“Polski Ład” [“The Polish Deal”] – major changes planned to corporate income tax (CIT)
Last week, a bill of amendment to the Personal Income Tax Act, the Corporate Income Tax Act and some other acts was submitted for social consultations. The bill results from the social and economic plan announced by the Government, known as “the Polish Deal”. The major changes planned in the area of PIT, Social Security and VAT were presented here.
The Polish Deal also contains proposed changes to the corporate income tax, which, although they attract less media attention, will have considerable consequences for entrepreneurs who are subject to this form of taxation.
1. A change of regulations governing the withholding tax (WHT)
The bill contains long-planned changes consisting primarily of narrowing the objective and subjective scope of applicability of the new system of withholding tax collection. The major changes consist of:
- limitation of applicability of the new mechanism of collecting the withholding tax on passive income, including interest, royalties, dividends (applicable to amounts receivable exceeding PLN 2,000,000), paid only to related parties.
- extension of the scope of opinion on applicability of the exemption from the withholding tax to include preferences resulting from double taxation avoidance agreements.
- when assessing whether due diligence was exercised, the existence of links between the remitter and the taxpayer is to be taken into account in addition to the size and nature of the remitter’s activity.
- the changes also apply to payments made by entities which maintain security accounts and collective accounts, payments under State Treasury bonds as well as payments to the so-called foreign sites located in Poland.
2. New reliefs to support innovations, production and investments
Changes relating to reliefs which support innovations, production and investments can be divided into those that modify the existing regulations and those introducing new reliefs which do not exist in the Polish tax system:
- an increased amount of deductions as part of the research and development (R&D) relief, i.e.:
- taxpayers who are not R&D centres will have the right to deduct 200% of employment costs as part of the R&D relief,
- entities which have the status of a Research and Development Centre (R&D Centre) will have the right to deduct 200% of eligible costs including the costs of obtaining and maintenance of a patent, a protective right for a utility pattern, a right from registration of an industrial design. Currently, an R&D Centre may deduct only 100% of the costs of obtaining such rights.
- the possibility to benefit from the R&D relief jointly with preferential taxation as part of the IP Box,
- the robotisation relief – the right to deduct from the taxable base 50% of the costs incurred for robotisation which have already been recognized as deductible costs. The deduction will apply to deductible costs incurred for robotisation in the years 2022-2026.
- a relief for innovative employees – the taxpayer will have a right to deduct eligible costs which he/she did not deduct from income in the annual return as the R&D relief in a situation, e.g. when a loss was incurred, from prepayments towards the income tax and flat-rate income tax (deductible from income of persons employed by him under employment contracts or civil-law agreements or copyright agreements),
- a relief for prototypes – applies to test production of a new product or product launch, if the product was created as a result of R&D. The amount of the deduction cannot exceed 30% of the costs incurred and no more than 10% of the taxpayer’s income.
- preferential treatment for investors – the possibility to deduct from the taxable base 50% of expenses for purchase (subscription) of shares in an alternative investment company or a company in which an alternative investment company has at least 5% of shares. The deduction can be used provided that the shares are held for a period of minimum 2 years. During a tax year, the taxpayer can deduct no more than PLN 250 thousand.
- easier applicability of the tax exemption for Alternative Investment Companies (AIC) – AIC can be exempt from taxation of income earned on sale of shares if, prior to the sale, it held (continuously for 2 years) no less than 5% of shares in the company’s share capital. Currently the threshold for application of the exemption is 10%.
3. Liberalization of applicability the Estonian CIT
Changes to the existing regulations on the Estonian CIT consist primarily of extension of the list of entities which will be eligible to choose this system and relaxation of the requirements necessary to be fulfilled to choose this form of taxation and for its continued use. These include, without limitation:
- extension of the list of entities eligible to apply the flat-rate taxation to include limited partnerships and limited joint-stock partnerships,
- waiver of the obligation to incur certain capital expenditure as a condition for applicability of the flat-rate tax regulations, while retaining the possibility to incur them in order to use the preferential flat rate,
- waiver of the condition concerning the upper limit of revenues of taxpayers taxed with the flat-rate tax, and consequently also the additional assessment of the tax liability in a situation where the limit was exceeded,
- making the payment deadlines for the tax liability resulting from initial adjustment more flexible, and in some cases also waiving the obligation to pay the liability.
4. Transfer pricing
The bill provides for introduction of new exemptions from documenting, including a very important change which consists of cancellation of the obligation to prepare documentation for micro- and small enterprises and exempting them from the obligation of benchmark preparation. Additionally, the changes consist of:
- simplification of the rules for transfer pricing adjustments;
- postponement of the deadline for transfer pricing file preparation until the end of the 10th month following the end of the tax year.
- postponement of the deadline for submission of transfer pricing information (TPR-P and TPR-C) until the end of the 11th month following the end of the tax year;
- modification of fiscal penalties.
5. Changes intended to improve the tax system sealing:
- Changes to regulations governing Controlled Foreign Companies (hereinafter: “CFC”):
- According to the new definition, a CFC also includes an entity in which a Polish taxpayer has, individually or jointly with related enterprises or with other taxpayers resident or having the management in Poland, either directly or indirectly, more than 50% of shares in equity or more than 50% of voting rights in management of the company.
- Also the list of passive income was extended to include intangible services such as consultancy, accounting, market research, etc. Additionally, the list of entities which create a CFC also includes holders of large assets, but generating no revenues or generating revenues to a small extent. Thusly, the following entities will be considered a CFC: entities whose passive revenues are lower by 30% from the shares they hold in other companies, immovable and movable assets held by the taxpayers, including those which are used under lease contracts, intangible assets held.
- Additionally, the entity will be a Controlled Foreign Company if immovable assets, movables, including those used under a leasing contract, and intangible assets account for at least 50% of the value of CFC’s assets.
- Introduction of a new concept in taxation, namely the so-called profit shifting. The tax on profit shifting is planned at 19%. Profit shifting is deemed to include costs incurred directly or indirectly in favour of a related party (the list of such costs was enclosed and includes, without limitation, the costs of advisory services, market research, royalties, etc.), if they are taxed 25% less in the country of its residence than in Poland and if these are tax deductible and account for at least 50% of the value of revenues earned by the related party. The costs referred to in the preceding sentence become profit shifting for the taxpayer if they account for at least 3% of the total of deductible costs incurred by the taxpayer in the year.
- Extension of the list of expenses which are not deductible costs to include the so-called “hidden dividends” to be construed to mean the economic distribution of CIT-payer’s profits, which formally is not a dividend. The beneficiary thereof is to be a shareholder/partner or an entity related to it either directly or indirectly. As an example, these will be payments which are not linked to the business activity, non-market transactions or transactions which, if the performance was not made, the CIT payer would have a net profit within the meaning of the accounting regulations for the financial year in which the performance was recognized in the financial result.
- “New” insufficient capitalization – changes to the manner of calculation of the limit of debt financing (i.e. costs related to obtain finance, such as interest, fees, commissions, bonuses, the interest portion of the lease instalment, etc.) to tax costs. So far, the rulings issued by the administrative courts indicated that the limit of debt finance costs was the sum total of PLN 3M and 30% of EBITDA. The Ministry of Finance presented a different view in this respect in its tax rulings (PLN 3M or 30% of EBIDTA). With the presented changes, the taxpayer can recognize as deductible the surplus of costs of debt financing up to the limit calculated as 30% of the EBITDA in the tax year, or may benefit from “safe harbour”. However, the two limits cannot be combined and used simultaneously.
- Changes concerning re-organisation of companies are as follows (without limitation):
- To retain the share exchange transaction neutral, two new requirements were added, namely: i) shares sold by a shareholder have not been acquired or taken up as a result of another share exchange transaction or previously allocated as a result of merger or division of entities, and ii) the value of shares acquired by the shareholder adopted for tax purposes is not higher than the value of the shares sold by the shareholder which would be adopted for tax purposes if the share exchange did not take place.
- Contribution of an enterprise or an organized part of an enterprise as an in-kind contribution will be neutral only if the company accepted the assets forming the enterprise or an organized part thereof for tax purposes at a value resulting from the tax ledgers of the entity making the contribution.
6. Consolidation relief:
- A taxpayer who is an entrepreneur and derives revenues other than from capital gains, will be entitled to reduce the taxable base by the so-called “eligible expenses” for the purchase of shares in a company which has a legal personality and has its registered office or management in Poland or in another state with which Poland concluded a double taxation avoidance agreement, provided that the requirements specified in the act are satisfied. The maximum deduction must not exceed PLN 250,000 in the tax year.
- The eligible expenses include expenditure for legal services related to acquisition of shares, including their valuation (due diligence), interest, taxes directly imposed on the transaction and notarial fees, court fees as well as fiscal charges. The price for the acquired shares and the costs of debt financing incurred in connection with the transaction were excluded from eligible expenses.
- The taxpayer or his legal successor, who sells shares, redeems shares or with respect to whom the circumstances occur as provided for in the act for business termination before the end of 36 months from the date of their purchase, will have to add the amount deducted to the taxable base.
7. Depreciation in real estate companies
With the planned changes, as regards real estate companies, depreciation write-downs on buildings, which are to be recognized as deductible costs, may not be higher in the tax year than amortisation or depreciation write-downs made in accordance with the Accounting Act for the use of fixed assets, charged to the company’s financial result for this tax year. The proposed change is quite odd given that, generally, buildings are investments for real estate companies and are measured at market price or fair value determined otherwise, and in this case there are no amortisation or depreciation write-downs for the use of fixed assets.
8. Relaxation of the conditions for setting up and operation of fiscal unities (tax capital groups):
- The groups can be set up by smaller entities (the limits of the average share capital is reduced from PLN 500,000 to PLN 250,000)
- Subsidiaries can hold shares in one another
- Waiver of the requirement to maintain profitability at the level of 2% of revenue.
9. Preferential tax treatment linked with the costs of Initial Public Offering
- the relief applicable to the costs of Initial Public Offering. It is to enable an additional reduction of income for taxation by 150% or by 50% (depending on the nature of the expense) of the amount of expenditure incurred directly to make the initial public offering concerning shares within the meaning of the Act on Public Offer and Conditions for Introducing Financial Instruments to Organized Trading System, and on Public Companies.
10. Counteracting the “black market” – restricting illegal employment or concealing part of remuneration:
- counteracting the “black market” in employment – a regulation whereby the employer will have revenues assigned as a result of illegal employment or failure to show the accurate value of income from employment. In case of illegal employment, the employer will have to incur a portion of the tax payable by the employee.
11. Making the conditions of income tax exemption more precise in respect of the Polish Investment Zone:
- Taxpayers are eligible to tax exemptions only on income earned from business operated within the area indicated in the authorisation or on income earned from a new investment built within the area indicated in the decision on support.
12. Place of management
A provision is to be added under which entities having no registered office in Poland will be considered as Polish CIT payers if persons or entities in their control bodies, decision-making bodies or governing bodies:
- have the place of residence, registered office or management in Poland, or
- actually, directly or through other entities, conduct the daily business of the taxpayer, also based on the deed of incorporation, a decision of a court or another document which governs its incorporation or operation, the powers of attorney granted or the actual links between such an entity, the taxpayer and Polish tax residents.
This is another odd proposal of a change, because the fact that a Polish resident is a member of the Management Board or the Supervisory Board in a foreign company will be the potential basis to decide that the company has the actual management in Poland, and thus the company will be considered a Polish taxpayer subject to the Polish CIT.
13. Introduction of a “holding company”
The bill provides for implementation of a new tax regime to the CIT Act, in the form of a Polish holding company, which is to be an alternative for the fiscal unity (podatkowa grupa kapitałowa) and dividend exemptions.
This is to consist of:
- Exemption from CIT of 95% of dividend amounts received by the holding company from subsidiaries (domestic or foreign). As regards the remaining 5% of the dividend, the bill provides for the possibility of proportional deduction of the tax paid abroad corresponding to this portion of the dividend (for foreign subsidiaries) or taxation at 19% (for Polish subsidiaries).
- Full exemption from CIT of profits from sale of shares in subsidiaries, but subject to certain conditions:
- the shares will be acquired by a non-related entity,
- the company whose shares are to be sold is not a real property company,
- the seller will file the relevant statement with the tax authority.
The main condition for benefiting from the above preferential treatment will be for the holding company to hold at least 10% of shares in the subsidiary for at least 1 year. Contrary to the dividend exemption currently in force, the proposed solution will also include entities from outside the EU, the EEC and the Swiss Confederation, and will also require that the shares are continuously held for a period of 1 year (rather than 2 years).
What’s interesting is that the definition of a “real estate company” for the purpose of defining the conditions of taxation for holding companies differs from that adopted for the purpose of the CIT Act at the beginning of 2021 to define the obligations for this group of taxpayers.
As the Polish Deal includes a number of changes which may significantly affect your business, and also considerably increase the tax liabilities, we suggest that a detailed analysis should be made on how the changes influence your company. Please note that majority of the changes are planned to take effect on 1 January 2022.