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 3 We will address the most important changes in stricte on CIT.
Limiting the cost of obtaining revenue in the form of a payment of the so-called ‘hidden dividend’
In the case of dividend payment, the taxpayer is not able to recognise the cost of obtaining revenue. The list of non-cost expenditure is to be extended to include so-called hidden dividends. Under this concept, the legislator understands the economic distribution of the profits of the taxpayer CIT to the shareholder, which, however, is not formally a dividend.
As examples of expenditure subject to the new restriction, it is indicated that the shareholders of the taxpayer or entities related to them are:
- non-economic payments,
- non-marketable transactions,
- over-indebtedness of the taxpayer from different titles to entities associated with the group,
- the use by the taxpayer of the assets belonging to the shareholder or related entities which were originally owned by the taxpayer.
Where it is found that the benefit paid is a hidden dividend, the value of that benefit according to the new Article 16(1)(15b) The CIT Act will not be at the expense of obtaining income for the taxpayer.
It should be stressed that these provisions were originally to apply from January 2022, Whereas in the final version of the bill amending the deadline, it was deferred by one year i.e. will enter into force from January 2023
New Thin Capitalisation
Provisions Article 15c The CIT Act – in its current version – was introduced into the CIT Act on 1 January 2018 According to the justification for the CIT Act, their function is to limit the excessive financing of the taxpayer's activities by debt, which may result in underselling the incomes shown in the country in which the taxpayer's business is conducted.
The draft law proposes amendments to the method of calculating the limit on debt financing costs (i.e. This appropriation is intended to cover the following: So far, presented point (e) an explicit interpretation of the provisions that were often confirmed in the administrative courts’ rulings indicated that the limit on the cost of debt financing was the sum 3,000,000 PLN and 30% EBITDA (i.e. the result of the operation of the company).
In practice, this meant that the surplus of debt financing costs up to the amount 3,000,000 PLN has always been the cost of obtaining income, and only in the case of an excess amount exceeding 3,000,000 PLN, the cost of obtaining the proceeds of the conversion was subject to the amount 3,000,000 PLN and the remainder of the surplus, if not exceeding 30% EBITDA – these values were aggregated.
This method has often been challenged by the Ministry of Finance, which has also been confirmed in the explanatory memorandum to the Act amending the existing solution.
The Ministry stressed that in order to avoid disputes with taxpayers which could be the source of current content Article 15c(14) The CIT Act therefore proposes to amend this provision and to indicate explicitly Under section 1, that the taxpayer may include in the cost of obtaining revenue an excess of the debt financing costs in the limit determined by the value 30% the EBITDA obtained during the tax year or alternatively the taxpayer will be able to use the so-called safe haven (i.e.
limit of 3,000,000 PLN). However, it will not be possible to “connect” both these limits and apply them simultaneously.
Holding companies
The project introduces a new ‘Chapter 5b Taxation of holding companies’ and definitions of a holding company, subsidiary, national subsidiary and foreign subsidiary into the CIT Act.
As the Ministry points out, the new tax regime will be available to Polish holding companies with domestic or foreign subsidiaries. It will be an alternative to the current tax institution of the capital group.
The main objective of the proposed changes is to provide Polish entrepreneurs with favourable conditions for the establishment and control of holding groups (the accumulation of domestic capital) and to create a competitive tax environment which will encourage the return of Polish entrepreneurs from foreign jurisdictions.
The additional aim is to create a favourable environment for foreign investors to invest in Poland holding companies (e.g. regional ones), which should translate into an increase in the capital present in Poland.
New dividend exemption, although incomplete (95%), includes a wider range of actors. The Polish holding company will also be able to apply them if it receives dividends from companies outside the European Union or the European Economic Area (this has so far only been the case for EU or EEA entities).
The proposed preferential regime will be based on the following pillars:
CIT exemption 95% the amounts of dividends received by the holding company from subsidiaries (national or foreign). For the others 5% the amount of the dividend, the draft law provides for the possibility of deducting the tax paid abroad proportionally for that part of the dividend (in the case of foreign subsidiaries) or the rate of taxation 19% (for Polish subsidiaries),
Full exemption from CIT of the profits from the sale of shares in subsidiaries.
The basic condition for exercising these preferences will be that the holding company has at least 10% shares or shares in a subsidiary by minimum 1 year.
Consolidation relief
The consolidation relief aims to create a tax incentive for taxpayers wishing to expand their business on domestic and foreign markets by acquiring shares (shares) of capital companies operating on these markets.
The mechanism is addressed to both residents and non-residents operating in Poland through a foreign establishment. The form of the measure will be similar to the way used in the R & D relief, thus using an additional deduction from the tax base of certain eligible costs.
As the MF argues, the proposed regulations respond to the need to adapt the principles and modalities for supporting new investments to changing socio-economic realities.
The changes are intended to facilitate further investment expansion of entrepreneurs operating in Poland by introducing reductions in the costs of this expansion and supporting development in the face of the difficulties of the global economy.
The assumptions adopted are intended to support the taxpayer, in particular with the current economic downturn, and further, inter alia, the international development of his company, through preferential treatment of the costs incurred in this context.
According to the regulations proposed by the Ministry, a taxable person who bears the so-called eligible expenditure for the acquisition of shares or shares in a foreign capital company (companies with limited liability or shares) would have the right to reduce his tax base for that expenditure in the year of their actual payment. However, the maximum amount of such reduction could not exceed the amount corresponding to the value in the tax year 250,000 PLN.
Expenditure eligible for acquisition of shares or shares of a foreign capital company would be subject to the inclusion of expenses for legal service of acquisition of shares, including due diligence, interest, taxes directly charged on that transaction and notarial, judicial and fiscal charges.
However, such expenditure would not be subject to inclusion of the price paid by the taxpayer for the shares purchased and the costs of debt financing associated with such acquisition. A taxable person would be entitled to the deduction under the following conditions:
the company whose shares are acquired has legal personality and has its registered office or management in the territory of the Republic of Poland or in another country with which the Republic of Poland has concluded a double taxation agreement containing the legal basis for obtaining tax information from the tax authority of that other State;
the principal activity of the company in question Under point 1, Whereas it is the subject of a taxable person's business or the activity of such a company may reasonably be regarded as supporting the activity of a taxable person, whereas the activity of such a company is not a financial activity;
activity in question Under point 2, was carried out by the company and by the taxpayer before the date on which the taxpayer acquired the shares (shares) for a period not less than 24 months;
during the period two years before the date of acquisition of shares, the company and the taxpayer were not related entities within the meaning of Article 11a(1)(4);
taxpayer one transactions acquire shares of the company in question Under section 1, in the amount of absolute majority voting rights.
It should be stressed that if within 36 months from the date of acquisition of the shares:
- the company will sell them,
- the taxpayer or its successor will be wound up,
- his bankruptcy will be declared, or
- there are other legitimate circumstances for the cessation of the activities of the taxable person or successor,
The taxable person or his successor shall be required to increase the tax base by the amount of the deduction made.
Precision of the seat of the board in the CIT Act
The government intends to limit the practice of establishing foreign companies, which are controlled by Polish taxpayers, but may serve to optimise tax liabilities. In this respect, the proposed amendments implement the NSA judgment of 18 November 2016, No II FSK 2475/14, where the NSA indicated that the seat of the Management Board was not only the place where the principal decisions concerning the company were taken, but also the place where the current business was actually carried out.
Polish Deal provides for an introduction section 1a to Article 3 The CIT Act, according to which the taxpayer has a management board in the territory of Poland, inter alia, when in the territory of Poland are conducted in an organised and ongoing manner the affairs of that taxpayer on the basis of in particular:
- the contract, decision, judgment of the court or other document governing the establishment or functioning of that taxable person, or
- the power of attorney granted, or
- links within the meaning of Article 11a(1)(5).
The above list of conditions for the presence of the Management Board in the territory of Poland is an example of calculation, as indicated by the use of words “among other things” or “in particular”. It is therefore appropriate to assume that the definition set out in the newly added provision is very open, which could lead to numerous interpretation disputes with tax authorities in the future.
Problems are those in which members of the board of directors live in Poland, for example, and the seat of the company is Cyprus. In Cyprus there are also meetings of the Management Board and key decisions are taken for the company, but part of the current activity is carried out by members of the Management Board in Poland. Will there be a seat of management in Poland as defined above? This is a debateable issue, especially in times when remote work is often used to carry out current business by the board.
A reference to links under transfer pricing rules can lead to different extreme situations, as the definition and method of establishing links are very broad. For example, if a Polish limited liability company has shares in a foreign company, it may turn out that a foreign company, although it is an establishment of a Polish company, will also be a Polish resident. In such a situation, there will be numerous doubts as to how such cases should be treated.
Minimum income tax
The project provides for new regulations under Article 24ca CIT Act, i.e. minimum income tax of 10% tax bases dedicated to resident companies and tax groups which:
- bear losses from a source of revenue other than capital gains; or
- show a low ratio of profitability in operating activities resulting from the ratio of revenue to revenue costs, i.e. the share of revenue, determined in revenue representing no more than 1% the tax base.
The minimum income tax will also apply to non-residents operating through a foreign establishment located in Poland in the field of its activities.
It should be stressed that, for the determination of the above values, no account will be taken, for example, of depreciation write-offs and costs resulting from the acquisition or improvement of fixed assets.
The tax base will, as a general rule, be the sum of certain values to be allocated:
- 4% the value of revenue from sources of revenue other than capital gains,
- incurred to related entities debt financing costs exceeding 30% the tax EBITDA calculated according to the statutory formula,
- the value of deferred income tax resulting from the disclosure in tax settlements not yet amortised by NNIP, in so far as it results in an increase in gross profit/loss reduction,
incurred directly or indirectly to related entities (or entities in a State or territory applying harmful tax competition) the cost of acquiring certain services or intangible rights exceeding by 3,000,000 PLN value 5% the tax EBITDA calculated according to the statutory formula.
The reducing values will be:
- in principle, any deductions reducing the tax base in question under Article 18, excluding deductions from Article 18f the CIT Act,
- revenue which is included in the calculation of tax-exempt income related to activities in the Polish Investment Zone.
The Ministry of Finance explains that the aim of the solution is to limit the use by taxpayers of optimization mechanisms which could result in tax liability being reduced by underselling tax revenue.
This is about instruments that can serve corporations to transfer profits. This includes, for example, fees for the use of intellectual property rights, interest on loans granted or payments for management services provided. However, the Resort excluded a certain category of entities to which the above regulations should not apply. These include in particular:
- taxable persons starting business in first 3 years,
- financial undertakings (catalogue of closed entities specified under Article 15c(16) CIT Act),
- taxpayers who showed 30% decrease in revenue from previous year's revenue,
- entities operating in a simple organisational structure, without any links which may result in optimization activities (e.g. where a natural person is the sole shareholder/shareholder/shareholder of the company).
Interestingly, after the project was directed Polish Deal to the Sejm, the government adopted an auto-correction, which shows that the minimum tax will not be paid either: energy companies, mining companies (extracting coal, copper) and engaged in international maritime or air transport e.g. LOT). Most of these are now companies with the State Treasury.
The minimum income tax will be calculated annually and paid to the account of the tax office. Tax payers will be required to show in the tax return the tax base, the deductions made and the amount of the minimum income tax.
The amount of minimum income tax paid for a given year can be deducted from the classical CIT in the tax return for successively consecutive 3 the tax years immediately following the year in which the taxpayer paid the minimum income tax. This mechanism is intended to avoid double taxation.
Author: Mateusz Krawczyński
Junior tax consultant in 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 gained at one of the Big Four companies. He specializes in tax on goods and services, in particular with regard to VAT settlements in local government units.