On 28 June 2022, the Government Legislation Centre published a bill to amend the Corporate Income Tax (CIT) Act and certain other legislation.
The bill proposes sweeping and very important changes to the CIT Act, including in terms of minimum income tax, tax on shifted income, CFC, WHT, and indirect transactions with tax havens. As a rule, the new law would enter into force on 1 January 2023, but there are some important exceptions.
- Modifications to and deferral of minimum income tax regulations:
- Taxpayers liable to minimum income tax to be relieved from the duties specified in Article 24ca CIT Act for the duration of the year (from 1 Jan 2022 to 31 Dec 2022).
- 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 or liquidation);
- 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) annual increases in salaries/wages and social insurance contributions as well as annual increases in energy value, income will not include trade receivables sold to factoring businesses, excise tax will be excluded);
- the ratio of income other than capital gains to decrease from 4% to 2%;
- the coefficient used in the formula in Article 24ca(3)(2) to decrease from 30% to 15%;
- the amount of PLN 3,000,000 to be deleted from the formula concerning costs of intangible services in Article 24ca(3)(4);
- taxpayers to have choice between two alternative methods to calculate tax base: either tax base equals 4% of gross income other than capital gains for a tax year (with tax rate being 10%), or tax base equals 2% of gross income other than capital gains + passive costs, i.e. borrowing costs and intangible services (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:
- introduction of measures to eliminate double or multiple CFC taxation of dividend distributions in holding structures (CIT Act’s Article 24a(2)(4), 24a(2)(12a));
- definitions added: controlled parent foreign corporation and controlled subsidiary foreign corporation;
- refinements to high-profitability test for CFC that compares profitability to assets in the event of potential asset sale during the year (CIT Act’s Article 24a(3f));
- Corresponding changes proposed to be made in personal income tax (PIT Act’s Article 30f);
- changes to regulations governing the taxation of shifted income:
- shifted income to mean tax-deductible costs incurred by taxpayer for the benefit of a non-resident related party if:
- the related party’s passive income is subject to full or partial tax exemption or to taxation at an effective rate below 14.25% in the country of its seat, management, registration or location; and
- at least 50% of all of the related party’s income is passive income from the taxpayer or taxpayer’s affiliate companies; and
- at least 10% of passive income is transferred by the related party in any form to some other entity (while the related party deducts or credits such expense for tax purposes or such income is treated as profit distributable as dividend or other kind of corporate profit distribution);
- shifted income tax regulations to apply as appropriate also to certain schemes involving foreign entities that shift income to other foreign entities which enjoy low taxes;
- changes to withholding tax (WHT) framework
- the exemption for non-residents under Article 17(1)(5) 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 validity of withholding agent’s representation (form WH-OSC) allowing for exemption from pay-and-refund mechanism to be extended until the end of the tax year in which it is made (instead of for just another two months) – this change will apply to payments, supplies and moneys made, paid or provided after 31 December 2022;
- changes to tax treatment of borrowing costs:
- Article 15c(1) to be amended to refine the calculation of non-deductible exceeding borrowing costs – the non-deductible amount will be any amount above the higher of PLN 3 million or 30% of EBITDA;
- the restriction that the deductible intercompany borrowing costs shall not include amounts used directly or indirectly for capital transactions to be narrowed down by a provision that it will not apply to borrowing costs incurred on financing extended for the purpose of:
- purchasing or subscribing for shares or interests in unrelated entities;
- providing finance where the finance party is a bank or cooperative savings and loans association established in an EU or EEA country;
- both changes to apply to borrowing costs incurred on or after 1 January 2022;
- 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;
- more precise rendering of the regulations on application of PSH regulations to dividend income or income from sale of shares where the holding company meets the condition of an at least one-year continuous holding period;
- holding company to have the right to dividend tax exemption under Parent Subsidiary Directive;
- the subsidiary no longer disallowed to (i) hold more than 5% shares in any other company, (ii) hold any interests in partnerships, or (iii) enjoy exemptions associated with doing business in special economic zones or Polish Investment Zone;
- full exemption of dividends (to replace the current exemption for 95%), with the application of the PSH exemption limited to 3 tax years before the dividend payment year;
- 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 (if the tax is payable, it must be paid, at the election of the taxpayer, either in full by the end of the third month of the first year of flat-rate corporate income taxation, or in parts over a maximum of two years from the end of the first year of flat-rate corporate income taxation, with the election 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 solutions 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);
- changes to provisions on documentation required for transactions with tax havens:
- higher documentation thresholds for direct and indirect transactions with tax havens which trigger the requirement:
- for direct transactions the threshold will be PLN 200,000;
- for indirect transactions the thresholds will be as follows:
- PLN 2,500,000 for goods transactions and financial transactions,
- PLN 500,000 for other transactions;
– corresponding thresholds to be set up in the PIT Act;
- presumption that beneficial owner resides in a tax haven to be abolished and replaced with a waiver of disclosure requirements in certain cases;
- the law to expressly allow for a possibility of obtaining a waiver of disclosure requirements based on statement by recipient of the payment.
II. Changes to Tax Code
- more precision added to provisions on mandatory submission of form ORD-U – it will not be necessary in the case of entities required to file transfer pricing report forms pursuant to PIT Act’s Article 23zf(1) or CIT Act’s Article 11t(1).
III. Other proposed changes
- repeal provisions on “hidden dividend”, i.e. Article 2(31)(a) third indent and Article 2(31)(b) of the Polish Deal Act of 29 October 2021;
- refine provisions on tax treatment of losses by companies in tax groups, i.e. Article 69b will be added in the Polish Deal Act of 29 October 2021 to the effect that the new treatment of tax losses in tax groups as per the Polish Deal legislation applies to new losses, meaning those that have arisen in any tax year beginning later than on 31 December 2021 (losses that arose before 1 January 2022 will continue to be regulated by the previous law);
- 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;
- introduce “housekeeping” changes to PIT Act provisions on statements and applications taxpayers issue for withholding or remitting agents for the purpose of withholding advance tax (as introduced by the Polish Deal 2.0 Act of 9 June 2022).
Pursuant to the Bill, the new law is expected to generally become effective on 1 January 2023, except for its transfer pricing provisions which will enter into force on the promulgation date. As regards transfer pricing provisions of the new law, businesses required to test their transactions with tax havens for whether they are to be reported in transfer pricing documentation will have the option of applying the new solutions retroactively, i.e. to controlled and other transactions commenced and pending before 1 January 2021 or commenced after 31 December 2020, but not later than until 31 December 2022, to the extent such transactions are carried out in any tax year commenced after 31 December 2020. In such a case retroactive changes introduced in prior years will have to apply.
If this issue pertains to your business and you are interested in our assistance, please contact us.
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