1. Old solutions put taxpayers in danger
Katarzyna Michalik-Studnicka
Old solutions put taxpayers in danger
Act dated 24 February 2006, amending the act on tax control and fiscal law (Journal of Law No.66 item 470), entered into force on May 6, 2006. As far as fiscal law is concerned, the amendment brings back into force the earlier version of Art. 181 applied before 1 September 2005.
In the justification for the introduction of an objective government's proposed amendment (form No. 242) it has been pointed out that the content of Art. 181 of Fiscal Law limited the powers of tax institutions and hindered their access to documents gathered as evidence in unconcluded penal proceedings and proceedings conducted with reference to fiscal offences or minor offences, which resulted in unnecessarily prolonged tax proceedings. According to the government opinion, the amendment aims to overcome potential difficulties faced while applying tax control regulations and preventing the repetition of costly evidence procedures followed by tax institutions.
The legislative initiative mentioned above and the act passed on 24 February 2006 are based on a one-sided and subjective assessment of the effects produced by Art.181 of Fiscal Law made from the point of view of tax institutions.
From the controlled entities' point of view - taxpayers, entrepreneurs, or persons conducting no business activity - the amendment made to Art.181 of Fiscal Law is not a change for the better. They are no longer protected by the mechanism guaranteeing that only those documents which have been verified in the course of penal proceedings concluded with legal validity, as well as proceedings conducted with reference to fiscal offences or minor offences, can be used as evidence in tax proceedings.
Undoubtedly, the fiscal interests of the State should be properly protected, and the law should generate instruments for eliminating and preventing irregularities in the taxpayers' settlements with the state budget. All legal and fiscal systems should, however, take into account the rights enjoyed and obligations assumed by both parties - the State and controlled entities. In Poland, the rights of controlled entities are being systematically limited for the benefit of the fiscal interests of the State. The amendment made to Art. 181 of Fiscal Law only confirms the statement, even though the fiscal interests of the State are guarded nowadays by such institutions and legal mechanisms, which prevent the limitation of tax liability, as well as the prescription of carrying out the execution of punishment for fiscal crimes and offences. Examples of such institutions and mechanisms include interest on overdue tax (Art. 53 of Tax Law), suspension of the course of negative prescription of tax liabilities in the event of legal proceedings being instituted in cases of fiscal offences or minor offences (Art.70 § 6 point 1), prolonged periods for the prescription of carrying out the execution of punishment for fiscal offences and minor offences (Art. 44 § 1 and § 5 of Penal Fiscal Code), maximum statutory penalty for fiscal offences and minor offences committed against tax obligations (Art. 56 - 84 of Penal Fiscal Code), penal measures (Art. 33 of Penal Fiscal Code) providing for the obligatory payment of financial benefits derived from committing a fiscal offence.
The amendment which has been in force since 6 May 2006 is not safe for the controlled entities and is not just a cosmetic change. It gives tax institutions access to all gathered documents concerning a penal case (such as official notes made by penal prosecution agency officers, etc.) and not just to evidence gathered during the course of proceedings. Moreover, it allows tax institutions to make use of materials gathered in penal cases at any time during the course of such proceedings.
This solution constitutes a clear and present danger resulting from the immediate enforceability of decisions made in fiscal cases and deficiencies in procedures for setting aside final decisions made in fiscal cases. If, during the course of proceedings instituted in a case on fiscal offence, a tax institution obtains evidence consisting of a VAT invoice and a testimony made by the entity indicated as the issuer of the invoice in which the entity denies having issued the invoice, the institution will redetermine the amount of tax to be paid by the taxpayer who included the invoice in question in his/her tax calculations, which will be higher than the declared amount of tax due because the purchase costs as indicated on the VAT invoice in question, secured as evidence in the proceedings instituted in a case on fiscal offence, will not be classified as tax deductible expenses. Redetermination of tax due, whose amount is higher than the amount declared in the tax statement, will result in the obligation to pay due tax together with statutory interest, as well as the necessity to accept penal and fiscal liability for diminishing the amount of tax after an adequate decision has been handed over to the taxpayer (Art. 224 § 1 of Tax Law). If, after the decision has been made, new evidence appears which questions the credibility of testimony made by the issuer of the invoice and confirms the authenticity of the VAT invoice, the taxpayer will be able to motion for the evidence to be taken into account by the tax appeal institution. However, the taxpayer may be deprived of his/her property, refused access to the bank account or forbidden to conduct any business activity until the appeal proceedings have been completed. If such evidence appears after the tax appeal proceedings have been completed, the taxpayer will not be able to set aside the final decision made by the tax institution by adducing new evidence gathered in proceedings instituted in a case on fiscal offence. Tax proceedings may be reinstituted only on the basis of evidence, unknown to the decision-making institution, which existed on the day when the decision was made (Art.240 § 1 point 5 of Tax Law). There will also be no grounds for declaring the final decision made in fiscal cases null and void because the tax institution will be acting in accordance with the law which allows it to make use of evidence gathered in the course of fiscal offence proceedings unconcluded with legal validity; the taxpayer shall not be able either to receive any compensation since the prerequisite on which compensation liability depends is the illegality of actions taken by State bodies, which will be made legal, however, by the proposed amendment.
Mirosław Wójcik
Following Centros
The costs of establishing a limited liability company in Poland are relatively high in comparison with such countries as England, Spain, or Portugal.
This is due to high initial capital costs, amounting to as much as PLN 50.000, which have to be borne in order for the company to be entered in the Register of Entrepreneurs (Art.150.§1 Commercial Company Code). In other words, to start business activity in Poland in the form of a limited liability company you need to have at least PLN 50.000 (plus registration costs, etc.).
In England, for example, setting up the so-called private limited company (Ltd) does not involve any initial capital costs (business activity in the form of such a company may be started with the capital amounting to Ł50). In Portugal, on the other hand, minimal initial capital equals PLN 8.000.
Now that Poland is to join the EU, maybe it's worth considering if setting up a company here will be a good idea at all. Perhaps it would be better to choose some other solutions instead which, after all, might turn out to produce analogous effects to the direct establishment of a limited liability company in Poland. The advantage of choosing such solutions is that they require much lower capital expenditure. So, why not establish a private limited company (Ltd) in England and then register its branch in Poland, taking advantage of the foreign entrepreneur's status (the doctrine underlying the Community law refers to such practice as the so-called secondary establishment)? It can be done quite cheaply, and there are no legal obstacles that would prevent focusing all business activities on the Polish branch, without the necessity to start up the company in England.
Prima facie the idea seems rather impracticable.
First of all, the proposed solution obviously aims at evading the Commercial Company Code regulations specifying the minimal initial capital of a limited liability company, which will certainly be taken into account by Polish registration courts while considering our application for registration of a foreign entrepreneur's branch.
Second of all, a Polish registration court considering application, being aware of intentions, will refuse to grant company the status of a foreign entrepreneur.
According to Polish International Private Law, each legal entity must have its personal status evaluated (i.e., its legal capacity, principles of functioning, or representation) on the basis of the law that is binding in the country where actual head office, main branch of the company is located - the so-called theory of head office (Art.9 §2 of the act dated 12 July 1965, International Private Law). In accordance with our assumption, business activity is to be conducted only in Poland. Thus, the law on which the evaluation of personal status of company would be based (formally, an English law company) is Polish law. Consequently, we should assume that a Polish registration court would probably refuse to register our company as a legal entity (Polish law does not define any legal entities whose structure corresponds with the structure of such a company). On such basis an application would be rejected as unacceptable.
The solution can be perceived in quite a different light if we take into account the judgement made by The European Court of Justice (hereinafter referred to as ECJ) on 9 March 1999 concerning the case Centros Ltd versus Erhvervs-og Selskabsstyrelesen - case reference number C-212/97 (published on: http://curia.eu.int/en/index.htm).
The situation looked as follows: a Danish married couple established in England a private limited company named Centros Ltd. The initial capital of Centros Ltd amounted to Ł 100 (according to Danish law the minimal initial capital of a limited liability company amounts to DKr 200.000). Then, without starting any business activity in England, Centros Ltd. applied for the registration of its branch in Denmark. Danish registration body rejected the application. Therefore, the situation seems analogous to the proposed solution mentioned earlier. The decision made by the Danish registration body was questioned, however, by The European Court of Justice.
First of all, ECJ assumed that the charge of evading initial capital regulations was groundless. The institution of minimal initial capital is to assure the company's creditors that the company's assets equal at least the amount of the minimal initial capital (guarantee function). If only Centros Ltd. had started some business activity in England before applying for registration in Denmark, the charge of evading initial capital regulations would be invalid. Rejection of application for branch registration is a measure which does aim at protecting company's creditors.
Second of all, ECJ assumed that if a company is re-established (secondary establishment), bodies examining the applications for branch registration should evaluate the company's personal status on the basis of the law binding in the country of registration (the so-called theory of establishment). In all other cases, the principle of freedom of business activity, as prescribed in Art. 43 (52) and Art. 48 (58) of The Treaty Establishing the European Community, is infringed.
So all we can do is hope that after Poland's accession to the EU, Polish registration courts will respect the judgement made by ECJ in the Centros Case. Polish legislators should also consider introducing an amendment to the Commercial Company Code that would decrease the amount of minimal initial capital of limited liability companies. This is the only way of increasing the competitiveness of Polish company law.
[16-05-2003]
Mirosław Wójcik
A "New" Bank's Mortgage
An inherent feature of credit activity of banks is credit risk. Within the framework of credit risks it is possible to distinguish the so-called active and passive credit risk. Active credit risk comprises risk related to the manner of securing a bank's receivables under a credit agreement.
A bank deciding about the manner of securing its receivables under a bank credit agreement and aiming for the reduction of active credit risk should in principle be guided by two factors: the average recovery rate and the average recovery time. The frequency with which banks selected various forms of securities in 1998 is as follows: registered pledge: 42%; ordinary real estate mortgage: 18%; agreement on the transfer of ownership (for security purposes): 10%; compulsory and contractual capped mortgage: 6%; assignment of receivables: 12%; surety, guarantee: 8%; promissory note: 4% (total amount 100%).
The above list shows that tangible security (including mortgage) is dominant with respect to the types of legal security for banks' receivables from credit agreements. This result is astounding, because these types of securities are characterised by the lowest rate of recovery (59%) and the longest time of recovery (8.5 months) in comparison with analogous values calculated for personal securities (respectively: 78% and 6.4 months). Such a good result obtained by tangible securities (including mortgage) may be a consequence of two factors.
First of all, the banks in Poland emulate the practices of banks from the EU countries. For example, in England the most popular manner of financing so-called real-estate transactions, i.e., transactions regarding turnover and investments in real-estate property is the so-called mortgage, i.e. an instrument which is similar to the Polish mortgage (http:// www4.law.cornell.edu/cgi-bin/htm). Such financing relies on the investor procuring a bank credit and simultaneously mortgaging the real-estate property to which such investment refers or another real-estate property.
Secondly, pursuant to the Polish law, Polish banks, contrary to banks from other EU countries, make use of the privilege in the form of the so-called bank's mortgage. For some time the existence of such a privilege was dubious in a legal context due to the ambiguous content of Art. 95 of the Banking Law (PBU) of August 29, 1997 (uniform text: Dz.U. 2002.72.665). A recent amendment of Art. 95 of the PBU (Act Amending the Banking Law of April 1, 2004, Dz.U. 2004.91.870) (PBU04), which became effective on April 1, 2004, finally corroborated the existence of the privilege with respect to banks. The nature of a bank's mortgage as privilege relies on the fact that banks are entitled to set up a mortgage (and to record a relevant entry in the land and mortgage register) which secures the bank's receivables under a credit agreement only on the basis of the so-called bank documents (a document confirming the fact that credit or loan was granted, its value, interest due and conditions of repayment). Therefore, in order to set up a bank's mortgage it is not required (as in the case of the ordinary real-estate mortgage) that the owner of the mortgaged real-estate files a statement in the form of a notarial deed in which it expresses its consent for mortgaging a given real-estate property (the statement in question can be filed in any form). Therefore, a bank's mortgage allows for the reduction of costs related with the granting of credit by the banks.
At the same time, PBU04 introduced two principal changes with respect to the bank's mortgage.
Example: Limited liability company X wishes to conclude a bank credit agreement with bank Y for the amount of PLN 200,000.00. The credit is to be allocated for the start-up of business of limited liability company X. As of the day of concluding the bank credit agreement, limited liability company X has at its disposal a real-estate property which is worth PLN 80,000.00 and which constitutes an in-kind contribution to the company to cover shares taken up by the sole shareholder of limited liability company X - Jan Nowak. Jan Nowak is the owner of a parcel of land whose value amounts to PLN 150,000.00. Bank Y makes the granting of credit to limited liability company X conditional upon setting up a mortgage to secure the bank's receivables resulting from the credit agreement on a real-estate (real-estates) which are valued at PLN 220,000,000.00 as a minimum.
Art. 95, prior to its amendment by PBU04, allowed for setting up a bank mortgage only on the real-estate property of the bank's debtor. Therefore, with respect to the example presented above, the bank mortgage could be set up on the real-estate property of Jan Nowak only if at the moment of establishing a bank mortgage Jan Nowak was a debtor of bank Y (e.g. in relation with concluding a loan agreement or a bank account agreement with bank Y). PBU04 allows for establishing a bank mortgage with respect to the real-estate which is owned by the bank's debtor or by another person who establishes a mortgage in favour of the bank in order to secure the receivables of the bank's debtor. With respect to the current legal status, the issue whether Jan Nowak is a debtor of bank Y or not has no legal significance.
Moreover, Art. 95 of the PBU04 stipulates that the owner of a real-estate files a statement regarding the mortgage in favour of the bank in writing under pain of nullity. Before the PBU04 became effective, it was possible to imagine situations in which banks did not obtain a clear statement from borrowers allowing for the mortgaging of their real-estates (the only thing that the bank was required to do was to include a note in the conditions of repayment which were issued by the bank and which stipulated that the bank's receivables under the bank credit agreement would be secured by means of setting up a mortgage on a real-estate property of the bank's debtor). What is more, the banks could (and there was legal basis for such procedure) aim for setting up a mortgage on the borrower's real-estate property without the borrower's approval for such mortgage (without the borrower's knowledge). In the current legal state these practices are not permissible.
A special function performed by bank credit agreements, i.e. financing investments which are important for the development of housing policy, constitutes justification for the violation of principle of equality of rights of the participants in the civil law transactions and granting the banks privilege in the form of a bank's mortgage. However, the privilege of the banks should not exceed limits determined by safety of legal transactions. PBU04 seems to take into account not only the banks' interests, but also the interests of the borrowers. However, it would be advisable to consider the fact whether the institution of a bank's mortgage does not breach the principle of freedom of competition in the EU market. A product - such as bank credit - offered by the Polish banks is cheaper from analogous products offered by German banks, thanks to the institution of a bank's mortgage.
[25-08-2004]
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