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Polish Order – Minimum Income Tax – version 2.0

As we wrote in a previous post on our blog already – the draft law on corporate income tax and certain other laws, which provides for further changes – this time in the field of CIT, assumes, among other things, a number of solutions concerning the minimum income tax on legal entities.

How is it now?

The minimum income tax, introduced on January 1st, 2022, is aimed at taxpayers that are companies and tax capital groups with headquarters or management in Poland (and foreign establishments), which incur a loss or have a low profitability ratio (share of income in income of no more than 1%) in their operations.

Among the assumptions for the introduction of a minimum income tax were:

  • limiting optimization activities,
  • reducing unjustified support for the business position of the largest corporations,
  • reducing the barrier to entry for new businesses.
  • increasing budget revenues (among other things, due to the elimination of the foreign gap in the CIT tax).

However, the minimum CIT was to take into account the specifics of activities where low profitability (or loss) is due to objective reasons (e.g., relating to prices regulated by the state or resulting from raw material quotations), as well as specific groups of taxpayers. However, the regulations also provided for exemptions for, among others, taxpayers starting their business (both start-ups, new companies established by Polish companies and entities entering the Polish market), or taxpayers with a simple ownership structure.

How (likely) will it be?

The minimum income tax, as rightly pointed out by the Ministry of Finance in the justification for the bill, also covers entities whose tax results (loss or low income) are not the result of optimization efforts. Consequently, this constitutes a very unfavorable solution for them and a threat to the very existence of their enterprise. In this regard, the bill proposes a number of new solutions, i.e.:

  • Increasing, to 2%, the profitability ratio and changing the methodology for its calculation by excluding:
    • the deductible lease contract fees,
    • from revenue the value of trade receivables sold to factoring entities,
    • from deductible expenses the increase in the value of salaries and social security contributions on an annual basis and the increase in the value of energy on an annual basis,
    • the value of excise tax,
  • introduction of an alternative method of determining the tax base – at the choice of the taxpayer, ie:
    • the tax base is 4% of revenues (tax rate of 10%) or
    • the tax base is 2% of revenues + passive costs, i.e. debt financing and intangible services (tax rate of 10%).
    • If the taxpayer chooses the simplified method of determining the tax base representing an amount equivalent to 4% of the value of revenues, the taxpayer will have to inform in the annual tax return,
  • exclusion from this tax additionally:
    • CIT taxpayers whose annual revenues do not exceed €2,000,000 (i.e., so-called small taxpayers),
    • municipal companies,
    • taxpayers if the majority of their revenues were earned in connection with the provision of health care services,
    • taxpayers whose profitability in 1 of the last 3 tax years was above the 2% indicator, as well as
    • taxpayers placed in bankruptcy or liquidation.

When calculating the tax base, the methods of calculation have also changed:

  • costs of debt financing incurred for the benefit of related parties – according to the planned changes, 15% of EBITDA value will be used in the calculation formula instead of the currently binding 30% – this means that the value of financial costs, which are included in the tax base, will be increased
  • costs of intangible services incurred for the benefit of related parties – the value of PLN 3,000,000 will be eliminated from the formula. According to the new formula, the calculation will be based on EBITDA of 5%, which also indicates an increase in the values entering the tax base.

Importantly, 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 1st, 2023.

Minimum income tax – comparison

Below is a comparison of the proposed version of the Polish Order with the current minimum income tax regulations.

image 8 - Polish Order – Minimum Income Tax – version 2.0
image 9 - Polish Order – Minimum Income Tax – version 2.0
image 10 - Polish Order – Minimum Income Tax – version 2.0

Depending on the financial results of a given taxpayer, the proposed changes could have a significant impact on the amount of/being subject to the minimum income tax. Certainly, in each case (where, for example, a taxpayer makes a loss in a given tax year), one would need to compare which method of calculating the tax base would result in a lower final tax. Although the scheduled entry into force of the regulations in question is January 1st, 2023, we encourage you to make an illustrative calculation now – based on your current financial results, this will allow you to estimate to some extent the amount of any additional tax liability.