Minimum tax and substance carve-out concept – the Polish angle on the OCED’s Pillar 2
The OCED is currently working on the so-called minimum tax (also known as Pillar 2 or GLoBE). Under the minimum tax concept, an MNE with a consolidated income of over EUR 750 m, would be obliged to pay a so-called minimum tax (as a top up to the minimum rate) on its controlled company’s or branch’s income, which is subject to an effective tax rate (“ETR”) lower than (probably) 10-12%. In practice it would be the ultimate mother company (the HQ) that would include such income in its jurisdiction and pay the minimum tax.
It is not yet known what would be: (i) the rate of the minimum tax and (ii) to what extent blending of low and high tax income would be permitted, and at what level (e.g. worldwide, jurisdictional or entity only). The OCED’s working group meetings are now focused on developing a carve-out, as well as thresholds and exclusions for minimum tax purposes, i.a. so-called “substance carve-out”. The goal of the “substance carve-out” is to safeguard that income of taxpayers having an ETR lower than assumed, who fulfill certain conditions regarding their economic substance, will be excluded for minimum tax purposes.
Poland is also an active member of this discussion as adopting a minimum tax without substance-based curve-outs may jeopardize the effectiveness of tax incentives applied in Poland, such as special economic zones (CIT exemption for the SEZ income), the IP BOX regime, R&D relief, and others.
In practice, the lack of such carve-out could mean that income of a Polish subsidiary whose ETR is low due to, e.g. SEZ exemption or IP BOX 5% CIT rate, should be allocated to its HQ’s jurisdiction, and taxed there with the minimum tax.
It is expected that more details of the OCED’s solutions on Pillar 2 will be revealed this autumn, but in the meantime it may be worthwhile reviewing the local ETRs to assess the potential impact of the changes.
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