New possibilities in tax liability insurance in Poland

By: Dean Andrews

In this interview, Piotr Nowicki, tax counsel at CMS Poland, talks to Dean Andrews, head of tax liability insurance in London at BMS Group, about new possibilities with insuring tax liabilities in Poland.

Dean: What has been your experience of tax liability insurance and its growth in Poland?

Piotr: Tax liability insurance (TLI) has grown in popularity over the last few years in Poland. In many markets it has moved from being a novelty to a standard facet of transactions.

This growth has been fueled not only by increased familiarity with insurance products like warranty and indemnity insurance (W&I) or title insurance (TI) among market players, but also by an increase in deal sophistication and complexity of tax issues that need to be addressed. Although, currently it is still common to see TLI as part of a bigger W&I and TI offering, stand-alone TLI has also gained significant popularity.

Dean: Has COVID-19 had an impact on the use of TLI?

Piotr: Yes, one condition that contributes to the popularity of TLI in Poland is the fact that under Polish COVID-19 regulations, the deadline for issuing of individual tax rulings has been extended from three to six months. Only seldom parties to transactions are willing to wait so long. Consequently, TLI which may be put in place in terms of weeks or even days, proves to be a good way of addressing tax issues that in the past could be addressed via tax rulings.

Dean: What Polish tax issues do you see most commonly insured?

Piotr: One of the most used TLI products in Poland is the so-called ‘VAT/CLAT insurance of real estate transactions’. Such products cover the potential reclassification of a sale of standalone assets (subject to recoverable VAT) to a sale of a going concern (subject to unrecoverable CLAT).

The potential application of the so-called ‘real estate clauses’ present in various double tax treaties and domestic Polish legislation is also insured. Such clauses generally provide that sales of shares that derive more than 50% of their value form real estate located in Poland, are subject to taxation in Poland (as opposed to taxation in the state of the seller).

In many cases the issue of whether such regulations apply is far from clear cut. The difference between real estate and infrastructure that is not considered real estate is in many cases debatable. This creates a great opportunity for TLI – particularly in deals in the public utilities, shipping, infrastructure or telecommunications sectors.

In addition, withholding tax compliance is also a growing TLI market in Poland. Recent years have been a period of renewed focus on withholding tax. Tax authorities tend to hold Polish companies to a higher standard than in the past.

In particular, since the 2019 introduction of regulations expressly requiring taxpayers to carry out due diligence when applying a particular withholding tax treatment. The risk related with withholding tax may also be insured. Underwriting focusses on verifying the correctness and validity of the taxpayers’ position and ways that the taxpayers’ position may be substantiated in case of a tax audit. Withholding tax issues and insurance are particularly relevant for the technology, media, and telecom sector.

Dean: Across Europe we are seeing a significant amount of enquiries for tax policies related to general anti-avoidance rule (GAAR) principles. Is this something that is regularly considered in Poland?

Piotr: Polish tax regulations include both a GAAR which applies to all situations that may be considered ‘artificial’, and a number of rules covering specific situations where certain benefits are dependent on whether a set of actions is taken for valid business reasons (e.g. according to Polish CIT regulations mergers of companies are considered tax neutral provided that they are not carried out for tax reasons).

In many cases such risk may be insured. Insurance usually covers both the application of the ‘business reasons regulations’ and the GAAR (their application is not mutually exclusive). Underwriting is heavily focused on the business reasons behind the actions undertaken, alternatives ways the insured objectives can be achieved (as they will form the basis for a potential challenge by the tax authorities) and ways that these business reasons may be successfully demonstrated in tax and/or court proceedings.

This type of insurance helps with addressing risks in complex acquisition structures or pre-transactions restructurings, e.g. when business lines are being sprung-off from the main company for future sale. In some cases, such projects are initiated long before any actual sale is to take place.

An additional reason for using TLI in such cases is the fact that the application of ‘business reason regulations’ or GAAR cannot be covered by individual tax rulings. In practice, this leaves parties with either complex side arrangements or insurance as means to manage tax risk.

Dean: How do you see TLI policies evolving in Europe and Poland?

Piotr: The abovementioned new TLI products are only the tip of an iceberg of TLI. Other potential areas of insurance include the risk of reclassifying B2B contracts into employment agreements, the risk of challenges in relation to real estate tax or regulations regarding the limitation on the tax-deductibility of interest.

The market is growing not only horizontally (with more TLI policies being placed every year) but also vertically (with more new types of TLI policies being developed). The coming years are going to be a growth period for TLI in Poland.

This article originally appeared in International Tax Review.