Day 26 July 2021 The Ministry of Finance has published a long-awaited draft law amending the Personal Income Tax Act, the Corporate Income Tax Act and some other laws in connection with the announced tax changes concerning the so-called scheme "Polish Deal” or rebuilding the economy after the coronavirus epidemic.
On 29 October 2021 There was a new, modified bill amending - after a public consultation, an auto-amendment from the government and amendments to the Senate. The project assumes a number of revolutionary tax changes that significantly transform the tax system in Poland.
The content of the bill itself counts 277 the parties and the reasons given to them, 267 pages. In our view, it is worth reading the amendments in order to identify the opportunities and risks that arise. To this end, we have prepared a series of articles that will facilitate this task. In Module No 1 We will address the most important changes made simultaneously on both the PIT and CIT grounds.
Amendments to the Foreign Controlled Unit (CIT) legislation
In the recipe Article 30f PIT Act and Rule Article 24a The CIT Act introduced amendments to clarify the conditions for the constitution of a foreign controlled entity by indicating that an entity in which the Polish taxpayer owns itself or jointly with associated entities or (and this has been added – see course) with other taxable persons residing or established in Poland directly or indirectly exceeds 50% equity or over 50% voting rights in the management of the unit.
These other taxpayers will be taxpayers who have at least 25% equity or at least 25% voting rights in the management of the unit, or 25% the right to participate in the profit of the company.
This means that if two Polish taxpayers, unrelated in no way to each other, have over 50% shares in the capital of a foreign company, this condition of control will be fulfilled.
In practice, the Polish tax may require payment of income tax obtained by a foreign controlled company, e.g. in the Czech Republic, Estonia, the Netherlands, Cyprus, Malta. If a foreign company is in a tax haven then it is automatically subject to the CFC rules. If it is located in the EU or in the country with which Poland has a signed double taxation agreement, it must be fulfilled together three the conditions to consider the foreign company to be CFC.
This includes control requirements, revenue sources and levels of taxation. After first, the taxable person himself or associated entities must have more than 50% shares, 50% voting rights in the company, or 50% rights to profit. After second, for the company to be considered as CFC, that is at least 33% Her income must be passive revenue. They currently include in particular the following revenue:
- from dividends,
- the sale of shares,
- from interest,
- from the claim,
- copyright,
- the sale of rights from financial instruments.
The directory of these revenues is closed
In this context, the list of passive revenues exceeding the threshold will be extended 33% of intangible services provided, such as advisory services, accounting, market research, etc., will constitute a foreign controlled entity.
After third, the tax paid by the company abroad must not be lower than CIT, which would be paid in the country. If it is lower, the condition is met.
The project adds two types of conditions for foreign controlled entities. The aim is to prevent the creation of shell companies. In its justification, MF explains that it is about entities with very large assets but not generating or generating revenue at all to a very small extent.
As a facade company subject to CFC, therefore, a company will be considered to be in which, among others, passive revenues will be lower by 30% from:
- held shares in other companies or mutual investment institutions,
- its movable, immovable assets, also used under the lease agreement,
- its intangible assets.
The requirement that movable, immovable, useable assets under the lease agreement and intangible and legal assets must also be met shall be at least 50% the value of its assets.
Another type of company is a company that generates a ‘over-normative’ income, without finding cover in its assets.
This income will be determined by the following algorithm: (b + c + d) x 20% in which individual point (e) ry means:
- b – the carrying amount of the entity’s assets,
- c – annual unit employment costs,
- d – accumulated (summarily) present value of depreciations within the meaning of the accounting rules.
If the entity's income exceeds the value indicated above, then, subject to the cumulative fulfilment of the other conditions in the design Article 24a(3)(5) PIT Act (30f, respectively section 3 point 5 CIT Act), it will be considered as CFC.
Simplification of transfer pricing documentation. Changes in time limits (IT and CIT)
The proposed amendments are, above all, a reduction in bureaucratic obligations, with an extension of the statutory deadline for their fulfilment.
The proposal is to remove the obligation to make a separate declaration of the compilation of the documentation and the marketability of the prices applied by transferring its content to the duly modified TPR-C, TPR-P forms.
Subsequent changes concern the way transfer pricing information is signed. In principle, the head of an entity within the meaning of the Accounting Act is currently entitled to sign. According to the draft, it is proposed to extend the entities entitled to sign also to attorneys, i.e. lawyers, tax advisers, auditors or prosecutors.
An extension to 14 the date of submission of the tax documentation at the request of the tax authority (currently this is 7 days).
The extension will also be subject to deadlines for drawing up the Local File tax documentation (until the end of tenth one month after the end of the tax year of the obliged entity) and a deadline for submission of transfer pricing information (until the end of eleventh one month after the end of the tax year of the obliged entity).
Simplification of transfer pricing documentation. Clarification of non-acute concepts (in PIT and CIT)
To clarify the concept of a company without legal personality by aligning terminology with the provisions of the PIT Act and the CIT Act, defining the moment of fulfilment of the condition of significant influence, concepts of tax and investment agreement.
Clarification of the circumstances of the application of the Safe Harbour mechanism by indicating the tax year as the period during which the condition for recourse to simplified accounting rules is being examined.
Clarification of the method of determining deposit, insurance or reinsurance transactions. According to the project Article 11l(1): „In the case of a deposit, the value of the transaction will refer to the value of the capital, in the case of insurance or reinsurance contracts, to the sum of the insurance and, in the case of non-legal companies, to the total value of the contributions to the non-legal person.’
To clarify that where VAT is not neutral, it should be included in the value of the transaction in question.
Clarification of the statement of drawing up the dossier, as proposed Article 11t(2)(7) and section 2b CIT Act: ‘2.
The transfer pricing information shall include: (...) 7) a statement by the entity that the local transfer pricing documentation has been drawn up in accordance with the real state and that the transfer pricing covered by that documentation is determined on terms that would have been determined by unrelated parties.’; Under section 2 point 7, in the event of receipt, free of charge or in part, of goods or rights, or of other benefits in kind constituting income, transfer prices shall be deemed to be determined under conditions which would be determined by unrelated parties if that income was shown for tax purposes in accordance with the market price principle.
‘
The issue of source documents on the basis of which transfer pricing records are drawn up has also been clarified, Article 11t(2a) Project: ‘Information on transfer prices shall be made on the basis of: 1) the local transfer pricing documentation, where the related party was required to produce that documentation; 2)the financial statements or other documents, where the related party was not obliged to produce that documentation.’
Simplification of transfer pricing documentation. Additional exemption from the documentation obligation (PIT and CIT)
The proposed provisions include extending the list of exemptions from the obligation to draw up local transfer pricing documentation by the following cases:
- transactions between foreign establishments located in Poland, whose parent entities are related entities, as well as between the foreign midwife in Poland, the foreign establishment of the related nonresident entity and its related tax resident in Poland;
- transactions covered by a tax agreement and an investment agreement;
- safe-harbour transactions for loans, loans, bonds;
the transactions of the so-called clean restocking, but in this case the following conditions shall be fulfilled:
- - if the added value is not generated and the settlement is made without taking into account the profit margin or charge,
- - where the settlement takes place without using the allocation key,
- - where the settlement is not related to another controlled transaction,
- - if settlement occurred immediately after payment to an unrelated party,
- - if the related party is not a resident, established or managed entity in the territory or country applying harmful tax competition.
Simplification of transfer pricing documentation. Other amendments (PIT and CIT)
In the case of an agreement of a company that is not a legal person, a joint venture agreement or other similar agreement, the transfer pricing analysis shall include, in particular, the adopted rules on the rights of shareholders or parties to the agreement to participate in profit or property and to participate in losses.
Introduction of the possibility for entities to refrain from drawing up a benchmarking/compatibility analysis for controlled transactions concluded by taxpayers, which are micro/small entrepreneurs and for non-controlled transactions, by taxpayers and non-legal companies with an entity from a tax haven (the planned facilitations will apply to the documentation prepared for the tax year starting In 2021).
Modification of tax penalties in the field of documentation and TPR form in connection with the liquidation of the document statement.
In the absence of local file preparation, or group file (Master File) transfer pricing documentation, the taxpayer is to be fined for 720 daily rates and for drawing up documentation after: 240 daily rates. The same sanctions are to be imposed on the taxpayer who does not draw up/submit after the deadline, information on transfer prices (TPR).
Remove the obligation to submit an ORD-U to taxpayers/non-legal entities who are obliged to submit a TPR and do not carry out so-called ‘transactions with tax havens’.
Allowing in-min correction to be applied, according to Article 11e(3) and Article 12(3aa) Project: ‘at the time of the correction, the taxpayer shall have a statement from the related entity or accounting evidence confirming that the entity has adjusted the transfer prices to the same amount as the taxpayer’.
Limiting the neutrality of share exchange transactions (PIT and CIT)
More were also introduced two the conditions under which the exemption from taxation of income from the so-called ‘exchange of shares’ defined can be exercised under Article 24(8a) PIT Act (as appropriate Article 12(4d) CIT Act).
Currently present two the conditions for non-fulfilling the right to apply an exemption from the exchange of shares (as appropriate) Article 24(8b) PIT and Article 12(11) CIT Act:
the acquiring company and the company whose shares are acquired are those entities In Annex 3 to the law or are companies subject to tax on all their income, irrespective of where they are achieved, in a State other than a Member State of the European Union belonging to the European Economic Area, and
the shareholder is an income tax taxable person and the shares (shares) he has contributed in kind or in part to increase the share capital of the acquiring company.
The proposed amendment extends the list of conditions which must be fulfilled in order for the taxpayer to benefit from the tax preferences in relation to the exchange of shares. To the list of conditions that do not comply with the right to benefit from this tax preferences were added two further conditions (points 3 and 4).
the shares (shares) transferred by the shareholder have not been acquired or covered by a share exchange transaction or allocated by merger or division of entities,
the value acquired by the shareholder of the shares (shares) accepted for tax purposes is no higher than the value transferred by that shareholder of the shares (shares) which would have been accepted for tax purposes if there had not been an exchange of shares.
In practice, this means that, for example, a shareholder who in the past has assumed shares as a result of a merger or division of companies may automatically be deprived of the right to exercise tax neutrality in the subsequent exchange of shares. Similarly, if the taxpayer wishes to make a ‘twice’ exchange of shares (e.g.
transferred shares to Company A in exchange for its shares and then planned to bring Company A shares to another company), second the exchange of shares would be excluded from the tax exemption. In this case, it would be irrelevant to have an economic justification.
Currently, in principle, the income (income) of the shareholder of the company being acquired or shared is not subject to taxation at the time of merger or division, and only at the time of the sale of the shares. In that case, the cost of obtaining income is the purchase of shares in the company being acquired or shared.
The project limits the neutrality of mergers and divisions to first A transaction like that. Therefore, the absence of prior reorganisation measures for the company being acquired will be a condition of fiscal neutrality.
The proposed law therefore introduced a restriction on the use of the transfer of the point of taxation of income from the division or merger of companies. As already mentioned, the draft law assumes the introduction into the PIT and CIT Act two new conditions which must be met together to ensure that the operation is tax-neutral:
the shareholders' shares in the company being acquired or shared could not be acquired or covered by the exchange of shares or allocated as a result of any other merger or division of entities,
the value of the shares (shares) allocated by the acquiring company or the newly established company, accepted by that shareholder for tax purposes, must not be higher than the value of the shares (shares) in the acquired or shared company that would have been accepted by that shareholder for tax purposes if no merger or division had occurred.
Thus, there will be no tax at the time of the transaction and only, as at present, at the time of the divestment of the shares in the acquiring company or the newly bound company, but only if both conditions are met together.
A brochure discussing changes In the Polish Deal, you can download for free HERE
Authors:
Mateusz Krawczyński
Junior tax consultant At Russell Bedford Poland. Graduated from bachelor's degree in Logistics and Master's degree in Finance and Accounting. He is currently studying law at the Łazarski University. Previous professional experience in tax matters In one of Big Four companies. He specializes in tax on goods and services, in particular with regard to VAT settlements in local government units.
Michał Zdanowski
Tax consultant At Russell Bedford Poland. Graduate of the Faculty of Law and Administration of the University of Warsaw, Graduate of the Postgraduate Tax and Tax Law Studies of the University of Warsaw, Graduate of the Postgraduate Accounting and Finance Studies of the Warsaw School of Economics. During his studies, he gained experience in law and tax law firms. Since September 2013 is associated with the law firm Russell Bedford Poland. Specialises in documenting transactions between related parties.
Darya Bannaya
Younger tax consultant. Graduate of Law at the Faculty of Law and Administration of the University of Warsaw, graduate of Global Business, Finance and Management in Warsaw School of Economics. Winner of the Ministry of Finance competition “Tax of Leaders” 7. edition.
Conducting trainings and conferences for foreigners in tax aspects of conducting and establishing business in Poland. He specializes in tax law, advising clients on current matters relating primarily to income taxes. Author and co-author of a tax law publication.