Last updated: 26.02.2025
General Anti-Avoidance Rule (GAAR) – Preventing Abusive Tax Practices
Since 2016, the General Anti-Avoidance Rule (GAAR) has been a key mechanism in the Polish tax system, aimed at combating tax avoidance and unacceptable tax avoidance practices.
GAAR grants the Head of the National Tax Administration the authority to deny tax benefits resulting from transactions that lack economic substance or are structured primarily to reduce tax liability. An action may also consist in omission.
Conditions for GAAR Application
For GAAR to apply, three conditions must be met simultaneously:
- The main purpose or one of the main purposes of the action was to obtain a tax benefit.
- The tax benefit gained contradicts the subject or purpose of the applicable tax legislation.
- The transaction or course of action is considered artificial, meaning it lacks commercial purpose beyond tax reduction.
By enforcing anti-avoidance rules, GAAR penalties deter abusive tax planning and ensure tax fairness by preventing base erosion and profit shifting.
What is Artificial Transactions Under GAAR?
A course of action is considered to be artificial if, on the basis of the existing circumstances it must be assumed that an entity acting reasonably and guided by lawful purposes would apply that method of operation to a predominant extent for justified economic reasons. The above reasons do not include the purpose of obtaining a tax advantage contrary to the object or purpose of the tax act or its provision.
Actions undertaken solely to obtain a tax benefit, without a genuine commercial purpose, may fall within the scope of GAAR penalties.
Contradiction to Tax Legislation – When GAAR Applies?
A transaction contradicts the subject or purpose of the applicable tax legislation if it is lawful yet structured in a way that exploits legal provisions to gain an unintended tax benefit. This often involves:
- Rearranging transactions to bypass specific taxation rules.
- Utilizing financial instruments to artificially reduce the tax base.
- Engaging in treaty abuse to minimize or avoid taxes altogether.
What is tax Benefit Under GAAR?
Under GAAR, a tax benefit may include:
- No tax liability or a delay in the establishment of tax liability arising under the Polish law or a reduction of its amount.
- An occurrence or overvaluation of tax loss.
- Arising under the Polish law of a balancing credit or a right to a tax refund or an increase in the amount of the balancing credit or tax refund.
By applying the economic substance test, GAAR ensures that tax planning strategies align with legislative intent, preventing avoidance transactions that undermine tax fairness and economic cooperation.
FAQ – General Anti-Avoidance Rule (GAAR) in Poland
When does GAAR apply to a transaction?
GAAR applies when a taxpayer engages in an avoidance transaction where one of the main purposes is to obtain a tax benefit that contradicts the subject or purpose of the Income Tax Act or other tax law provisions. Such transactions lack economic substance and primarily aim to reduce the tax burden.
What is considered an artificial transaction under GAAR?
An artificial transaction is one that lacks a genuine economic substance and is structured solely for tax avoidance. If an entity acting reasonably and for bona fide purposes would not engage in such a transaction, it may be subject to GAAR penalties under the general anti-avoidance rule.
What types of tax benefits can GAAR deny?
GAAR can deny tax benefits such as a reduction or delay in tax liability, an overstated tax loss, or an artificial tax refund. The economic substance test is used to assess whether the benefit aligns with the government’s responsibility to ensure fair taxation.
How does the purpose test impact GAAR enforcement?
The purpose test examines whether the main purpose of a transaction is to gain an unintended tax benefit. If a taxpayer structures a deal primarily to lower their tax burden, GAAR may apply, even if the arrangement complies with the rules of the Income Tax Act.
What are the penalties for abusive tax planning under GAAR?
If a tax authority determines that GAAR applies, the normal reassessment period can be extended, and gross negligence penalties may be imposed. These penalties discourage abusive tax planning and prevent more transactions designed to exploit loopholes in tax law.
How do new GAAR rules impact taxpayers?
The new GAAR introduces significant changes, including a lower threshold for applying anti-avoidance rules, more stringent explanatory notes, and stronger enforcement by government agencies. Recent case law from the Supreme Court reinforces the importance of aligning tax planning with legislative intent.
How does the economic substance test determine the application of GAAR?
The economic substance test assesses whether a transaction has a legitimate business purpose beyond tax avoidance. If a taxpayer engages in an avoidance transaction lacking commercial rationale, the tax authority may deny the tax benefit and impose GAAR penalties under the Income Tax Act.
What role does case law play in GAAR enforcement?
Recent case law from the Supreme Court and other judicial bodies helps interpret the application of the GAAR by defining bona fide purposes, evaluating expected value, and considering other factors. Courts assess whether such transactions align with anti-avoidance rules and legislative provisions to ensure fair tax compliance.
What is the General Anti-Avoidance Rule (GAAR)?
The General Anti-Avoidance Rule (GAAR) is a legal mechanism in the Income Tax Act designed to prevent tax avoidance by denying tax benefits from transactions that lack economic substance. GAAR applies when a taxpayer structures an arrangement primarily to reduce their tax burden, contradicting the rules and provisions of tax law.
