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Emperia Holding SA—operator of Stokrotka, one of Poland’s largest retail chains—said it will appeal an assessment from the Polish tax authority for payment of 142.5 million zloty ($35.4 million) in back taxes.
The Jan. 31 multimillion-dollar tax assessment against Emperia, listed on the Warsaw Stock Exchange, also includes payment of 52.4 million zloty in interest in relation to a 2011 sale of its wholesale business to a competitor.
In a statement, Emperia said it intends to appeal the matter—it has 30 days to do this.
Should the first-level decision be upheld by the Tax Chamber in Warsaw, Emperia is likely to go to court, although it will have to pay the back taxes and interest first, according to local tax practitioners.
The tax assessment against Emperia is seen as evidence of the Polish tax authority’s willingness to probe deeply into the past to recover tax lost to what they regard as aggressive planning schemes.
“This case illustrates that the tax authorities are presenting a more strict approach, and as it was announced by the ministry of finance last year” they are focusing “on fighting with VAT fraud and aggressive tax planning involving corporate income tax and transfer pricing,” Marcin Matyka, a co-chair of the Tax & Financial Services Committee of the American Chamber of Commerce in Poland, told Bloomberg BNA in a Feb. 1 telephone interview. “This case illustrates that what was announced they are nowadays trying to implement.”
The case also means the authorities are unlikely to stop at Emperia, Maria Kukawska, a Warsaw-based tax adviser and partner at Stone & Feather Tax Advisory, told Bloomberg BNA in a Feb. 1 e-mail.
“Tax authorities are determined to look for such cases,” she wrote. “It is very likely that similar cases will be investigated in the future. Emperia claims they have a tax ruling which covers them. The authorities say tax rulings are null and void if tax planning comes into question, therefore nobody can feel safe with their rulings.”
And as the statutory period of limitation for corporate income tax cases is five years, cases going back to 2011 and 2012 are likely to be inspected, according to Kukawska.
“Anybody with a similar case is a likely target for tax inspection, especially if significant amounts were involved,” she added.
The Emperia matter involved the sale of its wholesale business to Eurocash Group, a competitor, via a special purpose vehicle, a limited liability company called P1.
According to Emperia, the sale via P1 was arranged because Emperia was threatened by a hostile takeover at the time, and the transfer of its wholesale business to P1 limited the threat to just P1.
But that is not the whole purpose P1 served, the tax authorities believe, as P1’s existence also allowed Emperia to conduct the entire transaction in a tax-neutral way.
According to sources familiar with the case, the contribution of Emperia’s wholesale assets to P1 was a share-for-share transaction, which was tax neutral.
There was little or no tax paid on the sale of assets from P1 to Eurocash because P1 was able to offset its taxable revenue with the nominal value of shares issued to Emperia. The nominal value of the shares was roughly equal to the shares’ market value.
And proceeds from the sale were distributed back to Emperia tax-free through a redemption of shares that was triggered by the sale of P1’s assets to Eurocash.
The tax authorities argue that the redemption of shares was voluntary and therefore should have been taxed, while Emperia says the redemption of shares was mandatory and therefore without tax consequences.
But in the absence of a general anti-avoidance rule at the time—Poland enacted it only last year—courts may have to decide. According to Matyka, this may take as many as three years.
In the meantime, Matyka said it is too early to rush to conclusions.
“I am not sure if somebody did something like that similar in the past, I am not sure whether it’s a signal to just correct it because nobody knows what will be the final outcome for Emperia,” he said.
A company representative for Emperia could not be reached for a comment.
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