New Deal one step closer: new unprecedent “tax on revenues” and other key changes
On 1st October 2021 Polish Lower Chamber of Parliament (Sejm) approved a draft bill called “New Deal”. The proposed law will now be processed in the Higher Chamber (Senat). Ultimately it is expected that most of the new rules will enter into force as of 1 January 2022.
Despite the narrative, that it is a post-pandemic recovery tax package, the draft law provides for many changes in the area of corporate income tax as well as personal income tax, which ultimately may lead to increase of effective tax rate in Poland.
Below we present brief overview of the key tax changes which should be taken into account when discussing the 2022 and onwards tax settlements in Poland.
Unprecedent new “tax on revenues” in 4 key points
New Deal introduces a so called “tax on revenues” or “minimum tax”.
- The new tax will be levied on companies being CIT taxpayers and Tax Capital Groups:
- incurring a tax loss or
- whose tax income/revenue ratio is below 1%; for the purpose of ratio calculation, costs of development or acquisition of fixed assets, including depreciation write-offs will be excluded
Though the draft law provides for certain exclusions (see below), it does not limit the application of the new tax to companies above certain revenues threshold.
- The new tax rate would be 10%, whereas tax base would be calculated as:
- 4 % of company’s revenues (other than capital gains) plus
- sum of passive “excessive” expenses (in general intra-group financing intangible services and royalties costs as well as certain deferred tax assets positions)
- Exclusions could apply i.a. to financial institutions (specific CIT definition), companies benefiting from the special economic zones (but the scope of the exclusion is unclear), new business (for first 3 years), companies suffering 30% revenue drop down in the preceding year, companies with a simple ownership structure and companies paying the so called Estonian CIT.
- The “tax on revenues” can be deducted from a “standard” CIT.
New tax on so called “shifted profits” / “passed-on income”
The amendment is aimed at taxing “shifted profits”, i.e. costs incurred (directly or indirectly) towards related entities. The term “costs” in this case covers i.a. costs of intangible services (e.g. advisory, marketing, management), royalties, debt financing cost, costs related to transfer of functions, assets or risks (exit fee).
The tax on shifted profits would apply if the payment is made directly or indirectly to related party whose tax actually paid is 25% lower than the hypothetical tax which would be due in the case of application of 19% rate (standard Polish corporate income tax rate). Some additional conditions on how the received payments are allocated or treated for tax purposes by the recipient also need to be fulfilled.
The regulations are to apply if the costs of the above-mentioned costs payable to both related and non-related entities exceed 3% of the sum of tax-deductible costs in a given year.
Tax rate applicable to shifted profits is 19% and the tax burden lays on the Polish company making the payment.
The above would not be applicable to payments made to an EU / EEA based related company (i.e. UK and Swiss companies are not covered by this exclusion), if it conducts a “significant genuine business activity” although it is not fully clear how this should be interpreted with “direct/indirect” recipients.
Withholding tax – softening the regime but under conditions, 4 key changes
Narrowing the "pay and refund" mechanism
The WHT “pay and refund” mechanism (obligation to withhold the tax on payments exceeding PLN 2m/taxpayer/year irrespectively of EU Directives / DTT provisions):
- will be limited to payments to related entities (currently it applies also to non-related entities);
- will be limited to so called passive streams (e.g interest, dividends, royalties) and will not – as under current regulation - concern payments for intangible services (e.g. management);
- will not concern payments made between Polish tax residents.
WHT Advanced Tax Ruling
Application for advanced tax ruling (first mechanism allowing not to withhold tax on payments exceeding PLN 2m/year/taxpayer) will be also possible for payments benefiting from WHT exemption/ reduced rate under relevant double tax treaty (currently possible only for payments benefiting from WHT exemption under I/R and P/S Directives).
Management board statement
Management board statement (second mechanism allowing not to withhold tax on payments exceeding PLN 2m/year/taxpayer) will be signed according to the rules of the Polish remitter’s representation (currently it has to be signed by all MB).
New provision allowing to treat a given payment as subject to “pay and refund” mechanism, if it was not classified as such by a tax remitter without a valid economic reasons. The scope of this rule is uncertain, however it may potentially cover non-dividend type of transfers (e.g. buy-back) when company is in a dividend position.
The so-called “hidden dividend” is not to be tax deductible as of 1 January 2023
The draft announces regulations to prevent companies from distributing profits in the form of so-called hidden dividends to their shareholders or entities related directly or indirectly with the taxpayers or their shareholders.
The scope of the exclusion is very broad and has been highly critised during the legislative process. At this stage, a yearly vacatio legis for the provision has been set-up, meaninig it will enter into force as of 1 January 2023 and in the meantime its wording is supossed to be clarified and corrected.
New limits on financing costs
The safe harbour for debt financing costs limitation will be set at PLN 3m (c.a. EUR 600k) or 30% of tax EBITDA (and not PLN 3m + 30% EBITDA which is currently applied based on the wording of current provisions and their interpretation by administrative courts). In the worst-case scenario, the change would result in increase of non-tax deductible costs in PLN 3m PLN/annually (c.a. EUR 135k of tax leakage).
The costs of debt financing received from related entities for purchase or acquisition of shares / equity interest in other entity will be non-tax deductible.
No transitional provisions, which may put under discussions interest on loans already granted, are provided.
Depreciation of the real estate assets
New rules regarding depreciation in the real estate companies – an obligation to adjust tax depreciation rates to those used for accounting purposes; in case where for accounting purposes a given property is treated as an investment on which accounting depreciation write-offs are not made such treatment may result in no tax depreciation as well (in the current wording of the provisions the change is of revolutionary character and strongly disadvantageous to real estate companies).
Moreover, New Deal provides that residential properties will not be subject tax depreciation write-offs, however yearly vacatio legis (until 31.12.2022) will be applicable for properties acquired before 31.12.2021.
New rules concerning reorganizations
Polish New Deal provides for modification of rules concerning tax neutrality of certain reorganizations of Polish companies (spin-offs, mergers, share for share exchange) and also introduces a so called “exit tax” on cross-border reorganization.
Polish Holding Company – new regime, but strict rules to enter
Under Polish Holding Company regime, Polish company could enjoy i.a. participation exemption on the disposal of shares in a domestic or foreign (non-real estate) subsidiary and exemption of 95% of inbound dividends. However, project provides for several conditions concerning both the holding company and its subsidiary that should be fulfilled to benefit the regime.
Changes is taxation of employees revenues
Elimination of the possibility of deducting health insurance contribution from tax – as for now part of paid health insurance contributions (7.75%) is a tax-deductible item. In case of implementation of discussed change, tax liability ,as well as costs of remuneration (on a monthly and annual basis), will be increased.
Tax relief dedicated to employees – to be applied on a monthly and yearly basis. Said relief will be applicable for monthly gross remuneration up to 11,5k PLN.
Increase of tax-free amount – up to 30 000 PLN yearly.
Increase of tax threshold – up to 120 000 PLN yearly (higher tax rate of 32% will be applied to the annual cumulative income exceeding the level of PLN 120 000 instead of PLN 85 528).