Changes to income taxes from 2025 – a new plan of the Ministry of Finance applicable to Family Foundations and Estonian CIT
The Ministry of Finance has announced the commencement of legislative work on the Bill amending the Personal Income Tax Act, the Corporate Income Tax Act and certain other acts (hereinafter: the “Bill”). The information on the commencement of the work on the Bill has recently been published on the website of the Prime Minister’s Office, in the list of legislative and program work of the Council of Ministers.
It is therefore an indication of further significant tax changes that may come into force on 1 January 2025, in addition to the provisions on the global minimum tax or revolutionary changes of the property tax.
In our opinion, some of the changes are likely to be of great significance for entrepreneurs, so they are worth looking at now and keeping a close eye on.
Purpose of the changes
The MF points out that the proposed changes address the current needs for:
- sorting out tax regulations,
- eliminating interpretative doubts and discrepancies,
- sealing the tax system.
In our opinion, it is the last aspect that may be prevalent.
Groups of changes envisaged in the Bill
In practice, the planned changes can be divided into 3 groups:
- changes beneficial for taxpayers,
- changes aimed to seal the tax system – see: changes disadvantageous for taxpayers,
- technical changes.
Changes beneficial to taxpayers
The planned changes improving the situation of taxpayers are to include in particular:
- modification of the scope of the subjective exemption set out in Article 17(1)(4) of the CIT Act, resulting in the inclusion of income of all non-governmental organizations referred to in Article 3(2) of the Act on Public Benefit Activity and Volunteerism (hereinafter: the PBA Act) in the portion allocated to the activity set out in Article 4 of the PBA Act (the area of public tasks) with the exclusion of business activity,
This means that all NGOs will be exempt from the income tax as regards their public tasks.
- expansion of the tax relief to cover thermo-modernization expenses incurred as part of projects carried out by local authorities (“umbrella projects”),
- unambiguous indication that a taxpayer may deduct previous years’ losses from income which constitutes the base for calculating the solidarity surcharge,
- clarification and modification of certain provisions on taxation of a controlled foreign corporation (CFC),
- description of the rules for determining income and expenses in a merger of companies with no allotment of shares.
The above leads one to conclude that the rules for taxation of no-issue mergers (of sister companies) will be adjusted so as to restore tax neutrality of this type of transactions. Currently, the regulations make this neutrality conditional on the issue of shares (stocks) to the shareholders of the target company with an aggregate value corresponding to the value of assets of the target company.
Changes aimed to seal the system
As announced, the Bill provides for a set of changes aimed at sealing the tax system, with particular emphasis on:
- changes to tighten the regulations on taxation of family foundations.
According to press statements, these changes will apply to:- taxation at a rate of 19% of the sale of assets contributed to a family foundation, which is an essential change compared to the current tax exemption,
- simultaneous possibility to deduct the tax paid on the sale of assets contributed to the family foundation from the tax on funds paid out to the foundation beneficiaries – which will partly alleviate the negative impact of the former change, but not in every situation,
- taxation of the income of family foundations earned from letting real estate for use against payment (e.g. under lease),
- subjecting the family foundation to the provisions on controlled foreign corporations,
- introducing the obligation for a court to dissolve a family foundation if it carries out business activities beyond the scope permitted under the Family Foundation Act,
- additionally, a 15-year grace period is proposed, after which the disposal of assets owned by the foundation would not be taxed.
The changes to the taxation of family foundations must be viewed as negative. They undermine the confidence of taxpayers in the State which, having initially introduced an instrument aimed at facilitating the succession of assets in a company, subsequently deprives this instrument of its essential advantages. These changes should be tracked throughout the subsequent stages of the legislative process.
- changes to the IP Box preference – introduction of a requirement of employment,
- changes to the solidarity levy – extending the base for calculating the solidarity levy to include IP Box eligible income and payments received by beneficiaries from a family foundation,
- restructuring measures, i.e. transformation of companies, and measures aimed at reduction of the value of shares or exchange of shares.
Tax-sealing changes in this respect may mean that the tax neutrality of reorganization (restructuring) transactions, already significantly limited as a result of the solutions implemented under the Polish Deal, will be restricted even further. Potential reorganization activities will, from the perspective of business entities, require even more caution and additional time to analyze the tax consequences.
- introduction of regulations amending the rules of flat taxation of corporate income (Estonian CIT) to include:
- a change of the definition of hidden profits, which will result in any payment made to a related party being considered a hidden profit in Estonian CIT,
- elimination of the 10% CIT rate for small taxpayers,
- subjecting all taxpayers to a 20% CIT rate on profit paid by the company.
In this case, we also see gradual erosion of the benefits offered by an instrument that was intended to attract taxpayers by a simple method of its taxation.
Technical changes
In addition, the Bill, as announced, includes information on technical changes, sorting out
and clarifying provisions, in particular concerning:
- restructuring measures,
- clarification of certain transfer pricing provisions.
These plans, obviously, give rise to questions as to how far-reaching the changes in question will be and whether they are in fact only aimed at clarification of the law rather than being disadvantageous, which has often been the case in the past.
The scope of the declared changes
The above examples indicate the main issues which have been hinted at. The bill may address many more issues and matters.
The estimated date of entry into force
When informing about the Bill, the MF did not indicate the exact date of entry into force of the amended provisions. As announced by the Ministry of Finance, the draft act is expected to be submitted to the Council of Ministers in Q3 or Q4 2024 and then referred to the Sejm. As soon as the bill is available for public consultations and opinions, it will be published on the website of the Government Legislation Center. It can therefore be expected that the provisions of the Bill will take effect in 2025.
Andersen’s support
In anticipation of the forthcoming changes, we are continuously monitoring the status and progress of the legislative work and we analyze the potential changes and their impact. Once the Bill has been published, a dedicated webinar will be organized for you to discuss the essential changes and their potential impact on your business.
In addition, our support in relation to the planned tax changes includes:
- assistance in the implementation of the planned tax changes;
- mapping potential risks/threats/consequences in relation to the planned changes;
- delivering comprehensive/dedicated training;
- analysis of selected issues/problems;
– depending on the needs and situation of your organization.
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Our experts will be happy to answer any questions you may have and provide all the necessary support in the process of preparation for the planned changes in taxation.
KONTAKT
E: tomasz.wichary@pl.andersen.com
T: +48 32 731 68 95