On 25 August The bill amending the Corporate Income Tax Act and some other laws (hereinafter: Draft Act) was submitted to the Sejm. The Sejm page indicates that "the project concerns the extension of the Anti-Inflation Shield from 31 October 2022 to 31 December 2022 and to maintain a temporary reduction in VAT rates for food, motor fuels, natural gas, electricity and heat, fertilizers and other agricultural aids (...)’[1]. For most taxpayers, other changes will probably be more important.
This project has already been announced 28 June on the website of the Government Legislative Centre as another amendment of the provisions under the so-called Polish Deal. Hence, it is commonly called “Polish Deal 3.0”. However, given the different changes, it is worth considering whether the term “Polish Deal 2.5” It wouldn't be more appropriate. The project does not introduce any tax revolutions ( Fortunately!). Most of the changes concern modifications to the concepts already proposed, postponement or even complete withdrawal. Among the most important changes to the Corporate Income Tax Act (i.e. Journal of Laws of 2021, item 1800 as amended, The CIT Act is further mentioned:
- modification and postponement of the entry into force of the minimum income tax provisions,
- repeal of the so-called ‘hidden dividend’ provisions,
- repeal of the provisions concerning the documentation obligation for so-called indirect Paradise transactions,
- amendment of provisions concerning the Polish holding company (PSH),
- more flexible construction of a statement excluding the obligation to use the pay & refund mechanism,
- the amendment of the rules on taxation of transferred income,
- relaxation of provisions on the clearing of debt financing costs in tax costs,
- abolishing the obligation to submit an annex in the use of a "bad debt relief",
- improving the rules on flat-rate taxation on company income (the so-called Estonian CIT),
- amendment of the provision concerning the deadline for payment of contributions for employment and equalised income, in part financed by the payer, contributions to the Labour Fund, the Solidarity Fund and the Guaranteed Workers' Benefits Fund.
The Minister of Finance points out that: "The proposed regulations take into account the demands for change and signals from taxpayers, including both small, medium and large entities, industry, social and professional organisations. They relate in particular to the need to reduce administrative responsibilities on the part of taxpayers, to make tax regulations more proportionate and appropriate to the reality of economic activity, or to clarify existing rules."[2].
Special cases include amendments to the provisions on "hidden dividends" and "indirect paradise transactions". Both were repealed before they actually came into use because they would not produce the expected results or be too burdensome for taxpayers
Words that are repeated practically on the occasion of any subsequent revision of the tax rules, in particular with regard to "making tax regulations more proportionate and appropriate to the reality of economic activity". However, it must be acknowledged that, in this case, some of the demands raised in the public consultation were actually included in the draft.
Minimum income tax
The minimum income tax mechanism has been introduced first Polish Deal.
According to Article 24ca The CIT Act is 10% tax bases and addressed to corporate taxpayers and tax capital groups[3], established or managed in the territory of Poland, which in the course of its operations suffer a loss or show a low profitability rate (profitability at a level lower than 1%).
It also quickly began to be referred to as a tax on losses and low income. According to the legislator, it was unacceptable that companies with high turnover show low operating income or even losses. According to the legislator, this is a symptom of optimization, which results in a reduction in tax liabilities.
It is worth mentioning that, contrary to the provisions of this mechanism, it does not only concern revenue but also certain categories of tax costs which form the basis for taxation[4]. In addition, the design of the tax calculation itself is characterised by a high degree of complexity and multi-stageness. Both of these characteristics do not form a friendly tax law for economic operators, even though the amount of this tax is reduced by the ‘classic’ income tax due for the same financial year.
Due to the global economic situation in Poland and in the world (growing inflation, armed conflict in Ukraine, projected energy crisis), the legislature has decided on temporary release[5] from the indicated minimum tax during the period from 1 January 2022 to 31 December 2023 Given the uncertainty surrounding the economic situation in Poland, this postponement will certainly calm many taxpayers.
It will also allow the strategy and approach to the new fiscal burden to be adapted. In addition, the project also envisages a revision of the minimum income tax mechanism itself.
More worrying is the change in income ratio, with 1% to 2% profitability. In the opinion of the legislator, the proposed increase in the ratio is simulated by other proposed solutions, i.e.
Among other things, liberalisation of the method of calculating profitability, additional exemptions from this tax, as well as simplification of the method of calculating the CIT minimum tax base. In this case, the legislator did not agree with the demands, among others.
Polish Confederation Lewiatan whether the Polish Chamber of Commerce and Distribution, which considered raising the index to be unfavourable to the definitive level of burdens on entrepreneurs.
The methodology for calculating the tax base will also be amended and the number of entities excluded from the application of these provisions will be increased, inter alia, by small taxpayers or taxpayers who in recent years three years achieved profitability above 2%[6].
Repeal of the provisions on ‘hidden dividend’
Provisions in this respect, i.e. Article 16(1)(15b) and section 1d and 1e, may be repealed before their entry into force from 1 January 2023 As taxpayers cannot be included in the cost of obtaining the income of the amounts of dividends paid, there were patterns of action to circumvent this exemption.
Tax payers have often distributed profits to shareholders in a way that reduces income, by including such expenses in the cost of obtaining income, which is described as ‘hidden dividends’.
This provision was intended to exclude the possibility of attributing to the cost of obtaining revenue ‘costs incurred by the taxable person being a company in connection with the provision made by the related entity within the meaning of Article 11a(1)(4) with that company or with a shareholder of that company, if the carrying on of that cost constitutes a hidden dividend, subject to section 1d and 1e[7]”.
The requests made by industry organisations, entrepreneurs and experts, as well as further analyses of the Ministry of Finance, pointed to significant interpretation doubts regarding the provisions on hidden dividends and transfer pricing.
These rules could also negatively affect the activities of capital groups providing support or licensing services to subsidiaries.
The question also arose as to how these rules would interact with comparative analyses based on the method of distribution of profit or adjustment of transfer prices under the transfer pricing tax documentation rules.
The Ministry also acknowledged what the experts had previously pointed out that the broad nature of the conditions leading to the recognition of the costs as a hidden dividend could also concern economically justified transactions whose main purpose would not be to transfer the financial surpluses to related entities.
In this respect, the amendment should be considered to be particularly right and beneficial for taxpayers.
Repeal of the documentation obligation of the so-called ‘indirect Paradise transactions’
Another significant change is the repeal Article 11o(1a)(1b) CIT Act[8] concerning the documentation obligation for so-called "indirect Paradise transactions". This provision began to apply from 1 January 2021, but due to the specific nature of this institution, it has only become important In 2022, i.e.
when the obligation to draw up tax transfer pricing documentation appeared. These provisions were problematic from the beginning.
Not only did they impose on the taxpayer an obligation to control their counterparties and customers meeting the essential conditions of the transaction (value of the transaction above 500,000 PLN), But they also required the collection of information on their links or further transactions.
On any basis, it is assumed that the counterparty/customer is making a transfer to companies established or managed in a country applying harmful tax competition or even obtaining information that such an entity is the actual owner of the customer/counterparty, and that transfer pricing documentation was required.
In addition, there was a question of adding a new definition of “the actual owner”[9], which sounded similar to the concept of ‘real beneficiary’ already existing under the rules Act dated 1 March 2018 to combat money laundering and terrorist financing (i.e. Journal of Laws of 2022, item 593 as amended)[10].
Furthermore, the interpretation of the provisions of the Ministry of Finance was incompatible with the interpretation of the content of the articles itself.
The explanations indicated, among other things, that this obligation would apply only to purchases of the taxpayer, although there was no clear wording of the rules, as was repeatedly raised by tax law experts.
Given all this, another success of the public consultation should be announced.
Initially, the legislator planned only to abolish the provision on the presumption of ownership in a country applying harmful tax competition, which would significantly reduce the number of transactions subject to documentary obligations, as well as raising the transaction thresholds for commodity and financial transactions from 500,000 PLN to 2,000,000 PLN.
The thresholds for service and other transactions would remain at the same level. In the final version of the project, which went to the Sejm, the obligation to report indirect transactions was completely waived.
Moreover, this repeal will apply retroactively from 1 January 2021 Tax payers who have already started working on appropriate due diligence procedures and have started collecting information on their contractors will certainly not be satisfied with this sudden change, but many taxpayers will be relieved.
On this occasion, it is worth noting that the change has also affected documentation of direct transactions with entities located in countries applying harmful tax competition. The project raises transaction thresholds to 2,500,000 PLN in the case of a financial transaction and up to 500,000 PLN for other types of transactions.
In the current version, transactions whose value exceeds 100.00,00 PLN.
Amendment of the rules on foreign controlled entities (CFCs)[11]
In view of the doubts arising, inter alia, from the case law of the administrative courts, the legislator observed the need to amend the provisions also in this respect. The project therefore involves clarifying how to determine the foreign income of a controlled entity. In the current version of the legislation, this income is, in principle, the excess revenue obtained during the tax year over the cost of obtaining it, determined in accordance with the provisions of the Act, regardless of the source of revenue, fixed at the last day of the tax year of the foreign controlled entity. This income is also not deducted by losses from previous years as a form of special tax regime for such units. The amendments were made by:
- taking into account also the revenue and costs assigned in accordance with Article 5 The CIT Act,
- waiving the inclusion of reductions and exemptions under the CIT Act, except as laid down in the legislation on CFC
The change has also been recognised as a foreign controlled entity by adding Article 24a(3f) in the CIT Act. ‘The carrying amount of the assets of the entity and the depreciation write-downs referred to Under section 3 point 5 point (b), be determined on the last day of the tax year.
If, before the end of this tax year, the entity disposed at least 25% the carrying amount of all assets determined at the last day of the preceding tax year, the carrying amount of the assets disposed of shall be determined at the date preceding their disposal and taken into account in the value in question Under section 3 point 5 point (b), in proportion to the number of days on which those assets were held in the tax year, to the total number of days that year.’
Also added two new conditions for the constitution of a foreign controlled entity. In the new wording, this definition will read as follows: ‘Subsidiary unit — means the entity in question under Article 3(1), or a foreign non-compliant entity Under section 3 point 3 point (b) and c, point 4 point (b)–d or point 5 point (b)–d where the taxable person has, directly or indirectly, at least 50% equity or at least 50% voting rights in control bodies, acting as or managing bodies, or at least 50% the right to participate in profit’.
Summary
So you can see, although again from 1 January There will be changes in tax rules, it is difficult to call them revolutionary. Rather, they resemble the final brush swings when creating the painting. Special cases include amendments to the provisions on "hidden dividends" and "indirect paradise transactions".
Both were repealed before they actually entered into use because they would not produce the expected effects or be too burdensome for taxpayers. Why was the appropriate consultation not carried out in this respect before they were originally introduced into tax laws, why were the negative votes not further analysed? It's hard to judge.
Polish tax law is considered one the worst among OECD countries. Ranked[12] from 2021 International Tax Competition Index 2021, Tax Foundation Poland occupied the penultimate 36 the place, surpassing only Italy.
The introduction of rules which, in their nature, prove to be unnecessary or even harmful will not affect the better perception of law among foreign and national entrepreneurs.
It is important that the proposal has supported the comments made during the public consultation. However, we must continue to look at the work in the Sejm, which can make further changes to the bill.
[1] https://www.sejm.gov.pl/sejm9.nsf/PrzebiegProc.xsp?nr=2544
[2] https://www.gov.pl/web/finanse/rada-ministrow-przyjela-projekt-ustawy-dotyczacej-zmian-w-cit
[3] In addition to entities excluded in accordance with Article 24ca(14) CIT Act
[4] The tax base here is the sum of the amount corresponding to 4% the value of revenue from the source of revenue other than capital gains realised by the taxpayer in the tax year, the costs of debt financing incurred to related parties, exceeding the value 30% the so-called EBITDA, deferred income tax increasing gross profit or reducing net loss, and incurred to related parties, entities in a State or territory applying harmful tax competition, the cost of acquiring certain services or intangible rights, exceeding the value of the 3,000,000 PLN plus 5%
[5] Newly added Article 38hb in the CIT Act
[6] More about changes in the calculation of the minimum income tax CIT In the next article
[7] section 1d and 1e indicate more specifically what should be understood as a hidden dividend.
[8] In parallel, a repeal occurred Article 23za(1a)(1b) in the Personal Income Tax Act (i.e. Journal of Laws of 2021, item 1128 as amended, Next: PIT Act).
[9] Article 4a(29) CIT Act.
[10] Article 2(2)(1)).
[11] In this case, too, the amendment concerns both the CIT Act and the PIT Act
[12] D. Bunn, E. Asen, International Tax Competition Index 2021, Tax Foundation , October 2021
Author: Damian Kuszewski
The author is a graduate of the Warsaw School of Economics in Finance and Accounting, and a graduate of the Faculty of Law at SWPS. From 2018 Associated with Russel Bedford Poland. His professional interests are tax law and, in particular, income taxes.