2021 brings a number of changes in tax and legal regulations. Apart from the widely discussed changes in the field of VAT reporting, no less significant changes concern income taxation, which will essentially affect the profitability of entrepreneurs and investors operating in Poland. In addition to crucial changes to the concept of certain legal forms taxation, a number of amendments were introduced to clarify the existing provisions. New regulations also show positive changes for taxpayers, such as an increase in the limit allowing the application of a reduced tax rate or extending the deadlines for applying the exemption from tax on income from buildings.
In case of doubts or questions, our experts will be happy to explain the intricacies of the new regulations.
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Limited partnerships and General partnerships as a CIT taxpayer in 2021
The amendment introduces treatment of limited partnership having their registered office or management in the territory of Poland as a corporate income tax taxpayer. With respect to general partnerships, CIT taxation will be imposed in the case when at least one partner is not natural person or all partners having profit share are not disclosed to the tax authorities.
Limited partnership is so-called tax transparent company. This means that income is taxed only at the level of the partners and not the company itself. In other words, limited partnership is not a taxpayer, income is attributed proportionally to the partners and they are liable to pay the income tax.
Recognition of a limited partnership as a CIT taxpayer will significantly reduce the attractiveness of this legal form, what is more, this procedure is in a certain extend contradiction to its very concept, which should combine the features of a partnership and a capital company. The introduced change will undoubtedly constitute an impulse for a number of capital restructuring and relocation of investments.
Taxation of partners
The regulations provide for mechanisms which, according to the explanatory memorandum to the draft act, were to eliminate the negative effects of double taxation. In this respect, limited partners are treated differently than general partners.
The exemption will apply to amounts corresponding to 50% of the revenues obtained by the limited partner from the share in the profits of the limited partnership, but not more than PLN 60,000. The limit is to be calculated separately for each limited partnership in which the taxpayer is a limited partner.
This exemption is not applicable to limited partner which:
- Holds directly or indirectly at least 5% of shares (stocks) in a company with legal personality or a capital company in an organization being a general partner in this limited partnership.
- Is a management board member of:
- A company with legal personality or a capital company in organization being a general partner in this limited partnership, or
- A company with legal personality or a capital company in organization being a general partner in this limited partnership, or
- A company owning directly or indirectly at least 5% of shares (stocks) in a company with legal personality or a capital company in an organization being a general partner in this limited partnership, or
- Is a related entity with a member of the management board or a partner of a company holding directly or indirectly at least 5% of shares (stocks) in a company with legal personality or a capital company in an organization being a general partner in this limited partnership.
The issue of general partner’s taxation is regulated separately. Pursuant to the new regulations, it will be possible to deduct the amount of tax paid by this partnership from the income tax calculated on the income from the share in the limited partnership’s profits. Deduction shall be done proportionally encumbering the general partner’s profit obtained from the participation in such a partnership. This means that in practice the general partner will receive a tax credit corresponding to the amount of tax paid by the partnership on the profits to which he is entitled. As a rule, this mechanism will eliminate double taxation, but only in an ideal situation when both the limited partnership and its partner show no tax loss.
Timing of changes
It should be emphasized that taxpayers can decide on their own whether the new taxation rules will apply from January 1st, or from May 1st, 2021. The choice of a later date means that the financial year lasting in 2020 will be extended until the end of April 2021.
Real estate company definition and taxation of share sale
Definition of Real Estate Company
The amendment introduces the definition of a Real Estate Company. It is an entity other than a natural person, obliged to prepare a financial statement based on the provisions on accounting, in which:
- As at the first day of the tax year, and if the Real Estate Company is not a taxpayer of income tax – as at the first day of the financial year, at least 50% of the market value of assets, directly or indirectly, was the market value of real estate located in the territory of the Republic of Poland or rights to such real estate and the market value of these properties exceeded PLN 10,000,000 or the equivalent of this amount – in the case of entities starting their activity
- As at the last day of the year preceding the tax year, and if the Real Estate Company is not a taxpayer of income tax – as at the last day of the year preceding the financial year, at least 50% of the balance sheet value of assets, directly or indirectly, was the balance sheet value of real estate located in the territory of the Republic of Poland, or rights to such real estate and the balance sheet value of these real estate exceeded PLN 10,000,000 or the equivalent of this amount
- If the Real Estate Company is not a taxpayer of income tax – revenues included in the net financial result, from rental, sublease, lease, sublease, lease and other contracts of a similar nature or from the transfer of ownership the subject of which are real estate or rights to real estate, and from shares in other Real Estate Companies, constituted at least 60% of total revenues, respectively, included in the net financial result.
New taxation rules
From January 1st, 2021, the taxation will change in the event of the sale of shares or stocks in this type of companies, if one of the parties to the transaction is an entity without a registered office or management board in the territory of the Republic of Poland. In such a case, the company itself will be obliged to pay 19% income tax to the tax office by the 20th day of the month following the month in which the income was generated.
If the Real Estate Company does not have information about the amount of the transaction, the tax due is determined at the level of 19% of the market value of the shares to be sold, all rights and obligations, participation title or rights of a similar nature.
In addition, certain entities will be obliged to provide the Head of the National Revenue Administration by the end of the third month after the end of the Real Estate Company’s financial (or tax) year, information:
- About entities holding, directly or indirectly, in this Real Estate Company shares (stocks), units or rights of a similar nature, together with the number of such rights held by each of them – in the case of information provided by Real Estate Companies
- About the number of shares (shares), units or rights of a similar nature owned, directly or indirectly, in this Real Estate Company – in the case of information provided by taxpayers who are partners of Real Estate Companies
As of the last day of the tax year of the Real Estate Company, and if the Real Estate Company is not a taxpayer of income tax – on the last day of its financial year.
Tax strategy reporting obligation
From 1st January 2021, certain entities will be required to publish a report on the implementation of the tax strategy on their website.
The obligated entities will be:
- Tax capital groups
- Taxpayers whose revenues in the tax year exceeded the equivalent of EUR 50,000,000
- Real Estate Companies.
Failure to submit the report will be subject to a fine of up to PLN 1,000,000.
The report will have to be published by the end of the twelfth month following the end of the tax year.
Data to be reported
According to the amendment, the report will include:
- Description of the taxpayer’s approach to:
- processes and procedures for managing the performance of obligations under tax law and ensuring their proper performance
- voluntary forms of cooperation with the bodies of the Tax Administration.
- A description of the taxpayer’s approach to the fulfillment of tax obligations in the territory of the Republic of Poland, along with information on the number of information on tax schemes provided to the Head of the National Revenue Administration – MDR.
- Information about:
- transactions with related entities, where the value exceeds 5% of the balance sheet total of assets
- restructuring activities planned or undertaken by the taxpayer that may affect the amount of tax liabilities of the taxpayer or related entities.
- Information about submitted applications for:
- general tax interpretation
- interpretation of tax law
- binding rate information
- binding excise information.
- Information on making tax settlements for the taxpayer in countries applying harmful tax competition – excluding information covered by trade, industrial, professional or production secrets.
Limitation of tax loss settlements
The amendment provides for the extension of the catalogue of events that make it impossible to settle tax losses when taking over other entities.
As indicated in the justification, there are cases of tax optimization involving the acquisition by a loss-making entity that does not predict the possibility of producing profit in subsequent years, and thus utilizing the losses against the revenue of taken over entity. According to the Tax Authorities, some of these activities are carried out only to benefit from the tax and without any business justification.
Conditions of tax loss recognition
Starting from 2021, it will not be possible to offset the losses of the acquiring entity with the income of the acquired entity, enterprise or organized part of the enterprise if:
- The subject of the actually conducted basic business activity by the taxpayer after such takeover or acquisition, in whole or in part, was different than the subject of the actually conducted basic business activity by the taxpayer before such takeover or acquisition, or
- At least 25% of the taxpayer’s shares (stocks) are owned by an entity or entities that did not have such rights as at the end of the tax year in which the taxpayer suffered such a loss.
Taxation of in kind liquidation dividend
Tax on in kind settlement of liability
Polish CIT Act provides for a regulation which limit possibilities of tax optimization. The mechanism refers to settling the liabilities in kind. It provides that if the liability is satisfied by non-cash benefit, when its market value exceeds the value of the liability, this market value should be subject to taxation in the hands of the debtor.
This rule should eliminate the situation when the liability, for example due to dividends, is satisfied by delivering goods with a value exceeding its nominal value, while the nominal value of the dividend is subject to taxation.
Starting from 2021 these regulations will be also applicable to the liquidation dividend settled in kind.
Changes in the transfer pricing obligations
The act provides for the following changes to the transfer pricing regulations:
- No obligation for the taxpayer to have a declaration of a related entity about the fact that this related entity has made a transfer pricing adjustment in the same amount as the taxpayer – for the duration of the state of epidemic threat and state of epidemic announced in connection with COVID-19
- Extension of the catalog of entities exempt from the obligation to prepare transfer pricing documentation to include entities whose revenues in the fiscal year affected by the COVID-19 crisis fell by at least 50% in relation to the total revenues obtained in the corresponding period preceding this year.
As part of the package of changes concerning transfer pricing, the provisions on transactions with tax havens are also modified. The key changes in this area concern:
- Extending the scope of transaction value estimation, in particular to non-controlled transactions, if the beneficial owner has a tax residence in the tax haven
- Extending the scope of transactions requiring documentation, in particular:
- uncontrolled sales transactions as a result of which the payment of receivables from the so-called tax haven
- controlled or non-controlled transactions, if the beneficial owner has tax residence in a tax haven
- Extending the scope of the elements required in the local transfer pricing documentation for transactions with tax havens to include economic justification and a benefit test (description of expected economic benefits)
- Increasing the value of the transaction amount obliging to prepare transfer pricing documentation from PLN 100,000 to PLN 500,000.
Exemptions and benefits
Preferential tax rate
According to hitherto regulations CIT taxpayers having revenues below equivalent of EUR 1,200,000 can benefit from diminished 9% CIT rate instead of 19%. Introduced regulation increase the limit of revenues to EUR 2,000,000 per annum.
Extension of the validity of the exemption from tax on income from buildings
Polish tax regulations impose additional income taxation to the entities deriving income from commercial buildings. The amendment provides for the extension of the deadline for using of the exemption from tax on revenues from buildings also in the event that after December 31st, 2020, the state of the Covid-19 epidemic is still in force.