdictions are used – that means the country the business exits and the country the business enters. It is therefore necessary to manage this process in different countries, which is what we specialise in [link to specialisation].
- REDOMICILIATION – WHAT DO YOU NEED TO KNOW ABOUT?
Some of the typical redomiciliation problems faced by clients include:
- Choosing a legal structure in the new jurisdiction – this is key, it needs to fit the business needs and characteristics of the client’s business. This may seem extremely simple, but it is not. For example, when transferring a limited company from Poland to Luxemburg it is not enough to choose its equivalent, namely a SARL – it is also necessary to analyse the tax rules that this SARL will adopt, which of course has far-reaching consequences for the future. It requires a well thought-through (and thoroughly analysed) decision to be made.
- What will we move? – even before redomiciliation it is necessary to look carefully at what is on the balance sheet and consider what the consequences will be of moving a specific structure of capital abroad – perhaps some need to be ‘tidied up’ before the transfer, or on the contrary, they need to be built up to provide a certain leverage in the “new” entity after the transfer? Of course, everything depends on the goals sought and many other conditions that need to be taken into consideration.
- Isn’t that liquidation? – the opportunities described in point 1 (redomiciliation without the liquidation of assets) is a new win which, for the time being, is based solely on case-law. These are not ‘hard and fast rules’ (do those really even exist?!), which we can stick to when planning this process – so it is important to ensure that the Polish courts (or any other similar bodies abroad) that record redomiciliation do so diligently, and therefore without automatically applying the schemes that have been in place for years. Believe me when I write, this is not easy.
- “Substance” – what is it? Redomiciliation can take different shapes. Sometimes it’s about a business that doesn’t need a permanent office or administration services, or perhaps the main asset or production facility is in a different jurisdiction. In such situations, in order not to be exposed to negative tax consequences, one has to deal with the requirement to provide so-called “substance” in the new jurisdiction, which means – to demonstrate the existence of real headquarters which act as the centre point of the business. This may include both having an actual office, the provision of administrative services, access to conference rooms or the presence of true decision-makers and actual business management from that location (records of meetings in this location etc.)
- Bank account – sometimes opening a new bank account for a newly created or transferred entity is complicated, that’s because banks look to thoroughly examine assets unknown to them, understand the history of the move, conduct a full KYC (know your customer) procedure. All of this can be time consuming. Which is why an experienced advisor comes in handy 😉
- EXIT TAX
In the context of the above, we should mention the so-called exit tax in place not only in Poland, but also now in most EU countries.
This tax applies to natural persons who move abroad (i.e. change their tax residence) or, while remaining in Poland, transfer assets abroad. In both cases, it is crucial to note that, in the event of a move/transfer of assets, Poland will lose the right to subsequently tax the sale of that asset (most often it will not apply to real estate located in Poland, as it is in principle taxed in Poland).
In essence exit tax is the taxation in Poland of the value of assets belonging to a natural person. A hypothetical profit which is the difference between the market value and the tax value of the transferred assets, is therefore taxed at the rate of 19%. It is worth noting here that exit tax applies only if the sum of the value of the assets in question exceeds PLN 4 million.
- TAX RESIDENCE
It is worth highlighting that redomiciliation does not yet equal the loss of tax residence in the country from which a business is moved. Tax residence is something much broader and losing it is not that simple.
The rules governing tax residence contain a number of criteria which guide tax authorities when assessing where a person should pay taxes. More plainly, tax authorities have multiple reasons not to allow a taxpayer to leave the tax jurisdiction in question.
The basic principle in Poland is that a natural person is subject to income tax on all their income if:
- their centre of personal or economic interests (centre of vital interests) is in Poland or
- they stay in Poland for more than 183 days in the tax year (which corresponds to the calendar year).
In practice, the most difficult to fulfil is the principle of the centre of vital and economic interests, because a permanent and effective transfer to a new location is usually complicated and long-lasting (although one of our clients was able to do it instantly, but there was no spouse or children in their case, therefore making it relatively simple). The factors that are “binding” from a tax perspective are among others family ties, social and political activity, hobbies, sources of income and places where business is run, held investments, fixed and movable assets, insurance policies, loans, bank accounts.
When planning the transfer of a business, it is necessary to analyse the tax matters primarily based on the assessment of the centre of vital interests and the plans associated with it. Moreover, redomiciliation usually does not mean that contacts with the current country are broken. On the contrary. Usually, business carries on in that country, but through a new structure (abroad).
In summary, in order to achieve the intended results, tax residence matters should be monitored on a regular basis, because in practice it is not possible to ‘deal’ with this issue fully and comprehensively all at once.