President Andrzej Duda signed the law on tax changes provided for in the Polish Deal
Poland Tax Alert
On November 15th, the Polish President approved immense amendments to the tax law, significantly affecting tax position of foreign investors, domestic companies and individuals.
The changes include the introduction of a minimum CIT for companies with tax losses or those operating on profit margin lower than 1%, further reduction of deductions for intra-group services and financing, increase of factual level of taxation in PIT by increasing the health contribution / eliminating the possibility of its deduction. The amendment also introduces new tax reliefs, e.g. in the field of building a holding structure, tax consolidation (in the scope of CIT and VAT), or reliefs for the development of foreign activities.
Below is a summary of the most important of the proposed changes concerning companies and partnerships and groups of companies (affecting CIT and VAT).
Additional burdens / obligations
- Minimum tax payable by companies and partnerships declaring losses
- Taxable persons who declare losses or income below 1% of profitability (calculated without taking into account depreciation and amortisation) will be subject to a special minimum tax amounting to 10% of the sum calculated on the basis of a complex algorithm comprising: 4% of tax revenue, a portion of debt financing costs and the costs of certain services (advisory, management, licencing, etc.), and a portion of deferred tax.
- It will be possible to deduct the minimum tax from the tax calculated on profit over the next three fiscal years. The tax will not apply to companies and partnerships in which shares are held by individuals only.
- Hidden dividend
- Limitations on classifying the costs of intragroup services as tax deductible expenses will take a new form (the regulations in force to date, providing for a PLN 3 million limit and 5% of EBITDA, are to be repealed).
- The amendments introduce a limitation on classifying as tax deductible expenses costs constituting the arrangement known as hidden dividend. If it is found that any of the prerequisites is met, the cost will not be allowed to be treated as a tax deductible expense (if costs are higher than gross profit). The following will be regarded as demonstrating that there exists a constructive dividend arrangement:
- the amount of the costs or the date of incurring them depends in any manner on profit earning; or
- a reasonably acting taxable person would not have incurred such costs or could have incurred them in a lower amount; or
- the costs include a fee for a right to use assets which were owned or co-owned by a shareholder or partner or their affiliate before the taxable person was established.
- The circumstances relating to the payment of a hidden dividend will be assessed on the basis of transfer pricing regulations.
- Tax on passed-on income
- A new 19% tax is to be introduced on the costs of intangible services incurred for the benefit of an affiliate if the income accounts for more than 50% of the revenue of this entity and, moreover, is paid as a distribution of profit. The possibility of reducing this tax by the withholding tax paid on the costs of intangible services has been envisaged.
- The tax will apply to entities incurring significant expenses on intangible services (for the benefit of affiliates or entities other than affiliates), i.e. expenses constituting at least 3% of total tax deductible expenses calculated using a specific method.
- The tax on passed-on income will not apply if the recipient of the payment conducts significant, genuine business operations.
- Financial costs
- The limit on the costs of debt financing is to be reduced and these costs will be allowed to be deducted from the tax base either up to PLN 3 million or up to 30% of EBITDA (the possibility of adding together these coefficients is to be eliminated).
- Tax residence for companies
- A definition of a place of management is to be introduced for the purpose of determining tax residence for companies and partnerships. The definition is an open definition and refers in particular to the management of day-to-day matters in an organized and continuous manner on the basis of, for example, powers of attorney. The tax residence criteria for companies and partnerships should be consistent with the content (and the application in practice) of particular double taxation treaties.
- Withholding tax – Pay&Refund mechanism
- After years of work on the final shape of the regulations concerning withholding tax, the Pay&Refund mechanism (the obligation to pay WHT) will apply to transactions with affiliates within the meaning of transfer pricing regulations in relation to passive transactions (payment of dividends, amounts due under licences, interest, etc.) with respect to the excess over PLN 2 million in a fiscal year.
- An exemption from the obligation to apply the Pay&Refund mechanism will be possible on the condition that an opinion has been obtained demonstrating that withholding tax preferences may be applied or a special declaration has been made (as it is in the case of the legislation enacted in the past, but currently suspended).
- Other changes
- Elimination of the possibility of treating residential premises write-offs as tax deductible expenses.
- Clarification of CFC regulations.
- Clarification of regulations concerning restructuring operations.
- Surtax where illegal employment has been identified.
- An obligation to send tax books on a monthly basis is to apply from 2023, in addition to the same obligation concerning VAT.
Favorable tax treatment / tax preferences
- Taxation of holding companies / favorable tax treatment for alternative investment companies
- The amendments introduce the category of holding companies, i.e. companies holding at least 10% of shares in other entities for at least one year. Holding companies may take advantage of an exemption for income deriving from dividends (95%) and the sale of shares provided that several basic conditions are met (concerning, among others, genuine business operations, sale outside the group of companies, exclusion of multi-level structures and tax havens, notifications to tax authorities).
- The exemption concerning income from the sale of shares will not include income from the sale of shares / stocks in a real estate company in which real estate located in Poland accounts for more than 50% of assets.
- The shareholding level on the basis of which alternative investment companies are entitled to be exempt from CIT on income from the sale of shares in portfolio companies is to be reduced from 10% to 5%.
- Tax groups / tax consolidation
- The establishment and operation of tax groups is to be made easier by reducing the level of the average share capital from PLN 0.5 million to PLN 0.25 million, and by eliminating the 2% profitability requirement. It will be possible, as well, to establish a tax group made up of companies which hold shares in other companies (at present this is not possible).
- Tax groups will also be subject to the minimum tax (see paragraph 1 above).
- Simplifications in concerning transfer pricing obligations
- Changes include opting out of the preparation of transfer pricing documentation e.g. in the case of applying safe harbor arrangements (financial transactions or low value-added transactions) or re-invoicing, and in certain cases (small and medium-sized enterprises), the possibility of opting out of the preparation of a comparative analysis is to be introduced. The deadline for preparing transfer pricing documentation has been extended to 10 months, and the deadline for submitting it to the tax authorities has been extended from 7 to 14 days, for all taxable persons.
- Opting out of filing separate statements for transfer pricing purposes and their replacement with a statement made in the transfer pricing reporting (TPR) declaration has also been envisaged.
- The situation of establishments and the transfer pricing adjustment procedure have also been clarified.
- Robotization relief
- It will be possible to deduct 50% of robotization costs from income with no additional limitation on the amount. The catalogue of costs covered by the relief is a closed catalogue and includes, in particular, the costs of acquisition of new industrial robots (and various items of accompanying equipment, software, training, leasing fees).
- Trial production (prototype) relief and relief for marketing a new product manufactured as part of R&D work
- The possibility of deducting a maximum of 30% of the trial production costs (processing line start-up stage) and the costs of marketing a new product (e.g. capex, production materials, expert opinions, certificates, CE marks, marketing authorisation, ETV, etc.), but by no more than 10% of taxable income in a given year.
- If a tax loss is incurred, deduction is to be possible over the next six tax years.
- Relief for increasing sales of products manufactured by the taxable person
- Deducting from income the costs of participation in trade fairs (e.g. accommodation and travel), marketing activities, preparation of websites, packaging adaptation, preparation of documentation necessary to participate in a tender procedure / submission of a tender, of up to PLN 1 million.
- As a condition for taking advantage of the relief, proceeds from the sale of products in two fiscal years must be effectively increased.
- Consolidation relief
- The possibility is to be introduced of deducting the costs involved in taking over other companies carrying on a business which is the same as or similar to that of the taxable person (legal services, value appraisal, official fees / taxes – without the purchase price) from the tax base, up to PLN 250,000.
- Relief for initial public offering
- The deduction will cover 150% of expenses incurred in preparing a prospectus, notarial deed charges, stamp duty fees, stock exchange fees, publication of notices and 50% of expenses for legal, financial and tax advisory services relating to the IPO where the intention is to list the company on a regulated or alternative market (a limit of PLN 50,000).
- VAT groups
- The possibility of treating several companies as a single VAT taxable person, so that transactions between group members are not subject to VAT. The establishment of a VAT group is qualified by a number of conditions (e.g. appropriate financial links - a requirement to hold a minimum of 50% of shares in capital / voting rights, or economic or organisational links).
- Opting out of the VAT exemption for financial transactions
- The possibility of opting out of the VAT exemption for certain financial services (e.g. granting of loans or guarantees, money transfers). The possibility of opting out of the exemption may facilitate bookkeeping for internal financial activities within groups of companies.
- The possibility of taking advantage of relief for research and development work with respect to personal income withholding taxes deducted from remuneration paid to employees engaged (on an appropriate time basis) in R&D works.
- Relief for sports, cultural and higher education and scientific research support activities.
- Deduction for POS terminals.
- Favorable tax treatment based on the Estonian model (separate taxation available for companies and partnerships in which the only shareholders are individuals).
Simultaneously with the changes concerning companies, there are, inter alia, works affecting tax positons of natural persons (i.e. increasing the burden for health insurance contributions - by eliminating tax deductions, extending health insurance contributions also to members of the management board who perform their function only on the basis of a resolution, changing the tax scale and increasing the tax-free amount) and procedural provisions .
Garrigues specialists will be happy to discuss with you the planned changes and their impact on the situation of your company.