What is a tax equity group?
A tax capital group is an organizational form consisting of at least two capital companies. This group includes limited liability companies, joint stock companies or simple joint stock companies. All entities in the group must have capital ties between them and a registered office in Poland.
Inside a tax capital group there must be a parent company (parent company) and one or more subsidiaries (daughter companies). The parent company can be an entity that owns at least 75% of the share capital of the subsidiaries.
Entities in this group can jointly account for corporate income tax and achieve a number of other benefits – we’ll talk about all of them later in the article.
Capital group vs. tax capital group – what are the differences?
Since it is extremely easy to confuse these two terms, we rush to clarify. A corporate group is an organizational form in which each company independently accounts for CIT. A tax equity group also consists of several companies, but it is the parent company that pays income tax on behalf of all the entities belonging to the CIT group (and also calculates and collects it).
However, it is worth remembering that according to Art. 1a, para. 14 of the CIT Law, all companies are jointly and severally liable for PGK’s income tax liabilities due for the term of the agreement.
Tax capital group – conditions of formation
The formation of a group involves meeting a number of criteria detailed in Art. 1a, para. 2 of the CIT Law:
- The companies that make up the PGK are exclusively limited liability companies, simple joint stock companies or joint stock companies,
- all entities are based in the territory of the Republic of Poland,
- The average share capital per company is at least PLN 250,000,
- the parent company holds a direct 75% stake in the share capital or that portion of the share capital of the subsidiaries that has not been acquired free of charge or preferentially by employees, farmers or fishermen, or that does not constitute a reserve of Treasury property for reprivatization purposes,
- There are no tax arrears in any of the companies,
- the parent company and subsidiaries will enter into an agreement to form a tax capital group for a period of at least 3 fiscal years.
Important!
In order for a PGK to have the right to operate, the companies that make up the group cannot take advantage of the tax exemptions set forth in Art. 17 of the CIT Law. Nor can they choose income tax exemptions under other laws.
What’s more, if any PGK company conducts a controlled transaction with related but non-group entities, it may not set or impose terms of the transaction that differ from the terms that unrelated entities would set among themselves.
Agreement on the establishment of a PGK – what should it contain?
We have already mentioned that one of the conditions for the establishment of a tax capital group, is the drafting of an appropriate agreement between the companies. To be binding, this document must include:
- A detailed list of the companies that make up PGK,
- shareholder data, including the amount of each shareholder’s stake in the share capital – both in the parent company and in the subsidiaries,
- the period for which the contract is concluded (a minimum of three fiscal years), as well as specifying the framework of the fiscal year agreed upon by the parties.
The document that contains the above information must be submitted to the tax office competent for the seat of the parent company at least 45 days before the day on which the tax year determined by the parties to the agreement begins. A tax capital group is formed when it is registered by the head of the tax office. This fact is confirmed by the registration decision of the agreement on the formation of a tax capital group, which is received by the parent company.
Benefits of setting up a PGK – lower CIT and more
A tax equity group brings a number of benefits to companies. Here are the most important of them:
Tax optimization – The formation of a PGK has the effect of combining the tax results of the companies involved in the group. When one of the companies records losses and the others have surpluses, the tax capital group allows the offsetting of profits and losses, and consequently a reduction in tax liability for the entire group. The losses of one of the companies reduce the income and, consequently, the tax payable. This mechanism is often used by entities that operate in different markets or are affected differently by seasonality.
Less risk – companies that are part of a PGK can more easily enlarge their offerings (thus increasing competitiveness), as well as plan to expand their operations (for example, to other markets) thanks to the possibility of jointly deducting costs for investments. In this way, investments made by one of the companies will not be as risky for it as if it made them independently.
Less paperwork – participation in a tax capital group means that companies do not have to carry out transfer pricing documentation obligations for transactions between entities affiliated with the PGK.
Simpler settlements – within a PGK, only the parent company has to keep tabs on and pay CIT settlements – this reduces costs and saves time on tax formalities.
Easier restructuring – in situations where restructuring is needed – such as a merger or acquisition, companies can do so much more easily under a PGK, as all costs incurred and revenues earned are accounted for collectively on behalf of the parent company.
Is it worth forming a tax equity group?
The answer to the question posed in the headline depends on several factors. The formation of a tax capital group can be very beneficial when the companies belonging to it:
- operate in different branches of the economy – so they can help each other expand their offerings and increase competitiveness, all with significantly reduced risk (e.g., regarding investments),
- incur a lot of fixed costs – thanks to PGK they can settle them in subsidiary companies,
- operate in different markets – the group then facilitates legal tax optimization,
- incur losses – within the group it is possible to cover the losses and liabilities of one company with the funds of another subsidiary.
Operation of tax equity groups in practice
Once a group is formed, this means that the entities that are part of it must comply with certain regulations. Along with joining the PGK, there will also be new obligations – most of which apply to parent companies.
The most important duty of the parent company is to calculate, collect and remit CIT on behalf of all the entities that make up the group. Just as when the PGK is established, the parent company is required to submit the agreement to the head of the tax office, so during its operation the representative of this company must report all changes:
- In the contract,
- in the share capital of any of the companies,
- in factual or legal status, if these changes may result in the loss of CIT taxpayer status.
Important!
Each of the above-mentioned changes must be reported to the relevant tax authority within 30 days of the date of the change in question.
Loss of taxpayer status by PGK
Income tax status is not non-transferable – a PGK can lose it if it violates any of the conditions for forming a group, listed in Art. 1a, para. 2 of the CIT Law. If this occurs, consider the day before the changes occur as the last day of operation of the tax group. This day will also mark the date of the end of the group’s fiscal year.
Example:
Tax Group X violated one of the group’s statutory conditions on September 15. This means that the tax year for the group ended on September 14 – this day will also be treated as the day of loss of tax status.
Important!
If the group loses its taxpayer status, all companies previously part of the PGK must settle income tax separately, as the group ceases to exist. All entities have three months to settle, counting from the date of loss of status.
The loss of taxpayer status is confirmed by the head of the tax office, sending a decision to the parent company stating the expiration of the contract registration decision.
Summary
A tax capital group can be a very advantageous solution for cooperating companies. An important feature of a PGK is risk reduction and tax optimization – these are the two elements that matter most to companies that decide to form groups.
The latest data shows that in 2023 there were only 71 PGKs registered in Poland, which means that – despite the obvious benefits – this form is not yet very popular. So there is still plenty of space in the market for new tax equity groups.
