What are hybrid structures?
In practice, hybrid structures most often arise through cooperation between subsidiaries in different countries that benefit from differing legal regulations – for example, differences in whether a given company is considered tax-transparent or non-transparent, or differing approaches to specific financial instruments (e.g. subordinated loans, equity instruments with mixed characteristics).
Why are countries combating hybrid structures?
For years, hybrid structures have been one of the tools of aggressive tax optimisation, allowing multinational groups to significantly reduce their effective tax burden. Hence, the fight against such arrangements has become a priority for the European Union and the OECD, as reflected in the so-called BEPS (Base Erosion and Profit Shifting) project and in the provisions of the ATAD 2 Directive.
Provisions countering hybrid structures in Polish CIT
In response to the challenges associated with the abuse of hybrid structures, from 2021 Polish CIT regulations have been expanded to include mechanisms aimed at eliminating double deduction of costs and preventing situations where income ‘disappears’ from the tax system (so-called neutralisation of hybrid effects).
The regulations concerning the mechanisms described above are contained in Chapter 3a “Hybrid Structures” of the Corporate Income Tax Act.
Practical implications for businesses
The introduction of provisions concerning hybrid structures forces taxpayers operating within international structures to review their existing business and accounting models. In practice, it is necessary to analyse whether the solutions employed generate a risk of double deduction or non-taxation.
It is worth noting the typical “pitfalls”:
- Subordinated loans, which may be treated as equity in one jurisdiction and as debt in another.
- Tax-transparent companies – discrepancies in classification may lead to hybrid effects.
- Financial instruments combining the characteristics of debt and equity.
How to prepare?
Key recommendations for companies and corporate groups:
- Conduct a review of accounts to identify potential hybrid structures.
- Monitor changes in legislation in Poland and other countries where the group operates.
Summary
The fight against aggressive tax optimisation is one of the key areas of change in tax law in recent years. Regulations concerning hybrid structures require greater transparency and diligence in international CIT settlements. For businesses, this means both new obligations and the need to constantly monitor the tax arrangements applied within the group.
Do you need support in assessing your CIT returns or identifying risks associated with hybrid structures? Contact our team – we will analyse your situation and advise you on the best solutions.
Frequently asked questions
What are hybrid structures in the tax context?
These are mechanisms that exploit differences in the legal qualification of entities or instruments in different countries. The effect of such actions may be double deduction of the same cost or non-taxation of income in any of the jurisdictions.
Why did Polish law introduce regulations concerning hybrid structures?
These regulations aim to eliminate double deduction of costs and prevent situations where income remains untaxed. They constitute a response to aggressive tax optimization used by international capital groups.
What typical solutions may generate the risk of creating a hybrid structure?
The pitfalls include subordinated loans, which may be treated as capital in one country and as debt in another. Risk also occurs with tax-transparent companies and financial instruments combining characteristics of debt and capital.
What should entrepreneurs do to protect themselves against the consequences of hybrid structure regulations?
A review of settlements should be conducted to identify potential hybrid structures. It is also important to monitor changes in regulations in Poland and in other countries where the group conducts business.
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I specialize in Polish tax law, particularly income taxes, as well as international tax law. My experience includes, among others. providing ongoing tax advisory services, preparing legal and tax opinions, drafting requests for individual interpretations, conducting tax reviews. I gained professional experience in Warsaw law firms.
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