Revolutionary changes in CIT framework awaiting presidential signature

On 7 October 2022, the lower house of Polish Parliament (Sejm) enacted a law to amend the Corporate Income Tax Act and certain other acts (“Amending Act”). On 10 October 2022, the Amending Act was transmitted to the President for signature.

The new law is expected to generally enter into force on 1 January 2023. Below are the most important changes the Amending Act proposes in the CIT framework.

1. Withholding tax (WHT)

• The due date for the opening/initial representation of withholding agent’s management (form WH-OSC) is now the last day of the second month following that in which the PLN 2M threshold is exceeded.
• More entities are now eligible for applying for preference opinions.

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

• Withholding agent’s management representation that allows it to avoid the pay and refund mechanism is now valid until the end of the tax year in which it is made (instead of just two months).

This change will apply to payments, benefits, money and its equivalents which are made, paid or made available after 31 December 2022.

2. Modifications and deferral of commencement of minimum income tax regulations:

• Entities liable to pay minimum income tax are exempt from the duties set out in in Article 24ca of the 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;

• • 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%).

3. Changes to regulations governing the taxation of shifted income:

• 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 (Amending Act 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 (which are Polish tax residents); 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);

• • at least 3% of the taxpayer’s total tax-deductible costs for a tax year are represented by passive costs that the taxpayer incurred in the tax year for the benefit of parties related to it for the purposes of Article 11a(1)(4) and deducted for tax purposes in the same tax year.
• Tax groups are included among taxpayers, plus there is a definition of how to determine tax base for tax groups.
• Shifted income tax regulations 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.

These amended regulations will apply to income derived as of 1 January 2023.

4. Changes to tax treatment of borrowing costs:

• Article 15c(1) CIT Act has been 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.

• The Amending Act relaxes the 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 Amending Act provides for exclusions in certain cases where the debt funding was disbursed on or before 31 December 2021.

5. The provisions on “hidden dividend”, i.e. Article 2(31)(a) third intend and 2(31)(b) of the 29 October 2021 Act (“Polish Deal”), have been repealed.
6. Other important changes apply to:

• transfer pricing regulations applicable to transactions with tax havens
• controlled foreign corporation (CFC) regulations
• Polish holding company (PSH) regulations
• regulations on the treatment of losses by companies that make up tax groups
• simplification of bad debt relief regulations

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

This blog post is provided for general information purposes to keep you up-to-date with changes in tax law, tax rulings by authorities, case law of courts and interesting commentaries. Doradztwo Podatkowe WTS&SAJA shall not be held legally liable for any acts or omissions resulting from reliance on such information.