On 25 August 2022 the lower chamber of Polish parliament (Sejm) received a bill to amend the Corporate Income Tax Act and certain other acts. The Bill is significantly modified comparing to its original version dated 28 June 2022.

Major differences include the following:

  • Transfer pricing documentation no longer required for indirect transactions with tax havens and higher documentation thresholds for direct transactions with tax havens;
  • Exemption from minimum income tax for the period from 1 January 2022 to 31 December 2023 and change in its calculation methodology;
  • The proposed changes in law relating to management representations can be relied on retroactively with respect to payments made after 31 December 2021;
  • A wider range of entities eligible for applying for a preference opinion;
  • Further changes in tax on shifted income;
  • Change in law to renew anti-inflation measures and maintain VAT rates at their current level.

The new law is expected to enter into force on 1 January 2023 as a rule, but major exceptions to this rule have been proposed.

Below you will find the most important of the changes proposed in the Bill, with differences against its original version set in boldface.

I. Changes in corporate income tax (CIT)

  • Changes to provisions on the documentation of transactions with tax havens. The Bill proposes to:
    • abolish the requirement to apply the arm’s length price as appropriate and the documentation requirement in relation to indirect transactions with tax havens;
    • increase the documentation thresholds for direct transactions with tax havens:
        1. PLN 2.5 million for financial transactions,
        2. PLN 500,000 for other transactions,

                         -with the limits and thresholds to be increased or introduced in the PIT Act accordingly.

The changed law will apply:

    1. in the case of controlled transactions and transactions other than controlled transactions with entities having their residence, registered office or management in a territory or country applying harmful tax competition – to transactions which were commenced and not completed before 1 January 2021 or commenced after 31 December 2020, to the extent of those parts thereof which are performed in the tax year commencing after 31 December 2020;
    2. in the case of controlled transactions and transactions other than controlled transactions with foreign permanent establishments situated in a territory or country applying harmful tax competition – to transactions which were commenced and not completed before 1 January 2023 or commenced after 31 December 2022, to the extent of those parts thereof which are performed in the tax year commencing after 31 December 2022;
  • Modification and deferral of commencement of minimum income tax provisions:
    • taxpayers required to pay minimum income tax will be exempt from the duties set out in Article 24ca CIT Act for a period of two years from 1 January 2022 to 31 December 2023;
    • changes to characterisation of the tax:
      • additional exclusions (municipal companies, small taxpayers, taxpayers who derive majority of their income in connection with provision of healthcare services, taxpayers whose profitability in one out of three recent tax years was above 2%, taxpayers in bankruptcy, liquidation or restructuring, taxpayers who are party to co-operative compliance agreements, financial institutions whose core business involves provision of factoring services);
      • modification to exemption for groups of companies (mainly by allowing indirect ownership);
      • the profit ratio to increase from 1% to 2% and have a new calculation method, e.g. deductible costs will not include (i) lease payments, (ii) 20% of salaries, social insurance contributions and Employee Capital Plan (PKK) contributions, (iii) increase in deductible costs in respect of energy purchases in annual intervals, (iv) certain taxes, (v) income will not include trade receivables sold to factoring businesses, (vi) excise tax will be excluded);
      • the ratio of income other than capital gains to be reduced from 4% to 1.5%;
      • deferred income tax to be excluded from tax base;
      • modification to the rule that tax base does not include income exempt from tax under Article 17(1)(34) or 17(1)(34a) CIT Act and taken into account when calculating profitability ratio;
      • changes to previous income ratio used for calculation of tax base, plus taxpayers to have choice between two alternative methods to calculate tax base, i.e. either:
        • tax base equals 1.5% of gross income other than capital gains + passive costs, i.e. borrowing costs and intangible services (with tax rate being 10%); or
        • tax base equals 3% of gross income other than capital gains (with tax rate being 10%).
  • New frequency of data updates for large taxpayers:
    • publicly disclosed data on large taxpayers to be updated once a year instead of once a quarter;
  • Changes to controlled foreign corporations (CFC) framework:
    • refined method to determine CFC income (Article 24a(6c) CIT Act):  income and costs of entities without legal personhood to be included, and reliefs and exemptions under the CIT Act not to apply, except for those specified in CFC regulations;
    • introduction of measures to eliminate double or multiple CFC taxation of dividend distributions in holding structures (CIT Act’s Article 24a(11));
    • (the proposal to define CFC parent and CFC subsidiary has been scrapped);
    • refined test of high CFC profitability in comparison to its assets in the case of potential asset sale during a year (Article 24a(3f) CIT Act).

Corresponding changes proposed to be made in personal income tax (Article 30f PIT Act);

  • Changes to regulations governing the taxation of shifted income:
    • editorial changes to Article 24aa to clearly provide that shifted income tax applies to costs treated by the taxpayer as tax-deductible if the total passive costs (as defined in sub-para 3) incurred during a tax year for the benefit of related parties and recognised by the taxpayer as tax-deductible in that tax year represent at least 3% of the total tax-deductible costs of the taxpayer;
    • shifted income means costs incurred by a taxpayer for the benefit of a non-resident related party and recognised by the taxpayer as tax-deductible, if:
      • the related party is excluded or exempt from tax, or is taxed at an effective rate of less than 14.25%, on passive income in its home country (Bill elaborates on regulations re. determination of effective tax rate); and
      • at least 50% of the related party’s total income is passive income derived from the taxpayer or companies related to the taxpayer; and
      • at least 10% of its passive income is forwarded to some other entity in any form (where it recognises the related expenses as tax-deductible or deducts them from income or where such income constitutes profit distributable (at whatever time) as dividend or other income from interest in corporate profits);
    • tax groups to be included among taxpayers, plus definition of how to determine tax base for tax groups;
    • shifted income tax regulations to apply as appropriate also to certain schemes involving fiscally transparent entities or foreign entities that shift income to other foreign entities which enjoy low taxes;

                    The new law to apply to income derived as of 1 January 2023.

  • Changes to withholding tax (WHT) framework
    • the exemption for non-residents under Article 17(1)(50) CIT Act (Article 21(1)(130) PIT Act) to be extended to include also Treasury bonds offered domestically and Treasury bills, with the corresponding change to be made to the exemption from withholding agent’s withholding duties as per Article 26(1aa) CIT Act and Article 41(24) PIT Act;
    • the “opening” management representation from withholding agents (WH-OSC) to have a changed filing deadline – now the representation is to be filed until the last day of the second month following the month in which the PLN 2M threshold is exceeded;
    • more entities to be eligible for applying for preference opinion (drafters removed reference to Article 28b(2) CIT Act)

                    The changes to apply to payments, benefits, money and its equivalents which are made, paid or made available after 31 December 2022;

    • longer validity of withholding agent’s management representation that waives the application of the pay-and-refund mechanism – to be valid until end of tax year in which it is made (instead of just two further months); the change to apply payments, benefits, money and its equivalents which are made, paid or made available after 31 December 2022;
  • Changes to tax treatment of borrowing costs:
    • Article 15c(1) CIT Act to be amended to refine the calculation of deduction cap – the non-deductible (exceeding) borrowing costs are those above the higher of either PLN 3 million or 30% EBITDA;

                    This change will apply to borrowing costs incurred as of 1 January 2022 or, for taxpayers whose tax years do not coincide with the calendar year, as of the tax year beginning after that date;

    • relaxed restriction of deduction of borrowing costs incurred by companies and partnerships on funding from related parties to the extent the funding is used for capital transactions; the restriction will not apply to borrowing costs where the funding:
      • is for acquisition of shares or interests in unrelated parties, including acquisition of further shares if such acquisition occurs within 12 months from when the first shares in a given entity were acquired;
      • comes from a bank or cooperative savings and loans association established in an EU or EEA country;

                             This change will apply to borrowing costs incurred as of 1 January 2023 or, for taxpayers whose tax years do not coincide with the calendar year, as of the tax year beginning after that date. The Bill proposes exclusions in certain cases where the debt funding was disbursed on or before 31 December 2021;

  • Changes to Polish holding company (PSH) regulations:
    • simple public limited company (prosta spółka akcyjna) to be added as a legal form available to holding companies;
    • fine-tuning of the regulations on the application of PSH regulations to income from dividends or share sales where the holding company has held shares in subsidiaries for an uninterrupted period of at least 2 years;
    • holding company to have the right to dividend tax exemption under Parent Subsidiary Directive;
    • subsidiary no longer forbidden to (i) hold more than 5% of the shares in another company, (ii) hold partnership interests, or (iii) enjoy exemptions applicable in special economic zones or the Polish Investment Zone;
    • 100% exemption for dividends (replacing the 95% exemption), with the time limit for application of the PSH exemption to be changed to 3 tax years preceding the dividend distribution year;

                   The new law will apply to income derived as of 1 January 2023.

  • Changes to flat-rate corporate income tax (ryczałt od dochodów spółek), or Estonian CIT:
    • new method to quantify income represented by non-business expenses in situations where assets (e.g. passenger cars) are used for business and non-business purposes (50% of expenses, depreciation charges and permanent diminution in value on non-business assets will not be non-business expenses);
    • new deadline for taxpayer to file notice of election of flat-rate corporate income tax (ZAW-RD) before the end of taxpayer’s tax year (the notice to be filed until the end of the first tax year in which this tax is to apply to the taxpayer);
    • more refined provisions on the condition that involves expiry of tax liability in respect of initial adjustment (this liability expires in full after at least one full period of flat-rate taxation, which is 4 tax years);
    • determination of time to pay tax on conversion income (the tax must be paid, at the election of taxpayer, either in full, in which case the deadline is end of third month of the first year of flat-rate taxation, or in instalments, in which case it is payable over a period of no more than 2 years from end of the first year of flat-rate taxation; the election is to be notified by the due date for the filing of CIT-8 return for the tax year preceding the first year of flat-rate taxation);
    • designation of a due date for payment of tax on distributed profit and profit used to fund losses (applies also to interim dividends) and of tax on allocated net profit;
  • Amendments to the provision on due date for payment of employer-funded social insurance contributions on employment and similar income, contributions to Labour Fund, Solidarity Fund and Guaranteed Employee Benefits Fund:
    • simplified and more precise provisions on deduction of insurance contributions for tax purposes (CIT regulations amended to follow the solution introduced for PIT);
  • Change to provision on refund procedure for tax on income from commercial real estate:
    • simplified refund procedure where refund is based on request as per Article 24b(15) and 24b(16) CIT Act;
    • more precise language saying that refund will be made without the need for a formal decision whenever the amount to be refunded does not give rise to doubts (as in Article 30g(15) and 30g(16) PIT Act);

II. Changes to Tax Code

  • fine-tuning to provision on duty to file form ORD-U – the filing will not be required for entities which are under a duty to file transfer pricing reports pursuant to Article 23zf(1) PIT Act or Article 11t(1) CIT Act, except for entities engaging in controlled transactions with tax havens;

III. Changes to VAT

  • anti-inflation shield to last longer, i.e. until end of 2022;
  • VAT rates to remain the same in 2023 (23% and 8%).

IV. Other proposed changes

  • repeal provisions on “hidden dividend”, i.e. Article 2(31)(a) third intend and 2(31)(b) of the 29 October 2021 Act (“Polish Deal”);
  • refine provisions on tax treatment of losses by companies in tax groups, i.e. Article 69b to be added to the 29 October 2021 Act (“Polish Deal”) to provide that the new loss treatment regulations introduced by “Polish Deal” for tax groups apply to so-called new losses, meaning those that have arisen in any tax year beginning later than on 31 December 2021, while losses that arose before 1 January 2022 will continue to be governed by previous law;
  • simplified provisions on VAT relief on bad debts;
  • change of law on mandatory provision of return forms by Finance Minister pursuant to CIT Act, PIT Act, Flat-Rate Tax Act and Tax Code – it will be sufficient for Finance Minister to merely provide for a visualisation of the return, with the visualisation to be made available by the Digitization Minister in the Central Register of Electronic Document Forms;
  • change to improve the structure of PIT Act provisions on representations and applications to be submitted by taxpayers to withholding agents for advance tax withholding purposes (which are the provisions introduced under the 9 June 2022 Act called “Polish Deal 2.0”).

As per the Brill, the new law is generally scheduled to enter into force on 1 January 2023. As said, certain provisions will have retroactive effect.

If this issue pertains to your business and you are interested in our assistance, please contact us.

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