A small anti-optimization clause / TAX Alert

Legal provisions introduced in 2018 to support new investments have significantly changed the system for providing support in Special Economic Zones (SEZ). Aside from changes that concern new investors (replacing permits to conduct business activity in SEZs with decisions to provide support to an investor, irrespective of their location), these provisions also affect investors currently operating in SEZs.

For example, the so-called small clause against the abuse of tax exemptions in SEZs and exemptions based on decisions to provide support shall apply to any revenues generated from 1 January 2019.

Importantly, the clause may also apply to taxpayers who benefit from tax preferences in accordance with the currently applicable provisions.

The clause states that income tax exemptions granted in respect of business activity conducted in SEZs, and exemptions based on decisions to provide support shall no longer apply if:

  • the income deriving from a business activity specified in the decision to provide support or deriving from business activity conducted in an SEZ is generated due to having concluded an agreement or having performed another legal act(s) or many inter-related legal acts primarily in order to be exempted from income tax, or
  • such legal acts are not genuine, or
  • a taxpayer who benefits from tax exemptions performs legal acts or many inter-related legal acts, including acts related to a business activity falling outside the scope of such exemptions, solely or primarily with the aim of avoiding or evading taxation.

A taxpayer shall lose the right to benefit from the tax exemption from the date on which the first of the abovementioned legal acts is performed, from which time the taxpayer is obliged to pay tax at the appropriate rate.

According to the official explanation of the statutory provisions, the clause aims to prevent entrepreneurs from abusing tax exemptions by using instruments to avoid or evade taxation, for example by seeking to generate eligible costs on a non-market basis.

Although the clause’s practical application may cause some uncertainty, it is expected that it will be a powerful tool for the tax authorities when assessing the tax settlements of taxpayers who have benefitted from tax exemptions pursuant to the former legislation governing SEZs and the new legislation on providing support for new investments.

If you wish to discuss how this clause may impact on your tax settlements, or to assess any risks associated with how the clause may apply to your eligible costs or your exempted SEZ income, please feel free to contact us.

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