On June 28, 2022, the Ministry of Finance published a draft law on amendments to the Law on Corporate Income Tax and certain other laws. The amendment provides for changes primarily in the CIT Law, but also in PIT, flat tax and Tax Ordinance regulations. Their main purpose is to clarify and organize the current regulations, primarily those introduced by the Polish Deal. The most important of the proposed tax changes are set out below.
What are the major tax changes in the draft?
Adjustment of the minimum income tax rules and exemption for 2022
The draft includes changes to the minimum income tax (MIT) provisions introduced as of January 1, 2022, which cover entities with a profitability ratio not exceeding 1 percent or those recognizing tax losses.
What is particularly important, the draft includes an exemption from MIT for 2022 for taxpayers obliged to pay that tax. The draft sets out provisions adjusting the MIT regulations, including: (i) an increase of the profitability threshold from 1 percent to 2 percent, (ii) an extension of the catalogue of revenues and costs which are not taken into account in the calculation of the profitability level for MIT purposes, (iii) modification of the rules for determining the MIT tax base, and (iv) new exemptions from MIT applicable to e.g. small taxpayers or taxpayers who, in one of the three tax years immediately preceding the tax year for which the MIT is payable, have achieved a level of profitability of at least 2 percent.
The aforementioned MIT exemption, according to the draft, should apply to income (revenue) earned as of January 1, 2022, and the provisions amending the MIT rules should take effect as of January 1, 2023.
Repeal of provisions on hidden dividends
The Ministry of Finance considered it reasonable to repeal the provisions on hidden dividends due to significant interpretation doubts in this regard and the interdependence between the provisions on hidden dividends and transfer pricing. The regulations were to come into effect on January 1, 2023, and were intended to limit the ability to deduct for tax purposes certain expenses, such as those whose amount depends on the level of the taxpayer's profit. Among other things, there were doubts about their relation to the transfer pricing profit split method and transfer pricing adjustments.
Amendments to regulations on foreign controlled companies (CFCs)
The draft proposes changes to CFC regulations, which may be relevant to Polish tax residents who own or control foreign entities. In this regard, it is planned to introduce:
- A mechanism to eliminate double taxation in the situation of cascading dividends in multi-level holding structures. This mechanism will consist of reducing the tax on income from the parent CFC by the corresponding portion of the tax on the income of the subsidiary CFC. However, the application of this mechanism will be subject to a number of special conditions.
- A change in the premise of high profitability of the foreign entity in relation to its assets. The previous regulations caused interpretation problems, for example, when a foreign CFC entity disposed of a significant portion of its assets during the tax year. This distorted the calculation made to determine whether an entity meets the criteria for recognition as a CFC. The new regulations—which are intended to be clarifying in nature—explicitly indicate that in the case of the disposal of assets during the tax year, such calculation should be made on the basis of the assets value determined on the day preceding disposal of those assets (and not on the last day of the year, as per the current regulations). The value obtained in this way is to be multiplied in the next step by the proportion of the number of days the assets were owned by the entity in the year for which tax is to be paid to the total number of days in that year.
- The draft also clarifies the definition of a subsidiary).
Analogous changes in the three areas mentioned above are also to be made to the regulation of CFCs in the PIT Law.
Changes to the tax on ‘shifted profits’
Due to certain doubts concerning the interpretation of the regulations on the tax on ‘shifted profits’ which (along with the provisions on MIT) was to replace the limitation concerning tax deductibility of fees for intangible services paid to related parties, the new structure and wording thereof were proposed in the draft. Amongst others, according to the proposed adjustments, only tax-deductible costs shall be concerned for the purposes of this tax and only the ‘passive’ costs paid to related parties (not all entities) shall be treated as ‘shifted profits’. Moreover, application of the regulations on the tax on ‘shifted profits’ shall concern only cross border payments. Also, the new regulations precise the conditions pertaining to the Polish companies subject to this tax and foreign related parties receiving the payments as well as the rules of establishing the tax base.
The draft does not contain specific transitional provisions for the changes to PPD, so they should all take effect as of January 1, 2023.
Changes to withholding tax (WHT)
The draft provides for:
- exclusion of the application of the obligations of broadly defined payers (i.e., the issuer and the so-called technical payer) with respect to the withholding taxation of interest and discount on Treasury securities (i.e., Treasury bills and bonds);
- making the construction of the payer's statement exempting the pay & refund mechanism more flexible by extending the temporal scope of such statement to the end of the payer's tax year (instead of only an additional two months).
Changes in recognition of debt financing costs as tax deductible
In this area it is planned to:
- to clarify the amount of the debt financing cost limit - i.e. as the higher of: (i) PLN 3 million or (ii) 30 percent of tax EBITDA,
- exclude the application of the provisions on the limit of costs of debt financing of equity transactions in situations where the financing party is a bank or a credit union with its registered office in an EU or EEA member state. In addition, the provisions would not apply to debt financing granted for acquisition or take-up of shares or general rights and obligations in entities unrelated with the taxpayer.
It is planned that the amended regulations will apply to debt financing costs incurred as of January 1, 2022.
Easing the conditions for a Polish holding company to use the exemption
The key changes proposed in the draft regarding the taxation of holding companies include:
- expanding the list of legal forms in which a holding company may operate to include a simple joint stock company;
- abandoning the mandatory uninterrupted period of 1 year of holding 10 percent of the shares in the capital of a subsidiary by a holding company;
- replacement of the 95 percent exemption with a complete exemption from income tax on dividends paid in the structure;
- deletion of the condition for a subsidiary not to enjoy income tax exemption under the special economic zone / Polish Investment Zone schemes (Polish: SEZ/PSI) and the condition for a subsidiary not to hold more than 5 percent of shares in other companies;
- deletion of the condition for a holding company not to be exempt from income tax on dividends and other income from participation in the profits of legal entities having their registered office or management outside of Poland.
According to the legislator, the proposed changes will enable a larger circle of entrepreneurs to benefit from the holding regime. The new regulations will apply to income (revenue) earned as of January 1, 2022.
Amendment of regulations on the procedure for refunding tax on income from buildings (so called minimum CIT levy applicable to the owners of leased buildings)
The draft includes a proposal to simplify the procedure for refunds of tax on income from buildings, by not imposing an obligation to issue a tax refund decision in the absence of doubts about the amount of the refund.
Amendments to regulations on tax haven transactions
The bill includes amendments to the regulations on tax haven transactions, which were introduced in 2021. The regulations aroused much controversy due to the very significant expansion of taxpayers' obligations to verify the beneficial owner of the payment for the purpose of determining the scope of tax documentation.
In the new version of the regulations, the obligation to document transactions in which the beneficial owner is a tax haven entity remains. However, it was proposed to move away from the construction of a presumption that if a counterparty of a Polish taxpayer enters into any transactions with tax havens, the beneficial owner of the payment is a tax haven entity. Instead, there are exemptions to the application of the obligation in certain cases.
The draft raises the documentation thresholds for direct and indirect tax haven transactions, which will make fewer taxpayers required to prepare documentation. For direct transactions, the threshold increases from PLN 100,000 to PLN 200,000. For indirect transactions, the basic materiality threshold remains at PLN 500,000, but for financial and commodity transactions it will be PLN 2.5 million. For domestic transactions, the possible documentation obligation for indirect tax haven transactions will be borne only by the entity receiving the receivable.
The draft allows for a retroactive application of the proposed solutions to transactions concluded in 2021.
The draft amendment is currently under consultation. Therefore, it may be subject to modification at later stages of legislation.