Tax reform bill contains measures affecting businesses
Poland’s lower house of parliament passed an extensive package of tax measures on 1 October 2021 as part of the “Polish Deal,” which is designed to help the country recover from the economic effects of the COVID-19 pandemic, attract investment and close loopholes in the tax law. Measures that will affect businesses include the following:
- Introduction of a minimum tax on certain large corporate taxpayers;
- Relaxation of the requirements for the alternative lump-sum corporate taxation regime;
- Introduction of a holding company regime;
- Changes to the transfer pricing rules;
- Changes to the collection of withholding tax;
- Allowing certain investors to conclude an “investment agreement” with the Polish Ministry of Finance; and
- Introduction of VAT grouping rules.
The package has been sent to the upper house of parliament for debate, and is expected to be adopted by 30 November 2021. The measures are slated to become effective on 1 January 2022.
New minimum tax on companies
A minimum corporate income tax of 10% would be levied on companies that incur tax losses on operating activities or report a tax profitability ratio of less than 1%. The following companies would be subject to the minimum tax:
- Polish resident companies, i.e., companies established in Poland or that are managed and controlled in Poland and are subject to taxation on all of their income, irrespective of where the income is sourced;
- Polish tax groups, which may only be formed by limited liability companies or joint stock companies established in Poland; and
- Nonresident taxpayers conducting business activities through a permanent establishment (PE) in Poland to the extent revenue and losses are connected with the activities of the PE.
The tax base for purposes of the minimum tax would be the sum of the following:
- 4% of revenue from sources other than capital transactions;
- Related party debt financing costs that exceed a prescribed threshold;
- The value of deferred tax assets resulting in an increase in gross profits or a decrease in net losses; and
- A portion of the costs of the acquisition of certain intangible services or rights (e.g., advisory services, market research, advertising services, management and supervision, etc.) incurred directly or indirectly for the benefit of related entities that have their place of residence, registered office or management in a tax haven (as defined in Polish law).
The following taxpayers would be excluded from the application of the minimum tax:
- New companies, i.e., companies in their first three years of operation;
- Financial enterprises, i.e., domestic banks, credit institutions, cooperative savings and credit unions, etc.;
- Taxpayers that report at least a 30% decrease in revenue compared to revenue generated in the immediately preceding year; and
- Entities with a simple organizational and legal structure, i.e., those whose shareholders or members are individuals and the taxpayer company does not hold shares in the capital of another company, participation units in an investment fund or a joint investment institution.
The amount of minimum income tax paid in a year would be deductible in computing the corporate income tax liability for the year.
Relaxation of requirements for “Estonian CIT” regime
Changes would be made to the alternative system of taxation, i.e., the lump sum tax on the income of companies, often called the “Estonian CIT.” Under Estonia’s corporate income tax system, tax is not payable on current profits generated from business operations; instead, collection of tax is deferred until the company distributes dividends to its shareholders, thus incentivizing companies to invest and expand operations. Poland introduced an Estonian CIT-type regime on 1 January 2021, which allows limited liability companies and joint stock companies to elect to benefit from taxation on distributed income rather than be taxed under the normal Polish corporate income tax system, provided specific requirements are met.
The tax package would expand the scope of the regime and relax the requirements to qualify for lump sum taxation, as follows:
- All companies subject to corporate income tax would be able to benefit from the regime, as would limited partnerships and limited joint stock partnerships.
- The revenue thresholds that limit access to lump sum taxation would be eliminated so that companies would be able to use this form of taxation regardless of how much income they generate (currently, lump sum taxation is available only to entities whose revenue does not exceed PLN 100 million).
- The requirement that the taxpayer incur certain capital expenditure would be abolished (under existing rules, the taxpayer generally must incur direct capital expenditure exceeding 15%, but no less than PLN 20,000 over two consecutive tax years of the lump sum taxation, or 33%, but no less than PLN 50,000 over four tax years).
- The lump sum tax rates would be reduced from 15% for small taxpayers to 10% and from 25% to 20% for other taxpayers. The normal corporate income tax rates are 9% and 19%.
Holding company regime
A new holding company regime would be introduced that would be available to Polish holding companies with domestic or foreign subsidiaries. Under the regime, 95% of dividends received by a qualifying holding company would be exempt from corporate income tax (with the remaining 5% taxable) and 100% of capital gains from the sale of shares in subsidiaries would be exempt. A holding company should be in the form of a limited liability or joint stock company and to qualify for the regime, the holding company would have to hold at least 10% of the subsidiary’s shares for at least one year. Certain anti-avoidance rules would apply.
Transfer pricing rules
Several changes are proposed to the transfer pricing rules, including the definition of a related party, transfer pricing adjustments, the safe harbour, preparation of the local file and other documentation and information reporting.
Collection of withholding tax
Changes would be made to the rules governing the collection of withholding tax on payments of passive income, including a tightening of the scope of the withholding tax refund procedure, a broadening of the scope of clearance opinions to obtain benefits under applicable tax treaties (e.g., reduced withholding tax rates or exemptions from withholding tax) and modifications to the rules governing payments made via entities that maintain securities and omnibus accounts, payments from State Treasury bonds and payments to Polish PEs of foreign entities.
Poland made significant changes to its withholding tax rules in 2019, including the introduction of a requirement that the payer withhold tax at the full statutory rates of 19% and 20% rather than grant relief in the form of a lower tax rate or an exemption at the time of payment, and a tax refund procedure. However, application of these rules has been suspended so the “pay and refund” system has not yet come into effect.
No changes would be made to applicable thresholds, i.e., tax will have to be withheld if the total payments exceed PLN 2 million. The remitter is required to collect tax at the applicable Polish rate and the recipient of the income can request a refund to the extent collection of tax results in double taxation. This occurs in one of two ways: (i) if no tax is paid, the income recipient submits a declaration of eligibility for an exemption or obtains a clearance opinion; or (ii) if tax has been paid and the income recipient wants to recover the tax, it may submit an application for a refund.
The proposed changes would allow a taxpayer to obtain a clearance opinion to qualify for the application of a tax exemption or reduced rate under an applicable tax treaty at the time the payment is made. An opinion would be able to be requested by the income recipient, the Polish payer or an entity that makes payments via entities that keep securities accounts. The application would have to be made electronically and, if approved, would be valid for three years.
To encourage and increase the flow of domestic and foreign investment and to streamline various procedures, certain investors would be able to conclude an agreement with the Polish Ministry of Finance on the tax effects of a planned project or a project that has already commenced. To qualify for the investment agreement, the investment would have to be at least PLN 100 million during the period 2022-2024 and PLN 50 million as from 2025.
An investment agreement would provide certainty to the investor about the tax consequences of its project. Currently, investors wishing to obtain legal protection of planned projects have to approach various authorities and submit various applications for the issuance of administrative acts (e.g., tax rulings, binding rate information, opinion on collateral, etc.). The investment agreement would replace all such acts, thus streamlining the process.
The conclusion of an investment agreement would be optional for the investor and the Polish tax authorities. An application submitted by a potential investor would not require the tax authorities to conclude an investment agreement, and the investor would be permitted to amend or withdraw its application at any time. The investment agreement would be binding on the investor, the tax authorities and any other relevant authority for the periods covered by the agreement.
Creation of VAT groups
The tax package also provides for the introduction of VAT grouping in Poland by entities that are financially, economically and organizationally connected. For detailed coverage of the proposed VAT group rules, see the article in the October 2021 issue of BDO’s Indirect Tax News.