Sign up for tax alert emails    GTNU homepage    Tax newsroom    Email document    Print document    Download document

October 4, 2021
2021-6015

Poland plans to limit tax deductibility of payments considered hidden dividends

Executive summary

Representatives of the Polish Government, on 8 September 2021, submitted draft legislation to the Polish Parliament on the major tax reform referred to as the “Polish Order." The changes would affect several areas of taxation including Corporate Income Tax (CIT), Personal Income Tax (PIT), and Value Added Tax (VAT). The majority of the provisions are expected to come into force as of 1 January 2022.

One of the significant changes proposed under the Polish Order is limiting the tax deductibility of payments classified as “hidden dividends.”

For an overview of other proposed amendments, see EY Global Tax Alert, Poland: Major tax reform proposal moves to Parliament, dated 17 September 2021.

Detailed discussion

According to the draft proposal, payments classified as “hidden dividends” would not be tax deductible for Polish CIT purposes. According to the legislative explanation, the intention of the new regulations is to prevent the tax deductibility of payments which economically are profit distributions.

According to these new provisions, costs incurred by a corporate taxpayer in relation to a service or other performance provided by a related entity (not only a shareholder though) can be disallowed for CIT purposes if they are determined to constitute hidden dividends.

These costs would be regarded as the hidden dividends if one of the following conditions is met:

  • The amount and/or timing of the payment are dependent on the profit earned.
  • A taxpayer acting reasonably would not incur such costs or would incur them in a lower amount if the benefit was provided by a non-related entity.
  • These costs comprise remuneration for the right to use assets which were owned by the shareholder or an entity related to the shareholder prior to establishing the paying entity.

However, fulfilment of the tests under the second and third bullets above can be waived, if the total amount of costs regarded as the hidden dividends (based on these two bullets) in a given tax year is lower than the amount of gross profit (based on the accounting provisions) generated in a financial year in which these costs were included in the taxpayer’s financial result.

Next steps

The draft legislation will now be discussed in the Polish Parliament and it is likely that the effective date for rules regarding hidden dividends will be postponed until 1 January 2023.

However, as the potential impact could be very broad, including on payments and arrangements under genuine business operations, taxpayers should begin to assess the impact on affected entities and determine the action to be taken.

_________________________________________

For additional information with respect to this Alert, please contact the following:

EY Doradztwo Podatkowe Krupa sp.k., Warsaw

EY Doradztwo Podatkowe Krupa sp.k., Wroclaw

Ernst & Young LLP (United States), Polish Tax Desk, New York

Sylwia Migdal | sylwia.migdal1@ey.com

 
 

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

 

Copyright © 2024, Ernst & Young LLP.

 

All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.

 

Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

 

"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

 

Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct