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Polish Deal in CIT – enacted amendments

Another amendment to the corporate income tax law (the Act of 7th October, 2022 amending the Corporate Income Tax Act and certain other acts) will come into force on 1st January, 2023, but some solutions already apply to settlements from 1st January, 2022. In this post, we briefly outline the most relevant changes with an indication of when they are or will be applicable. In turn, we will refer to each ‘new’ solution in detail in a separate post on our blog.

Debt financing costs

The new provisions, which are retroactively effective (as of 1st January, 2022), assume the obligation to exclude debt financing costs from deductible costs to the extent that the excess of debt financing costs exceeds the higher of the indicated amounts, i.e. the amount of PLN 3,000,000 or the amount calculated according to the EBIDTA formula.

In addition, the legislator introduced certain exceptions to the previous amendment to the act exclusion from tax costs in their entirety of the costs of debt financing from a related entity – in the part allocated to capital transactions. The exceptions concern the carrying out of such transactions in entities not related to the taxpayer and by a bank/ SKOK established in an EU/EEA state. In addition, the rule that the exclusion from tax costs does not apply to financing costs on debt that was obtained and disbursed before the end of 2021 has been clarified.

Tax on passed-through income

In the wording of the legislation in force from 1st January, 2023, only costs incurred directly or indirectly for the benefit of a related entity of the company, representing a receivable of that entity, which were included in tax deductible costs in the tax year, will be deemed to be flipped income. The new provisions specify that the related entity for which the costs are incurred may only be a taxpayer who does not have its registered office or management in Poland.

The prerequisites for “preferential taxation” of an associated entity have also been clarified, i.e. it has been indicated that in accordance with the tax law provisions in force in the state of the registered office, management board, registration or location of that associated entity, such income (revenue) of an entity associated with the taxpayer, obtained on account of passive costs, is to:

  • be subject to taxation at an income tax rate lower than 14.25%, or
  • be subject to exemption or exclusion from this tax.

In addition, it has been specified that the related entity is to derive at least 50% of the total passive income from the taxpayer or other companies related to the taxpayer which are Polish tax residents. The new provisions also provide for new taxation prerequisites – it will be necessary for the related entity to which the costs are incurred to transfer at least 10% of passive income to another entity in cases specified by the act.

Minimum income tax

The changes to the minimum tax have been postponed for another year – the provisions will be in force from 1st January, 2024. The legislator has once again modified the provisions.

Among other things, the manner of calculating the tax base will change (the ratio has been reduced from 4% to 1.5%) with the introduction of an alternative tax base, i.e:

  • tax base – the sum of: 1.5% of operating income and excess passive costs, i.e. debt financing costs, and costs of intangible services, or
  • tax base – 3% of the value of the operating income achieved by the taxpayer in the tax year, with the taxpayer informing about the choice of such a method of determining the tax base in the return filed for the tax year for which it made such a choice.

In addition, the expected share of income in operating income has been increased from 1% to 2% when examining the issue of minimum taxation (the additional premise – having a loss has not changed).

The catalogue of entity exemptions has also been expanded to include, among others, small taxpayers, entities performing medical activities or municipal companies.

Holding companies

One of the more significant changes concerning the so-called ‘holding company regime’ is the increase in the exemption from withholding tax on dividend payments from 95% to 100%. In addition, the definition of a holding company has also been amended (including the extension of the definition to include a simple joint stock company) and a subsidiary.

The period required for the exemption of holding shares has been extended from one year to two years.
The changes in this case will come into effect on 1st January, 2023.

Transfer pricing

One of the most significant changes to transfer pricing is the elimination of the provisions on the obligation to document indirect haven transactions.

In addition, the thresholds for direct haven transactions have been raised – PLN 2,500,000 – for a financial transaction; PLN 500,000 – for a transaction other than a financial transaction.

Controlled transactions and transactions other than controlled transactions, with an entity having its place of residence, registered office or management in a territory or in a country practising harmful tax competition – applicable to transactions commenced and not completed before 1 January 2021, with respect to that part of such transactions which are carried out in a tax year commencing after 31st December, 2020, or commenced after 31st December, 2020.

Controlled transactions and transactions, other than controlled transactions, with a foreign permanent establishment resident, established or managed in a territory or country practising harmful tax competition – applicable to transactions commenced and not completed before 1st January, 2023, in respect of that part of such transactions which are carried out in a tax year commencing after 31st December, 2022, or commenced after 31st December, 2022.

Withholding tax

With effect from 26th October, 2022, the obligation to file follow-up WH-OSC payers’ statements has been abolished, with the effect of applying the extended deadlines of the statements to receivables paid in 2022. The first WH-OSC statement filed by a payer will allow the payer not to apply the provision of section 26(2e) of the CIT Act until the last day of the tax year in which the statement is filed. The follow-up WH-OSC statement will only have to be filed by the last day of the month following the end of the tax year.

Estonian CIT

As of 26 October 2022, the deadline for filing the CIT-8E return and paying the lump sum due on the value of the distributed net profit income is the end of the third month of the tax year following the year in which this disposition was made (Articles 28r(3) and 28t(1)(2) of the CIT Act).

Among other things, changes have also been introduced with regard to the determination of income from non-business expenses in the case of the use of assets (e.g. personal cars) for business purposes and other non-business purposes. The amending provisions are rather of a clarifying nature.

Foreign controlled entities (CFCs)

With regard to the provisions on foreign controlled entities (CFCs), from 1st January, 2023, a provision is introduced stating that in determining the income of a CFC, the income and expenses attributed to it in accordance with Article 5 of the CIT Act are also taken into account, and that the reliefs and exemptions under the CIT Act, with the exception of those set out in Article 24a of the CIT Act, do not apply.

In addition, it was indicated how to determine the premise of high profitability – if, before the end of the tax year, an entity has disposed of assets corresponding to at least 25% of the carrying amount of all assets determined as at the last day of the previous tax year, the carrying amount of the disposed assets is determined as at the day preceding the date of their disposal and is included in the value referred to in Art. 24a(3)(5)(b) of the CIT Act, in the proportion in which the number of days in which those assets were owned by the entity in the tax year remains to the total number of days in that year (art. 24a(3f)).

Bad debt relief

From 1st January, 2023, there will be no obligation to show the bad debt relief in the tax return (CIT-WZ or CIT/WZG attachments).

Tax on income from buildings (minimum)

From 1st January, 2023, a simplification of the procedure for the refund of tax on income from buildings will apply – no obligation to issue a decision on the refund of tax in the absence of doubts about the application submitted.