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July 7, 2022
2022-5641

Poland proposes significant changes to Corporate Income Tax law

Executive summary

On 28 June 2022, the Polish Government announced draft legislation implementing changes to the Polish Corporate Income Tax law. The proposed changes affect several areas of taxation, however, most of them are related to areas which were covered by the latest reform implemented as of 1 January 2022.

The potential impact of the proposed changes, including the areas where the 1 January 2022 tax reform has not yet become effective, should be assessed by businesses in order to prepare for change and undertake the necessary actions.

Detailed discussion

The draft legislation impacts the following areas:

  • Tax deductibility limitations regarding so called “hidden dividends” that were supposed to be in force as of 1 January 2023 will not be implemented
  • The effective date of the new “minimum tax” is postponed to 1 January 2023 (or until the end of a taxpayer’s tax year that started during 2022) and there are changes in its specific provisions, including:
    • The minimum profitability ratio providing for an escape clause from the minimum tax is increased from 1% to 2%
    • Several new types of payments are excluded for the purpose of the profitability ratio calculation (e.g., fixed assets lease payments, revenues and costs related to sale of receivables under factoring arrangements, revenues and costs corresponding to excise duty and year-to-year increase in payroll cost and in costs of electric energy purchased for business purposes)
    • An option is now proposed to choose between two alternative formulas to calculate the minimum tax basis (in both cases the tax rate is 10%), i.e., 4% of revenues (other than capital gains) or 2% of revenues (other than capital gains) increased by certain types of payments (several changes compared to the catalogue of payments and to the methodology of their calculation implemented under the 1 January 2022 reform)
    • Exemptions are allowed for new types of entities, e.g., small taxpayers (less than €2m gross revenue in a preceding year), entities that generate majority of revenue from regulated medical services or taxpayers whose profitability in at least one of previous three tax years exceeded 2%
  • Changes to the “shifted profits tax” which was introduced as of 1 January 2022 with the first due date linked with the annual Corporate Income Tax (CIT) settlement (typically the end of the third month of the following tax year). The changes are predominantly aimed at clarifying conditions which trigger application of the 19% shifted profits tax. However, some amendments are also proposed, like an additional condition that at least 10% of shifted profits paid by the Polish entity must be subsequently transferred by the foreign recipient to another entity, for the shifted profits tax to apply
  • Changes to the withholding tax (WHT) pay-and-refund regime, by extending the validity of a management board statement until the end of a given tax year (currently up to three months)
  • Changes to the WHT regime regarding e.g., lifting of the obligation to remit WHT in certain situations, e.g., in the case of securities issued by the Polish State Treasury, bonds issued by some Polish State entities, covered bonds and bonds admitted to trading on a regulated market (or in an alternative trading system) that are held by foreign tax residents
  • Amendments with respect to limitations of debt financing costs:
    • Explicit indication that the higher of PLN3m or 30% of tax EBITDA (earnings before interest, taxes, depreciation and amortization) should be applied as a maximum threshold
    • New exceptions from non-deductibility of related party financing costs related to so called “capital transactions,” for example for acquisitions of shares of unrelated entities or debt financing granted by banks seated in the European Union or the European Economic Area
  • Broader scope of CIT exemption for interest or discount and capital gains earned by nonresidents investing in Polish securities issued by the State Treasury (currently the exemption applies only to securities issued on foreign markets, which narrows down the scope of this exemption)
  • Changes in the “Polish holding company regime” which include an increase of the exemption for dividends received from qualified subsidiaries to 100% (from 95%) and easing of some of the conditions required to benefit from the regime
  • Amendments in regulations regarding Transfer Pricing (TP) documentation for transactions (also indirect) with tax havens, including an increase of minimum thresholds triggering certain documentation obligations
  • Limitation of reporting obligations regarding certain transactions with nonresidents, which are already subject to TP reporting
  • Clarification of the rules regarding use of tax losses by Tax Capital Groups (tax grouping system in Poland)
  • Simplification of rules regarding refund of the minimum levy (tax on certain leased properties)
  • Amendments to the Controlled Foreign Company (CFC) regime
  • Changes in the rules regarding lump-sum taxation regime

The majority of the changes proposed in the draft legislation are to come into force as of 1 January 2023. However, there are certain exceptions including cases where new provisions are planned to be effective retrospectively (e.g., from the beginning of 2022).

Next steps

The proposed legislation impacts a broad range of tax areas. This Alert provides a general overview of certain selected issues under the new proposed provisions.

Future Global Tax Alerts will report on the most significant changes for multinational groups and the progress in the legislative process.

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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

 
 

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