A draft amendment to the CIT Law has been published, which is a modification of the regulations effective from January 2022. Below we present the most important assumptions of the planned changes to the Polish Deal 2.0.
Modification and postponement of the entry into force of the minimum income tax rules
The proposed amendments provide that the minimum income tax rules will be suspended for one year (i.e. from 1 January 2022 to 31 December 2022). They would consequently only start to apply from 2023. In addition, the legislator foresees changes in the construction of the tax itself, in particular:
- The profitability index will be increased from 1% to 2% and at the same time the methodology for its calculation will be changed. There will not be taken into account:
- tax deductible costs being the payment under a fixed asset lease agreement
- revenues being the value of trade receivables sold to entities in the factoring industry, and
- excise duty.
- The calculation of the minimum income tax will change. Currently, the levy is 10% of an amount equivalent to 4% of the value of income other than capital gains and passive expenses (concerning i.a. debt financing and intangible services). The draft does not change the tax rate – still 10%. However, there will be two alternative methods from which the taxpayer can choose the more favourable one. The basis, depending on the taxpayer’s preference, will be either 4% of the value of revenues or 2% of revenues plus passive costs.
- Among others, municipal companies, medical entities, small taxpayers, entities in bankruptcy or liquidation and those whose profitability in one of the last 3 tax years was above 2% will not be subject to minimum CIT at all.
Amendment of the regulations on foreign controlled entities (CFC)
The modifications to the CFC are based on 3 pillars:
- Eliminating double or multiple taxation of CFC when cascading dividends in holding structures
- Clarification of the rationale for the high profitability of a foreign entity relative to the assets held in case of potential disposal of assets during the year
- Clarification of the definition of a subsidiary.
Amendments to the rules on taxation of flipped income
The aim of the proposed solutions is to eliminate the doubts raised by the business community by i.a.:
- To include in the scope of the tax on flipped income only costs that are deductible
- Clarification that the related entity for which the costs are incurred does not have its registered office or central administration in the territory of the Republic of Poland
- Clarification of the condition concerning 50% of the revenue generated by a related entity and the condition concerning the transfer of revenue to another entity (at least 10%)
- Simplification of the condition relating to preferential taxation in the country of residence, management, registration or location of the related party.
Changes to withholding tax (WHT)
The new rules aim to ease the WHT mechanism in force from 1 January 2019 by:
- Exclusion of the application of certain obligations of broadly understood payers with regard to withholding tax on interest and discount on treasury securities (treasury bills and treasury bonds) by extending the material scope of the non-resident taxpayer exemption from income tax to include also treasury bills and bonds offered in the domestic market
- In addition, the validity of a declaration by the board of directors that, in the exercise of due diligence, the payer was not aware of circumstances preventing the application of a lower withholding tax rate or tax exemption (provided for in an international double tax treaty) is to be extended. Such a statement is to be valid for seven months instead of only three months as at present.
Amendment of the rules on debt financing costs
As regards tax treatment of debt financing costs, the Ministry intends to eliminate interpretation doubts reported by taxpayers. This includes a clear indication that the amount of PLN 3 million or 30% of EBITDA – whichever is higher – will be excluded from tax costs. In addition, the provisions on debt financing costs will not apply:
- Where the financier of the equity transaction is a bank or cooperative savings and credit union established in an EU or EEA country
- In the case of debt financing granted to acquire or take up shares or all rights and obligations in entities unrelated to the taxpayer.
Modifications to the polish holding company (PSH)
The changes are also to apply to holding companies – a new institution, effective from 2022:
- The right to exempt 100%, and not as at present 95%, of the dividend income received from subsidiaries. In parallel, the holding company will be able to take advantage of the dividend exemption under EU Directive 2011/96/EU (Parent Subsidiary Directive) – this is not currently possible
- It will be possible to benefit from both types of preferences, even if domestic subsidiaries benefit from an exemption from income from activities carried out in a special economic zone or under a support decision. Obecnie takiego prawa nie mają ani one, ani spółka holdingowa. Currently, neither they nor the holding company have such a right
- Introduction of a new definition of domestic subsidiary and foreign subsidiary.
The aim of all these changes is to allow more entities than before to benefit from holding exemptions.
Amendments to the rules on flat-rate taxation of company profits
Changes are also envisaged in the provisions on flat-rate corporate income, commonly known as Estonian CIT. The legislator plans to:
- Introduce modifications to the way income from non-business expenses is determined when assets (e.g. cars) are used for business and other non-business purposes
- Amend the deadline for filing a notice of election to tax companies’ income on a flat rate basis (ZAW-RD). This will be done by the end of the first tax year in which the taxpayer wishes to apply this method of taxation
- Clarify the condition for extinguishing a tax liability for a preliminary adjustment, i.e. a temporary difference between tax and accounting results, Once the changes have been implemented, it will be clear that the obligation will lapse in full after at least one full flat tax period, i.e. four tax years
- Modify the deadline for payment of the tax due on the income from the transformation (unambiguous indication that if the tax on the income from the transformation is paid in full, the taxpayer is obliged to pay the tax by the deadline for submission of the CIT-8 return for the tax year preceding the first year of flat-rate taxation)
- Modify the deadline for the payment of a flat rate on distributed profit income and income from profit to cover losses (also applies to advances on anticipated dividends) and a flat rate on distributed net profit income.
Amendment of the rule on the procedure for the refund of tax on income from buildings
From June 2022, commercial property owners will pay building revenue tax again. This is a result of the abolition of the epidemic status from 16 May 2022.
The procedure for refunding tax on income from buildings will be changed. The legislator plans to specify that the tax will be refunded without the need for a decision when the amount of the refund is not in doubt.
Amendment of the rules on the documentation obligation in respect of “haven transactions”
The amendments are to address the rules on direct and indirect haven transactions:
- Elimination of presumption of residency of beneficial owner in tax haven
- New reporting limits for indirect tax haven transactions:
- PLN 2,500,000 – goods
- PLN 2,500,000 – financial
- PLN 500,000 – other (“basic threshold”)
- Further emphasis on the role of the statement as “sufficient to verify the documentation obligation”
Having regard to the above regulations, which are planned to be introduced by the Ministry of Finance, it should be unequivocally stated that taxpayers will have to face further radical changes, which will significantly affect business operations. We will keep you informed about the stage of legislative work on the bill amending the CIT Act and about the presentation of further detailed solutions in this respect.
