We herewith present to you a summary of the most important changes in the tax law provisions, under the so-called “Polish Order”. The bill was signed by the President on November 15, 2021, so most of the changes will come into force on January 1, 2022.
We encourage you to contact us to discuss the detailed impact of these changes on the tax settlements of your companies.
- Minimum income tax
- Hidden dividends and profit shifting
- Debt financing costs
- Lump-sum tax on company profits
- Withholding tax
- Changes in Transfer Pricing regulations
- Reliefs – for expansion, IPO, R&D, prototype, robotisation, education/sports, increased sales
- Changes in PIT
- Health contribution for individual groups of taxpayers
- VAT – VAT group and other changes
- Investment agreement
- Obligation to keep tax records electronically
Minimum income tax
The new tax will apply to entities subject to CIT and PGKs (polish tax capital groups) whose share of income in revenues (other than from capital gains) will be less than 1%, or which will incur a loss for a tax year, and shall equal to 10% of the tax base.
For the purposes of calculating loss and revenue share, the following shall not be taken into account:
1) costs relating to the acquisition, production or improvement of fixed assets;
2) revenues and related costs, if the price or the manner of determining the price of the subject of the transaction results from the provisions of laws or normative acts issued on their basis, and the taxpayer incurred a loss or a share of income of less than 1% from such transaction.
The tax base will be determined as follows:
- the value of 4% of revenue from the source of operating income,
- debt financing costs incurred to related parties, exceeding the amount of 30% of tax EBITDA,
- the value of deferred income tax arising from the disclosure of an intangible asset resulting in an increase in gross profit/decrease in gross loss,
- the value of the costs incurred for the benefit of related parties (or entities from a country or territory applying harmful tax competition), directly or indirectly, of the acquisition of specific intangible services or fees for the use of intangible assets, in the part exceeding the sum of 5% of tax EBITDA and PLN 3 million.
The tax base may be reduced by, among other things, the value of deductions reducing the tax base as indicated in Article 18 of the CIT Act, however, no deduction of the so-called bad debt relief is allowed.
The minimum income tax is due on the date of filing the annual tax return in the CIT. It is subject to deduction from the CIT for three consecutive tax years.
The minimum tax provisions do not apply to:
- so-called start-ups, i.e. taxpayers who have started their business and in the following two tax years of their activity,
- financial undertakings,
- taxpayers that show temporary difficulties (decrease of income in comparison with the previous tax year by at least 30%),
- taxpayers with a so-called simple structure (natural persons as partners, no shares in other entities)
- entities that derive most of their operating revenue for the tax year from the operation of sea-going vessels/aircraft in international transport
- entities that derive a majority of their revenues for the tax year from the extraction of minerals whose prices depend directly or indirectly on world market quotations,
- taxpayers that are part of a group of at least two companies, both of which are Polish residents, one of which directly holds at least a 75% interest in the other and the share of their total revenue in revenue is greater than 1%.
Hidden dividends and profit shifting
“The Polish Order” assumes the tightening of regulations concerning the settlement of costs in transactions with related entities, including shareholders. “Hidden dividend” means the impossibility to include in the tax-deductible costs the remuneration paid for e.g. rendering services to the company (such an expense, as opposed to a dividend, can in principle be included in the tax-deductible costs and reduce the taxable income of a taxpayer).
In Polish Order, the legislator points to limitations on the deductibility of expenses incurred for the benefit of shareholders or entities related to the company or a shareholder, meeting the following premises:
- conditioning the amount or term of payment of remuneration paid for various benefits obtained by the taxpayer from related entities on the fact of achieving profit or the amount of profits made by such taxpayer,
- non-business-related payments, transactions of a non-market nature, excessive indebtedness of the taxpayer for various reasons towards related entities of the group (“a rational taxpayer would not incur such costs or could incur lower costs“)
- use by the taxpayer of assets belonging to a shareholder (ownership or co-ownership), or an entity related to a shareholder, which were held by the shareholder (or its related entity) prior to the formation of the taxpayer.
The latter two categories are not included in the tax-deductible costs, if their sum in the tax year is lower than the amount of the balance sheet gross profit, achieved in the period in which these costs were included in the financial result of the taxpayer.
It is worth remembering that classification of expenses as hidden dividends may have consequences in the form of the obligation to collect withholding tax. Regulations concerning hidden dividends shall be in force as of January 1st, 2023.
Furthermore, 19% CIT will be levied on “pass-through income”, i.e., certain costs (e.g. for certain intangible services, licence fees, debt financing costs – making at least 3 per cent of the sum of all costs) incurred directly or indirectly for the benefit of a related entity and constituting that entity’s receivable, if they accounted for at least 50% of the value of income obtained by that entity as defined in income tax regulations or in accordance with accounting regulations, and the tax actually paid by him is at least 25% lower than the tax that would be due in Poland.
Tax on “pass-through income” is due on the due date of the annual return and the taxpayer is the Polish company incurring the expenses. This tax may be reduced by the amount of withholding tax levied on the categories of payments indicated in the regulations, as well as by the appropriate part of the tax attributable to financing costs not included in the tax deductible expenses.
This regulation will not apply in the scope in which these costs were incurred for the benefit of an affiliated entity, which is subject to taxation on its entire income in an EU member state or in a state belonging to the EEA and which conducts significant economic activity in that state.
The assessment shall in particular take into account whether:
- the registration of the entity is linked to the existence of an enterprise, in the context of which it actually carries out activities constituting an economic activity, including in particular whether the entity has premises, qualified staff and equipment used in its economic activity,
- the entity is free to decide on the use to which the income received is put,
- the entity bears the economic risk related to the loss of the receivable.
In addition, the ratio between the income received by the affiliate from the actual business activity and the total income will also be decisive in assessing the actual business activity.
Debt financing costs
Polish tax residents will be required to exclude debt financing costs from their tax-deductible expenses to the extent that the excess of debt financing costs exceeds:
1) the amount of PLN 3,000,000 or
2) the amount calculated according to EBITDA (earnings before interest, taxes, depreciation and amortisation), i.e.: ([(P – Po) – (K – Am – Kfd)] x 30%)
In addition, the Polish Order also provides for the exclusion in full of the costs of debt financing from a related party – in the part allocated directly / indirectly to equity transactions (purchase or acquisition of shares, all rights and obligations in a company that is not a legal person, making additional contributions, increasing share capital or repurchasing own shares in order to redeem them).
The details of the issue are fully described on our blog.
Lump sum on company income
The idea of lump sum tax on company income is to defer taxation of company income until the distribution of profits from the company. In addition, the unification of tax and accounting records and the right to apply lower tax rates are also beneficial. So far, a very small group of taxpayers can take advantage of it. The “Polish Deal” proposes, first of all, to broaden the scope of entities that can be covered by this form of taxation to include new commercial law companies, i.e., limited partnerships and limited joint-stock partnerships (Polish SKA).
The conditions to benefit from lump sum tax on company income are to be as follows:
- only natural persons can be shareholders/partners and the company itself cannot hold shares in the capital of other companies (simple structure),
- no need to tax income when switching to lump sum (as long as it is used for more than 4 years),
- companies must run a real business in Poland, i.e., generate most of their income from operational activity – removal of income limit
- companies must employ the minimum number of employees required by the act (as a rule three employees) – abolition of investment obligation.
Taxation of different groups of taxpayers would be as follows:
- small taxpayer / start-ups 10% (so far 15%)
- others – limited partnerships/ limited liability partnerships 20% (so far 25%)
- flat-rate 19%,
- possible deduction on tax from distributions of profits of the company made during the period of taxation with the flat rate on the income of companies:
- minus 90% x the company’s lump sum (calculated at a rate of 10%),
- minus 70% x the company’s flat rate (calculated at a rate of 20%).
Lump sum tax on company income is a good taxation alternative for capital entities.
The main changes to withholding tax include changes to the mandatory withholding tax procedure, the scope of the preference opinion or the definition of beneficial owner.
In particular, the main changes to withholding tax relate to the following:
Narrowing the “Pay and refund” procedure to:
- related parties,
- payments of interest/royalties/dividends (exclusion of intangible services),
- payments which without justified economic reasons are not qualified as receivables from the above titles,
- payments made between Polish taxpayers are excluded.
Opinion on the application of preferences:
- in case of payments of interest/ royalties/dividends for the amount of more than PLN 2 million within a year,
- also applies to preferential rates or exemptions based on DTT agreements,
- Conditions for refusal of issuance – no reference to actual economic activity from Article 24a Section 18 of the CIT Act.
Amended definition of Beneficial Owner:
- when assessing whether an entity conducts actual economic activity, the nature and scale of activity conducted by this entity with respect to the receivable received shall be taken into account.
Details of the issue are fully described in our blog.
Changes in transfer pricing
The proposed amendments provide for the extension of deadlines for documentation obligations but also change the scope of these obligations by excluding certain categories of transactions from the obligation to prepare local documentation or comparative analysis.
The proposed changes provide for the extension of documentation obligations as follows:
- preparation of local documentation – until the end of the 10th month after the end of the tax year,
- preparation and submission of Transfer Pricing Information (TP-R) – by the end of the 11th month after the end of the tax year.
A requirement has been added for the local tax documentation to be prepared in electronic form.
In addition, related entities that belong to a group of entities if they are consolidated using the full or proportional method and are obliged to prepare local transfer pricing documentation (Master File) will be obliged to prepare group documentation – the revenue condition (PLN 200 million) has been abolished.
The concept of the value of a controlled transaction was also clarified. The draft indicates that the transaction value will refer in the case of eg.:
- a deposit – to the value of the capital,
- agreements of companies not being legal persons – to the total value of contributions made to the company.
According to the proposed regulations, the local transfer pricing documentation is not to include a comparative or compliance analysis in the following cases:
- the controlled transaction meets the safe harbour exemption for controlled transactions involving low value-added services (current regulation),
- the controlled transaction is entered into by related parties that are micro or small enterprises, and
- the transaction covered by the documentation obligation is not a transaction concluded with so-called tax havens (direct and indirect transactions).
Exemption from documentation obligation is also provided for transactions:
- between foreign permanent establishments located in Poland, whose parent entities are related entities, and between a foreign permanent establishment located in Poland of a related entity that is a non-resident and a related entity with tax residency in Poland,
- covered by an investment agreement or a tax agreement, for the period to which such agreement applies,
- loan, credit or bond issue – when safe harbour applies for financial transactions,
- low-value-added services – where the safe harbour applies for transactions constituting low-value-added services; however, a detailed calculation of the transaction must be carried out in accordance with the safe harbour conditions, and a function, asset and risk analysis must be carried out.
Another change is the exemption from documentation obligations in the case of so-called pure reinvoicing.
Other changes also concern, among others, the scope of basic documentation, changes in the declaration on preparation of documentation, changes in TP-R and sanctions in the Penal and Fiscal Code.
Details of the issue are exhaustively described on our blog.
New tax reliefs
“The Polish Order” provides for a number of tax reliefs, including:
- consolidation relief
- IPO relief
- prototype relief
- relief for robotization
- tax relief for expansion
- relief for sport / cultural activities / higher education / science
- revised R&D relief.
This relief enables a deduction from the tax base of additional costs incurred in connection with the acquisition of shares in a company up to an amount not exceeding the income earned by the acquiring company in the tax year, but not exceeding PLN 250,000. This is to apply to expenses such as taxes and other public and legal fees, legal services for the acquisition of shares and their valuation, as well as expenses for notary fees, court fees and stamp duties.
The relief will be available if both the target company and the acquiring company meet certain requirements, i.e., they have not been related parties for two years prior to the acquisition of the shares and have been in operation for at least 24 months prior to the acquisition.
Furthermore, the acquiring company must generate income from its operating activities and acquire shares (stocks) in a number giving an absolute majority of voting rights in a single transaction. The target company, in turn, should have its registered office or management board in Poland or in the territory of a country with which a tax information exchange agreement has been concluded. Its object of activity must be the same as or supportive of the taxpayer’s activity (it may not be a financial activity).
It will not be possible to take advantage of the relief if the shares are sold/redeemed within 36 months of their acquisition or if liquidation/bankruptcy/other circumstances of cessation of business activity, as provided by law, occur within 36 months of their acquisition.
Relief for Initial Public Offering (IPO)
The relief is provided for joint stock companies and will relate to expenses for making an initial public offering of shares on a regulated market. The tax base may be reduced by:
- 150% of the expenses for the preparation of the prospectus, notarial, court, stamp and stock exchange fees and the preparation and publication of announcements required by law,
- 50% of expenses, exclusive of VAT, for legal advisory services, including tax and financial advisory services (maximum PLN 50,000).
The IPO relief will be deductible from income after prior deduction of the R&D relief, the prototype relief, the relief for increasing revenue from the sale of new products and the consolidation relief (if applicable to the company).
Relief for prototype
The relief provides for the possibility of deducting from the tax base 30% of the expenses for the trial production of a new product and the launch of a new product on the market (no more than 10% of income). These costs are reduced by VAT.
It is worth noting that a taxpayer who in a tax year benefit from exemptions within a Special Economic Zone (polish Specjalna Strefa Ekonomiczna – SSE) or a Polish Investment Zone (polish Polska Strefa Inwestycji – PSI), is entitled to a deduction only in respect of the costs of a trial production of a new product or market launch of a new product, which are not taken into account by the taxpayer in the calculation of income exempt from tax under these exemptions.
Tax relief for robotisation
The allowance provides for a possibility to deduct from the tax base an amount constituting 50% of the tax-deductible costs which have already been included in the tax-deductible costs due to costs allocated to robotisation.
The amount of the deduction may not exceed the amount of the income obtained in the tax year from income other than capital gains.
The tax-deductible costs allocated to robotisation will be, inter alia, the costs of purchasing brand new industrial robots and machines, the costs of purchasing training services, leasing fees or the costs of purchasing intangible assets.
Expansion tax relief
The tax relief provides for an additional deduction of expenses that are related to the increase of revenues from the sale of products (items manufactured by the taxpayer) to unrelated entities.
Expenditure on expansion will be able to be deducted twice – as a tax-deductible cost and as a relief, but the deduction is limited to the amount of PLN 1 million in a tax year.
The condition for taking advantage of the relief is:
- increase in revenue from the sale of products,
- sale of new products, as well as
- increase in revenue from the sale of products not previously offered on a given market (domestic and foreign).
The tax-deductible costs will include, inter alia, expenses related to participation in fairs, promotional and information activities, or adaptation of packaging to the requirements of the contracting party.
Similarly, as in the case of the prototype relief, a taxpayer who in a tax year benefit from exemptions within a special economic zone or Polish investment zone, is entitled to a deduction only in respect of costs incurred in order to increase revenues from the sale of products which are not taken into account by the taxpayer in the calculation of income exempted from tax under these exemptions.
Tax relief for sport / cultural activities / higher education / science
The tax relief will consist in the possibility to deduct 50% of tax-deductible expenses incurred for sports/cultural/ higher education/science activities from the tax base. This means that the taxpayer, in addition to including the costs incurred as tax deductible expenses, including through depreciation write-offs, will be entitled to an additional preference in income tax by deducting half of the costs incurred from the tax base.
Tax relief for R&D and IP BOX (PIT and CIT)
|Deduction limits for research and development centres (polish CBR) are to increase to 200%. For other entrepreneurs up to 200% in the case of salaries of employees and costs of civil law contracts. Possibility to deduct the R&D relief from PIT advance payments (in certain situations).||Reference taxation of income from intellectual property rights that are legally protected (e.g., patent, copyright in a computer programme), created, developed or improved as part of the taxpayer’s R&D activities. Production of own IP (profits) taxed at the rate of 5%.|
|Possibility for a taxpayer with income from intellectual property rights that falls under the IP Box preference to benefit from R&D relief at the same time.|
Changes in PIT
“The Polish Order” also envisages a number of changes in personal income tax (in addition to the reliefs mentioned above). These are in particular the following:
- increase to PLN 30,000 the “free amount” from tax for taxpayers calculating tax according to the tax scale (already applied when calculating advance payments for tax by deducting from tax an amount equal to 1/12 of the tax-reducing amount (1/12 of PLN 5,100)),
- increase to PLN 120,000 the income threshold beyond which the 32% tax rate applies,
- relief for middle class:
- intended for employees whose income is between PLN 68,412 and PLN 133,692 per year (monthly – for the purposes of calculating monthly tax advances – between PLN 5,701 and PLN 11,141), but also for entrepreneurs applying progressive rates,
- inapplicability to revenues to which 50% tax deductible costs apply – from authors’ use of copyrights and performing artists’ use of related rights,
- change in the rules for determining the basis for health insurance contributions for entrepreneurs and lack of possibility to deduct health insurance contributions from PIT,
- change in the amount of tax costs on income received by persons performing social or civic duties.
Health contribution for particular groups of taxpayers
As a rule, the basis for calculating health contributions is to be the actual income (also in the case of business activity – instead of a fixed lump sum payment). A novelty is the lack of the possibility to deduct health contributions from tax.
|Taxation||Flat rate||Progressive scale||Fixed amount tax||Lump sum|
|Rate||4.9% (not less than 270 PLN)||9%||9% (approx. 270 PLN)||60% (annual revenue up to 60k zł) / 100% (annual revenue up to 300k zł) / 180% (annual revenue over 300k zł)|
|Basis for calculating health contribution||income (minimum: minimum salary)||income||the amount of the minimum wage in force on 1 January of the year in question||Average monthly salary|
VAT Group and other VAT changes
It is planned to introduce the possibility of joint accounting for VAT purposes for entities with financial, economic and organisational links.
Financial relation is understood as a direct possession by one of the entities of:
- more than 50% of shares in the share capital of other taxpayers being members of the group or
- more than 50% of the voting rights in the controlling, establishing or managing bodies, or
- more than 50% of the rights to share in the profits of each of the other taxpayers that are members of the group.
Economic relations shall exist where at least one of the following conditions is met:
- the principal activity is of the same nature, or
- the activities are complementary and interdependent or
- a member of the group carries out activities from which others benefit wholly or mainly.
Organisational links shall exist where at least one of the following conditions is met:
- joint management – direct or indirect, legal or de facto, or
- organising activities in concert.
The conditions for this relationship are to be fulfilled for as long as the group has VAT group status.
The institution implies that transactions for the supply of goods and services between entities within the VAT group are not to be subject to VAT. In transactions with entities outside the VAT group, the VAT group will be regarded as a single taxable person, without any division into its constituent companies. Therefore, the purchase of services or goods by an entity within the group shall be a purchase of those services or goods by the VAT group. The same rule will apply to sales.
Other amendments to the VAT Act include:
- change in binding rate information (polish WIS) – relates to the introduction of an investment arrangement- binding rate information may relate to an investment arrangement,
- changes in the form of the option to tax financial services – the possibility to waive the VAT exemption for certain financial services (does not apply to insurance services and financial services provided to retail customers). The use of this option may be beneficial for taxpayers providing financial services who make investments resulting in input VAT,
- “Fast VAT refund” for non-cash taxpayers – 15 days counting from the day on which the deadline for submission of the return expired, in the case of submission of a return/ correction in which the taxpayer showed a refund of the tax difference. The “Fast VAT refund” is subject to a number of obligations, which must be met in order to take advantage of it. Among others, it is necessary to meet criteria regarding a high share of total sales with tax recorded with the use of online cash registers (minimum 80% share) or a high share of received payments made with the use of payment instruments,
- a specific moment when the tax obligation arises for certain transactions made by operation of law,
- adjustments to the Combined Nomenclature (polish CN).
The Investment Arrangement is to take the form of an agreement concluded between the Ministry of Finance and an investor, i.e., an entity that plans or has commenced an investment on the territory of Poland with a value of at least PLN 100 million (PLN 50 million from 2025). The Investment Arrangement is addressed both to investors who are residents of Poland and to foreign entities.
A group of investors, in particular a consortium, company, branch or representative office formed in connection with the investment, will also be able to apply for the Investment Arrangement.
According to the proposed amendments, the Investment Arrangement is to be equivalent to the following administrative acts:
- prior pricing arrangement (unilateral only),
- security opinion,
- binding excise duty information,
- binding rate information,
- individual interpretation.
The Investment Arrangement is to be in force for 5 years from the date of issue. Renegotiations of its content resulting in changes to the agreement will be possible, including extension of its validity period.
Details of the issue are exhaustively described on our blog.
Obligation to keep tax records electronically
The bill provides for the introduction of an obligation to keep accounting books, a tax revenue and expense ledger, as well as a register or list of fixed assets and intangible assets in electronic form using computer programmes. According to the justification to the draft, the books are to be sent in a structured form on the principles provided for in the Tax Ordinance.
Analogous regulations are planned for taxpayers conducting business activity, taxed both with CIT, PIT and lump sum tax on registered incomes.
The obligation to send books and records (lists) will cover both monthly and quarterly periods as well as after the end of the year. Books will have to be sent as at the last day of the month/quarter and after the end of the year, respectively.
In the case of PIT and lump-sum taxpayers on registered incomes – monthly/quarterly advances on income tax – by the 20th day of the following month. Additionally, after the end of the year – by 30 April of the following year in the case of PIT taxpayers, while in the case of taxpayers of lump-sum tax on registered incomes – by the end of February of the following year. In turn, CIT taxpayers – by the end of the third month of the following year.
If you have any questions or concerns – please contact us.
Katarzyna Klimkiewicz-Deplano – Managing Partner, Tax Adviser, firstname.lastname@example.org
Katarzyna Kochańska- Senior Consultant, email@example.com
Sławomir Patejuk – Partner, firstname.lastname@example.org
Mirosław Siwiński – Partner, Tax Adviser, Legal Counsel, email@example.com