Advicero Nexia
Home / Blog / Polish Order – CIT – further changes

Polish Order – CIT – further changes

A draft law on corporate income tax and certain other laws dated June 27, 2022 has appeared on the website of the Government Legislation Center. Currently, the draft is at the opinion stage. This is another revision of the original “Polish Order”, which makes numerous modifications to the changes that take effect on January 1, 2022. In addition to changes to the Corporate Income Tax Act, the draft also provides for changes to six other laws. Below is a collection of the most important planned changes to the CIT Act. For the most part – as currently envisaged – the changes are scheduled to take effect on January 1, 2023.

Assumptions of the bill:

“The proposed law aims to improve the provisions on corporate income taxation (…) in a way that will make them simpler, more transparent and at the same time ensure them more effective from the standpoint of their application and the purpose they are intended to serve. Proposed in the draft regulations take into account demands for changes and signals from income taxpayers, including both small, medium and large entities, as well as social and professional organizations. These demands relate in particular to the need to simplify the tax system and clarify some of the existing regulations.”

The changes include, in particular:

1. Minimum income tax

The minimum income tax, as a brand-new regulation introduced on January 1, 2022 (we wrote in detail about the minimum tax on our blog) has raised a number of questions in various taxpayer circles and beyond. Under this regulation, entities incurring a loss or showing low income (share of income in income not exceeding 1%) are required to pay 10% of the tax base calculated in a specific way.

Among the most important planned changes are an increase in the profitability rate to 2% and a change in the methodology for its calculation, as well as the introduction of an alternative method for determining the tax base, i.e.:

  • tax base – 4% of revenue (tax rate of 10%) or
  • tax base – 2% of revenue + passive costs, i.e., debt financing and intangible services (tax rate of 10%);

The taxpayer will have to inform about the choice of the simplified method of determining the tax base, which is an amount equivalent to 4% of the value of income, in his annual tax return.

In addition, more subject exclusions have been proposed for the application of the minimum income tax, i.e. it will not apply to taxpayers who:

  • have annual revenues not exceeding EUR 2,000,000 (i.e., so-called small taxpayers),
  • are municipal companies,
  • have earned most of their revenues in connection with the provision of health care services,
  • have achieved profitability in 1 of the last 3 fiscal years above a rate of 2%,
  •  are placed in bankruptcy or liquidation.

Significantly, according to the current bill, the minimum income tax is to be suspended for one year. The new regulations (and those already in effect for this year) are therefore not to take effect until January 1, 2023.

2. Profit shifting

Another “new” regulation that is the tax on profit shifting is planned to clarify the regulations in effect from this year.

Recall that under current regulations, costs incurred directly or indirectly by a Polish company to a related party on account of a related party may be considered as flipped income:

  • intangible services,
  • royalties,
  • debt financing costs,
  • transfer of debtor insolvency risk, as well as functions, assets and risks

if their sum, incurred in the tax year for the benefit of related and unrelated parties, constitutes at least 3% of the sum of deductible expenses (including depreciation of fixed assets and intangible assets) incurred in that year in any form. The tax on them (which does not change) would be 19%. There are other prerequisites for taxation (we have also covered the tax on profit shifting extensively on our blog).

The bill clarifies that the regulation applies to costs included in deductible expenses. In addition, it is explicitly stated that in order to determine the numerator of the ratio, the sum of passive costs to a related party is to be at least 3% of the total deductible costs accounted for in a given year by a given taxpayer in any form, including through depreciation write-offs.

However, as for the related entity itself – it was clarified that it must not have a registered office/place of management in the territory of the Republic of Poland. It should receive at least 50% of its revenue from passive receivables – as a rule, from one Polish company that transfers these passive receivables, or as it receives from more than one Polish company – the value of its revenue is determined jointly for these Polish companies. It must then transfer these costs to another entity for a portion of at least 10%.

3. Hidden dividend

According to the draft law, due to:

  • numerous interpretive doubts about the dependencies between the hidden dividend provisions and the transfer pricing provisions,
  • significantly hampering capital activities providing support services to subsidiaries, which depend on the profitability of these companies,
  • possible negative impact on the provision of licensing services,
  • the possibility of considering the costs as hidden dividends (in the case of economically justified transactions, the main purpose of which is not the transfer of financial surpluses to related parties),
  • demands made by industry organizations (restrictions on anti-abuse regulations)

– plans to completely repeal the hidden dividend regulations, which were originally scheduled to take effect on January 1, 2023.

4. Changes in transfer pricing

The following changes in transfer pricing are planned:

  • For domestic transactions, the documentation obligation is only with the payment recipient. For cross-border transactions – at the entity making the payment.
  • Exemptions are to be provided for entities that (i) are not affiliated with a tax haven resident or (ii) do not directly transact with a tax haven resident.
  • The presumption of beneficial ownership of receivables is to be abolished, and instead a rule is to be introduced to allow confirmation of the absence of beneficial ownership in a tax haven through a declaration.
  • Value thresholds are to be introduced depending on the type of transaction, i.e. for commodity and financial transactions it will be PLN 2.5 million. For other transactions, the threshold will remain unchanged at PLN 0.5 million.
  • For 2021, taxpayers will have a choice of applying the regulations in the new or previous wording.

5. Debt financing costs

With regard to debt financing costs, it was clarified that the excess of debt financing costs incurred for the benefit of related parties exceeding the higher of 30% of EBITDA or PLN 3 million is subject to exclusion from deductible expenses.

It is planned to introduce the possibility of including in tax deductible expenses the cost of debt financing for the acquisition or assumption of shares (stocks) or all rights and obligations in unrelated entities and financed by EU, EEA banks and cooperative savings and credit unions.

Still (as introduced as of January 1, 2022), the cost of debt financing from related parties will not be allowed in the part in which they are allocated directly or indirectly to capital transactions, in particular the acquisition or subscription of shares (stocks), the acquisition of all rights and obligations in a non-corporate company, the payment of surcharges, the increase of share capital or the redemption of own shares for cancellation.

According to the transitional provision, the above changes would apply retroactively from January 1, 2022.

6. Withholding tax

It is planned to expand the subject scope of the non-resident taxpayer’s exemption from income tax, which is contained in Article 17(1)(50) of the CIT Act and Article 21(1)(130) of the PIT Act, to include treasury bonds offered on the domestic market and treasury bills and a corresponding change in the material scope of the exemption from the tax remitter’s duty to collect tax, which is contained in Article 26(1aa) of the CIT Act and Article 41(24) of the PIT Act.

Currently, this exemption covers only interest or discount on bonds issued by the State Treasury and offered on foreign markets, as well as income from the paid disposal of these bonds earned by non-resident taxpayer.

In addition, changes are planned to the validity of the tax remitter’s statement (WH-OSC) exempting the pay & refund mechanism. According to them – if the tax remitter makes further payments from interest/dividends – it will be valid until the end of the year (currently it is only valid for 2 months from the submission of the statement). In turn, the follow-up statement – until the end of the month following the end of the year (currently, the follow-up statement is valid until the 7th day following the month in which the original statement expired).

7. Controlled Foreign Company (CFC)

The bill includes provisions to eliminate double taxation of CFCs when dividends are paid between foreign controlled entities that remain in the same holding structure. Also to be introduced is a definition of a dominant foreign controlled entity, i.e. an entity at the highest level of the holding structure in which a Polish taxpayer directly holds at least 50% of the voting rights in the controlling, constituting or managing bodies (or 50% of the right to participate in profit).

Similarly, changes are planned with regard to a subsidiary foreign controlled entity (i.e., an entity at a lower level of the structure in which the parent controlled entity directly holds at least 50% of the voting rights in the controlling, constituting or managing bodies or 50% of the right to participate in profit). The definition of a subsidiary will be amended with two new premises, according to which a foreign entity that does not meet the prerequisites of a foreign controlled entity indicated in Article 24a (3)(3), (4) or (5) of the CIT Act should be considered a subsidiary. This is an amendment of an editorial/ additional nature.

The new provisions are intended to allow the elimination of double taxation, i.e., the deduction of the income of the parent controlled entity only by the tax relating to one entity – the directly dependent foreign controlled entity (however, these provisions will not be reflected in the case of very extensive, multi-level structures).

The proposed tax reduction is limited by several conditions, which we will discuss in detail in a separate article.

8. Polish holding company (PSH)

Introduced as of January 1, 2022. “holding company regime”, which provides for an income tax exemption of 95% of dividends earned by the holding company – is to be changed to a full exemption.

The proposed amendments are designed to allow a larger circle of entrepreneurs to take advantage of the holding regime – the catalog of legal forms in which a holding company can operate will be expanded to include a simple joint stock company.

In the definition of a holding company itself, it has been proposed to delete the condition of not benefiting from other tax exemptions. Also in the definition of a subsidiary, it is proposed to delete the condition of absence:

  • o more than 5% of shares in other companies,
  • having all rights and obligations in a company that is not a legal person, and
  • using an exemption within a special economic zone or the so-called Polish Investment Zone.

9. Lump-sum taxation on corporate income

In terms of the so-called “Estonian CIT,” the following changes have been proposed:

  • Clarification of the deadline for filing a notice on the choice of lump-sum taxation on corporate income (ZAW-RD), before the end of the tax year adopted by the taxpayer (by the end of the first tax year in which the taxpayer is to be taxed in a lump sum),
  • amendments to the determination of income from non-business expenses when assets (e.g., passenger cars) are used for business and other non-business purposes (at 50% of expenses, depreciation and impairment charges related to the use of assets not used for business purposes will not constitute non-business expenses),
  • clarification of the provision specifying the condition for expiration of the tax liability under the so-called “preliminary adjustment” – the amendment will specify that the tax liability under the so-called “preliminary adjustment” will expire in full after at least one full lump sum tax period, i.e. 4 tax years,
  • clarification of the provision specifying the deadline for payment of the tax due on the income from the conversion – the provision will indicate that if the tax on the income from the conversion is paid in full, the taxpayer is required to pay the tax within the deadline provided for filing the CIT-8 return for the tax year preceding the first year of lump sum taxation,
  • change the timing of payment of a lump sum on distributed profit income and distributed profit income to cover losses (also applies to advances on anticipated dividends) and a lump sum on distributed net income (this is to eliminate the obligation to pay interest in the event of distribution or coverage of net income, payment of advances on anticipated dividends, or disposition of net income after the completion of lump sum taxation, after the sixth month of the tax year,
  • clarifying the provisions on the conditions for entitlement to lump-sum taxation on corporate income with regard to expenses incurred by the taxpayer for the employment of individuals under a contract other than an employment contract.

10. Procedure for refund of tax on income from buildings

The proposed provision is intended to provide a solution to the problem associated with the procedure for refunding tax on income from buildings on request, resulting from the lack of definition in the current legislation of the procedure for verification as well as the rules for refunds. The draft includes a proposal to simplify the procedure for refunding tax on building income, by not imposing an obligation to issue a tax refund decision in the absence of doubts about the value of the refund. In other words, a refund in accordance with the taxpayer’s request will be limited to the technical act of paying that refund.

11. Tax Capital Groups (PGK)

New regulations that came into effect on January 1, 2022 limited the possibility of accounting for losses incurred by PGK companies. The legislator proposed that current regulations be applied to losses incurred before January 1, 2022.

The proposed changes will certainly have a significant impact on the tax settlements of CIT taxpayers (despite the fact that for the most part they are only clarifying). Although, as we know from practice – a lot can still change – it is worthwhile to already conduct an analysis of the planned changes in order to assess their impact in individual cases / prepare business actions accordingly.