On 29 October 2021, the Polish Parliament accepted the so-called Polish New Deal Package. The act is awaiting the President’s signature and publication in the official journal – but no turnarounds are expected at this point.

Most of the changes will enter into force as of January 2022 and will impact (in “minus” but also sometimes in “plus”):

  1. Effective taxation of employees
  2. Effective taxation of self-employed persons
  3. Effective taxation of companies, in particular those making intra group payments or operating on low margins.

Below we present an executive summary of the key changes. It is worth noting that the amendments to the tax law are very broad and cover almost 300 pages – so careful analysis of the tax implications is required.

Key changes for employees and self-employed cover:

  1. Elimination of the possibility of deducting health insurance contribution from tax
    • Under the current rules, paid health insurance contributions (7.75%) are a tax-deductible item, and the amount is not related to the amount of income
    • As of 1 January 2022, this will become non-deductible and the amount will vary:
      • employees and self-employed on a progressive tax rate (17% and 32%): 9% on income
      • self-employed taxed with a 19% flat rate - 9% of minimum wage (for income up to approx. EUR 1.2k / month) and 4.9% on income
      • self-employed taxed with lump sum tax: between 60%-180% of the average wage (income “brackets” applicable).
  2. Increase of the minimum tax-free amount and an income “bracket” for a higher 32% tax rate
    • As of 2022, employees and self-employed taxed with a progressive tax rate (17% and 32%) will be able to enjoy:
      • a PLN 30k (approx. EUR 6.5k) tax free amount (currently at the level of approx. EUR 1.5k)
      • higher income bracket to enter a 32% PIT tax rate (approx. EUR 26k instead of approx. EUR 18k)
      • moreover, this group will also benefit from so the called “middle class relief” – a special type of relief introduced to mitigate the impact of non-deductibility of insurance contribution. The relief is directed towards persons earning between c.a. EUR 14,5k – EUR 29k per year.

What does it mean?

Employees and those entering into B2B contracts should be prepared for higher wages pressure – effectively, the public burden will increase by up to 6-8%. The timing of the  changes is highly unfortunate as it overlaps with one of the highest inflation rates in Poland for decades. Firms should therefore consider changes or options that may mitigate this impact (in particular, use of a lump sum tax regime or review of parts of remuneration that potentially could be outside the scope of new limitations or subject to specific deductions).commented by Michał Wodnicki

Key changes for business

  • Tax on revenues

The 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 loss / ratio calculation, costs of development or acquisition of fixed assets, including depreciation write-offs, are not taken into account.

Though certain exclusions are provided (see below), there is no limitation of application of the new tax to companies above a certain revenue threshold.

The new tax rate is 10%, whereas the tax base is calculated as:

  • 4% of the company’s revenue (other than capital gains), plus
  • the sum of passive “excessive” expenses (in general, intra-group financing, intangible services and royalty costs, as well as certain deferred tax assets positions).

Exclusions can apply, i.a. to financial institutions (specific CIT definition), companies benefiting from Special Economic Zones / Polish Investment Zone (but the scope of the exclusion is unclear), new businesses (for the first three years), companies suffering 30% revenue drop 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 “standard” CIT.

  • Intragroup transactions and reorganizations

Companies making intragroup payments should, in particular, pay attention to certain new rules that could influence their tax effectiveness. These concern namely:

  • 19% tax on so-called “shifted profits”
    • due from a PolCo making payments directly or indirectly to a group for i.a interest, royalties and intangible services. The new rule and subsequent conditions (for being in-scope or out-of scope) are highly vague and require careful case-by-case analysis.
    • Still if a “significant genuine business activity” requirements at the payment recipient level are met, payments could be shield against application of the new law. However, this only concerns payments made to EU/EEA based companies.
  • Polish remitters may be obliged to collect 19% or 20% WHT under a new “Pay and Refund” procedure irrespective of the relevant wording of double tax treaties or implemented EU Directives.
    • The “Pay and Refund” mechanism could apply to payments made to related parties for interest, royalties or dividends and would be applicable on the excess of approx. EUR 400k per taxpayer / per year. For certain payments (irrespective of their value), a business substance based definition of beneficial owner could apply.
    • A switch-over rule to treat certain payments as “in-scope” is also provided, and may, i.a. concern certain dividend-like income distributions or payments made for intangible services.
    • Due diligence of the tax remitter will be necessary to maintain to benefit from any WHT tax relief, but for payments subject to the “Pay and Refund” procedure, WHT relief will only be possible provided that a specific tax ruling is obtained, or Board members sign a specific statement – under pain of fiscal penal sanctions.
  • Tax neutrality of reorganization
    • New provisions will make maintaining tax neutrality of reorganizations for its shareholders challenging. Under the new rules, only the “first” in chain share for share exchange, spin-off or merger can be tax neutral. The final impact on cross-border operations should be also analyzed in light of double tax treaty provisions.
  • Deductibility of financing costs – new restrictions
    • The safe harbor for debt financing costs limitation will be set at PLN 3m (approx. 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 an increase of non-tax deductible costs in PLN 3m annually (approx. EUR 135k of tax leakage).
    • The costs of debt financing received from related entities for financing directly or indirectly of broadly understood “capital transactions” (e.g. purchase or acquisition of shares / equity interest in other entity) will be non-tax deductible.
    • No transitional provisions are provided, which may put under discussion interest on loans already granted.
    • “Hidden dividend” distributions:
    • The new law provides for regulations to prevent companies from distributing profits in the form of so-called hidden dividends to entities related directly or indirectly with the taxpayers or their shareholders.
    • The scope of the exclusion is very broad and has been highly criticized during the legislative process. At this stage, a yearly vacatio legis for the provision has been set, meaning it will enter into force as of 1 January 2023, and in the meantime its wording is supposed to be clarified and corrected.
  •  New rules regarding depreciation in real estate companies
    • The new law provides for an obligation to adjust tax depreciation rates to those used for accounting purposes; in the 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, the New Deal provides that residential properties will not be subject to tax depreciation write-offs, however a yearly vacatio legis (until 31 December 2022) will apply for properties acquired before 31 December 2021.

What does it mean?

Companies, especially when making intragroup and in particular (but not exclusively) IC outbound payments will have to carefully analyze their tax effectiveness and safety. CIT Law already provides for many rules that may increase effective tax rate on such payments (e.g. ATAD 2, GAAR, anti-debt push down limitations) which may interfere and overlap with new rules. All together may increase the effort to maintain current effective tax rate. commented by Paweł Toński

Changes that can bring additional tax savings

Despite the rather negative narrative surrounding the Polish New Deal, its provisions also provide for certain new tools that if applied can result in additional tax savings, limitation of the compliance burden or increase of tax certainty.

  • New opportunities for tax consolidation, i.e.: (i) introduction of the VAT Groups regime with benefits such as pooling the VAT results and limitation of the compliance burden within the group, (ii) loosening requirements for the set-up and operation of a Tax Consolidation Group for CIT purposes (what may be also beneficial in terms of “revenue tax”)
  • Removal of the provision limiting deduction for tax purposes of payments for certain intangible services and royalties (currently to the limit of approx. EUR 600k + 5% EBITDA) – the change is in general positive, one should note however that the same payments (but limited to IC costs) are included in the tax basis for “revenue tax”
  • New tax incentives for companies that implement certain innovations, g.: (i) R&D relief (additional deduction between 100%-200% of eligible costs), (ii) automation relief (additional deduction up to 50% of eligible costs), (iii) prototype relief (additional deduction up to 50% of eligible costs), relief for hiring so-called “innovative employees”
  • Additional tax reliefs related to, i.a. CSR type of payments, increased deduction of IPO/VC costs or costs incurred for increased sales of products
  • Polish Holding Company regime, which may benefit in the participation exemption on sale of shares in a Polish or foreign subsidiary
  • New tax certainty tool being an Investment Agreement, which may cover up to five separate tax instruments in one document. The Investment Agreement will be available for eligible investors making investments valued over EUR 21m (above EUR 10m after 2025).