NEW POLISH DEAL – WHAT MAY CHANGE IN CIT TAX?
Tax alert (16/2021) | 6th August 2021
On July 26, 2021, the draft of the Act amending the act on personal income tax, the act on corporate income tax and some other acts (the so-called "Polish Deal") was published. The amendment is to enter into force on January 1, 2022.
The bill provides for a number of amendments related to the establishment and operation of TCG. The planned changes include inter alia:
- reduction of the average share capital requirement for each of the companies to PLN 250,000 (the current limit of PLN 500,000);
- allowing subsidiaries to hold shares in other subsidiaries that are part of a tax capital group (currently only the parent company may hold shares in other entities forming TCG),
- elimination of the tax profitability condition for the tax capital group (currently the required tax profitability of TCG at the level of 2%),
- elimination of the requirement to conclude an agreement to establish a tax capital group in the form of a notarial deed - a written agreement will be sufficient,
- changing the rules for extending TCG after the registration of the agreement,
- changing the rules for reporting the extension of the TCG operation period.
At the same time, the draft amendment regulates the issue of settling tax losses:
- by a company that is part of the TCG, in the event of the loss of taxpayer status by TCG, when the loss was incurred before the formation of this group,
- by TCG, if the loss was incurred before the formation of the group by the company forming the group.
The draft amendment adds a definition of the term of having a place of management in Poland as one of the conditions for obtaining the status of a Polish tax resident by a taxpayer - which will be important from the perspective of companies established or operating outside of Poland. Pursuant to the proposed changes, in relation to taxpayers who are not established in the territory of the Republic of Poland, it is considered that they have a management board in this territory if persons or entities sitting in control bodies, constituting or managing the taxpayer:
- have their place of residence, seat or management board in the territory of the Republic of Poland, or
- actually, directly or through other entities, conduct current affairs of this taxpayer, including the act of establishing the same, a court decision or other document regulating its establishment or functioning, powers of attorney granted to it or factual relationship between the taxpayer and persons residing in The Republic of Poland.
As follows from the justification to the planned amendment, the purpose of the planned changes is to clarify that not only an entity having its registered office in Poland, but also an entity not having its registered office in Poland, but formally or actually managed by a person or persons residing in the territory of Poland may be considered a Polish tax resident, subject to taxation in Poland on the total income obtained.
In the Polish Deal project, the catalog of revenues from capital gains was extended by:
- all revenues obtained as a result of transformations, mergers or divisions of entities;
- revenue from receipt of assets in connection with the liquidation of a company that is not a legal person or the withdrawal of a partner from such a company, as a result of which the Republic of Poland loses the right to tax income from the sale of these assets.
Capital gains will also include additional payments received in the event of a merger or division of entities by persons having the right to participate in the profit of the acquired, merged or divided entity. Currently, this regulation applies only to the partners of the acquired company, merged or divided companies.
The proposed amendments to the regulation on lump sum taxation on company income (the so-called "Estonian CIT") are aimed at extending the catalog of entities that will be entitled to use this tax, as well as at limitation the necessary conditions allowing for the choice of this form and its further application.
These amendments include in particular:
- extension of the catalog of entities entitled to lump-sum taxation to include limited partnerships and limited joint-stock partnerships;
- resignation from the necessity to incur specific investment expenditures as a condition for the application of the lump sum provisions, with the possibility of incurring them in order to benefit from the preferential rate of lump sum;
- resignation from the condition concerning the upper limit of taxpayers' income taxed with a lump sum, and consequently also from the additional tax liability;
- making the deadlines for the payment of tax liabilities more flexible in the scope of the so-called initial correction, and in some cases also elimination of the obligation to pay this obligation.
The planned amendment provides for the introduction of an obligation for CIT taxpayers to keep the accounting books (tax records) using computer programs, as well as their obligation to send them in a structured form in accordance with the provisions of the Tax Ordinance Act, by the deadline for submitting a tax return for the tax year specified in art. 27 sec. 1 of the CIT Act.
Additionally, the draft of the Act provides for the introduction of new reporting obligations in the case of:
- transformation of the company into a company which is not a legal person - then the transformed company is to close the accounting books and prepare the financial statements in accordance with the accounting regulations on the day preceding the transformation date;
- transformation of a company which is not a legal person into a company or the acquisition of a company which is not a legal person by the company as a result of a merger - then the company which is not a legal person will be obliged to close the accounting books (if it keeps such books), or to prepare a list of assets of its enterprise, if it does not keep accounting books, that will contain the data indicated in the Act. This new obligation may become binding starting from FY beginning after 31 December 2022.
The Polish Deal Draft also provides for a number of changes to the transfer pricing regulation. The most important changes in this area include:
- extension of the deadline for the preparation of local transfer pricing documentation, this deadline is to expire by the end of the tenth month after the end of the tax year;
- extension of the deadline for submitting information on transfer pricing by the end of the eleventh month after the end of the tax year (currently the end of the ninth month);
- elimination of the statement of the preparation of transfer pricing documentation as a separate document and transferring it, in the amended wording, to the transfer pricing information;
- extension of the deadline for submitting, at the request of the tax authorities, local transfer pricing documentation from 7 to 14 days;
- changes in the scope of transfer pricing adjustments - the taxpayer making the transfer pricing adjustment is to be allowed to have, instead of the related entity's declaration, an accounting proof confirming that the entity has made a transfer pricing adjustment in the same amount as the taxpayer and the condition for confirming the adjustment by the taxpayer will be repealed in the annual tax return for the tax year to which this adjustment applies;
- changes in the regulation of the safe harbor mechanism consisting in the introduction of provisions according to which the period in which the condition of the possibility of using the safe harbor institution is the fiscal year, not the financial year. In addition, the draft amendment provides for the regulation of the moment for which the loan agreement (loan, bond) should comply with the conditions of the safe financial harbor in terms of interest rates, i.e. these conditions should be met each time the loan agreement is amended;
- adding the regulation specifying the value of controlled transactions in the case of articles of association of a company that is not a legal person - this value should be determined in the total value of contributions made to such a company;
- adding the regulation according to which the local transfer pricing documentation, in the case of an agreement of a company that is not a legal person, a joint venture agreement or another agreement of a similar nature, should also contain the adopted rules concerning the rights of partners or parties of the agreement providing for participation in profit, assets or losses;
- changes in the definition of related entities and in the definition of the exerting significant influence (it was added that this also means situations in which one has, directly or indirectly, at least 25% of shares or rights to participation in the company's losses).
The planned amendment provides for the introduction of:
- CIT exemption for 95% of the amount of dividends received by the holding company from subsidiaries;
- full CIT exemption of profits from the sale of shares / stocks in subsidiaries sold to unrelated entities.
The introduced regulations are to constitute an alternative to the currently existing exemptions for dividend payments. The planned changes assume, in our opinion, that a taxpayer who is a holding company will be able to choose between:
- taking advantage of the existing dividend exemptions (regulation of art. 20 sec. 3 and art. 22 sec. 4 of the CIT Act), or
- taking advantage of exemptions under the proposed holding regime. Then such a taxpayer will be entitled to exempt income from the sale of shares (or stocks) in subsidiaries.
The above rules will apply only if the entity is considered to be the so-called holding company. Pursuant to the proposed regulations, a limited liability company or a joint stock company, being a Polish tax resident, will be considered a holding company, which meets the additional conditions provided for in the draft of the Act, that is:
- holds, for an uninterrupted period of at least 1 year, directly on the basis of title, at least 10% of shares (stocks) in the capital of a subsidiary;
- is not a company forming a tax capital group;
- does not benefit from tax exemptions (activity in the special economic zone or on the basis of a decision on support for new investments);
- conducts a real business activity;
- shares (stocks) in this company are not held, directly or indirectly, by a shareholder (stockholder) having its seat or management board or registered or located in the territory or in the country:
- listed in the regulation of the Minister of Finance on the determination of countries and territories applying harmful tax competition in the field of corporate income tax;
- indicated in the EU list of non-cooperative jurisdictions for tax purposes adopted by the Council of the European Union;
- with which the Republic of Poland has not ratified an international agreement, in particular a double tax treaty, or the European Union has not ratified an international agreement constituting the basis for obtaining tax information from the tax authorities of that country.
The draft amendment provides for a number of changes in the taxation of reorganization transactions, including the regulation on tax treatment of the so-called share exchange transactions.
According to the proposed changes, Art. 12 sec. 4d of the CIT Act, regulating the conditions of tax neutrality of transactions, may be used in a situation where a company acquires shares (stocks) from the same partner in more than one transaction within a period not exceeding 6 months from the month in which their first acquisition took place, if as a result of these transactions the conditions set out in this provision are met (so far there has been no requirement for the number of partners).
Additionally, it is planned to extend the catalog of conditions that must be met so that the taxpayer will be able to take advantage of the income tax preferences in connection with the exchange of shares. Pursuant to the draft amendment, two new conditions are planned to be added to the CIT Act, that is:
- the shares (stocks) contributed by the shareholder were not acquired or acquired as a result of a share exchange transaction or allocated as a result of a merger or division of entities,
- the value of shares (stocks) acquired by a shareholder, adopted for tax purposes, is not higher than the value of shares (stocks) contributed by that partner, which would be adopted for tax purposes, if the shares were not exchanged.
The Polish Deal draft provides for significant changes in the provisions on taxation of mergers and divisions of companies - thus, in practice significantly increasing the number of cases when such mergers / divisions will be subject to income tax in Poland (in particular at the level of the shareholding entity and/or at the level of the acquiring company).
These changes, in particular, are to be applied to the method of determining the tax revenue related to the merger and division of companies. These transactions will, in principle, be tax neutral provided those additional conditions provided for in the Polish Deal draft are also met.
A significant change here will concern the conditions underlying the right to exclude from taxable revenues of the shareholder in the company (which is disappeared within a merger or which is divided within a legal demerger) the value of shares (stocks) allocated by the acquiring company or the newly formed company, only if:
- shares (stocks) in the acquired or divided entity were not acquired or acquired as a result of an exchange of shares or acquired as a result of another merger or division of entities, and
- the value of shares (shares) allocated by the acquiring company or the newly formed company adopted by the partner for tax purposes is not higher than the value of shares (stocks) in the acquired or divided company that would be adopted by this partner for tax purposes if the merger or division did not take place.
As the same time, a new, more challenging, income taxation and income tax exemption mechanisms (conditions) are planned to be introduced as regards the acquiring company within a merger or a division.
The planned amendment provides for the introduction of a regulation aimed at introducing a tax on Polish tax residents on account of the so-called shifted income. This tax will be 19%.
The shifted income is to be deemed to be certain costs incurred directly or indirectly for the benefit of an entity related to the company and constituting the receivable of that entity, if:
- the actual income tax paid by this related entity for the year in which it obtained the receivable, in the state of its seat, management, registration or location is lower by 25% than the amount of income tax that would be due from it if the income of this entity were taxed with applying a 19% tax rate, whereby the tax actually paid is understood to be tax that is not refundable or deductible in any form, including the one for the benefit of another entity, and these costs:
- are recognized in any form as tax deductible costs, are to be deducted from the income, tax base or tax of that related entity, or
- paid by this related entity in the form of dividends or other revenues from participation in the profits of legal persons for the year in which it received the receivable
- constituted at least 50% of the value of revenues obtained by this entity, determined in accordance with the provisions on income tax or in accordance with the provisions on accounting.
The amendment assumes that the above rules of taxation will not apply if the indicated costs are incurred for the benefit of a related entity, subject to taxation on all its income in a European Union Member State or in a country belonging to the European Economic Area and conducting a significant real business activity in that country.
According to the planned changes, real estate companies, i.e. business entities whose main source of revenue or income are real estate, will be entitled to include in tax deductible costs depreciation charges with respect to the consumption of fixed assets and intangible assets) in the amount not higher than in a given tax year than the depreciation or redemption charges for the consumption of fixed assets made in accordance with the accounting regulations, charging the entity's financial result in this tax year.
The above change may be severe for those taxpayers who, due to the accounting classification of real estate, do not make depreciation charges for accounting purposes.
The planned amendment provides for a change in the provisions of Art. 15c of the CIT Act, the so-called thin capitalization, which involves:
- introducing the name of the ratio used to calculate the maximum amount of debt financing costs which - in a given tax year - may be charged to the tax result (income / loss) reported by a given taxpayer in connection with the activity conducted by such a taxpayer (EBITDA ratio),
- introducing an algorithm to calculate the EBITDA ratio,
- introducing a provision directly stating that the taxpayer may include as tax deductible costs the surplus of debt financing costs within the limit set by the value of 30% of the EBITDA obtained in the fiscal year or use the safe harbor, i.e. the limit of PLN 3 million. Therefore, there will be no basis for combining both limits and applying them simultaneously.
In addition, in accordance with the proposed changes, debt financing costs within the meaning of Art. 15c sec. 12 of the CIT Act obtained from a related entity, in the part in which they were intended directly or indirectly for capital transactions, in particular: acquisition or subscription of shares (shares), acquisition of all rights and obligations in a company that is not a legal person, making additional payments, increase of the share capital, purchase of own shares for the purpose of their redemption, will be excluded from tax deductible costs.
The draft Polish Deal also provides for a change in the withholding tax regulation. These changes include, inter alia, narrowing the scope of application of the tax refund procedure (WHT refund) to passive revenues (income) paid to related entities and allowing for issuing opinions on the application of an exemption (reduced tax rate) on the basis of the provisions of double tax treaty, which so far was only possible with regard to the Polish WHT regulations.
Further changes are expected at the level of withholding tax clarifications, which are currently being prepared by the Ministry of Finance.
The planned amendment provides for changes in the regulations relating to foreign controlled entities consisting in:
- extending the definition of CFC by adding a provision, according to which the CFC is also an entity in which the Polish taxpayer has, independently or jointly with related entities or other taxpayers having its place of residence or registered office or management board in Poland over 50% of shares, directly or indirectly in the capital or more than 50% of the voting rights in the management of the entity. Other taxpayers are taxpayers who own at least 25% of the capital or at least 25% of the voting rights in the management of the entity or 25% of the right to participate in the company's profit,
- extending the catalog of passive revenues provided that they constitute at least 33% of all revenues of a given entity, this entity will be considered a CFC with the following revenues:
- for the provision of consulting and accounting services, market research, legal services, advertising services, management and control, data processing, employee recruitment and sourcing services as well as services of a similar nature,
- from the disposal of all rights and obligations in a company, which is not a legal person of participation titles, in an investment fund, collective investment or other legal person and rights of a similar nature,
- for lease, sublease, tenancy, subtenancy and other similar contracts,
- from copyrights or industrial property rights included in the selling price of a product or service,
- from the sale and exercise of rights from financial instruments,
- from the sale of goods or products purchased from related entities or sold to them.
- extending the catalog of entities that make up the CFC by recognizing that such a unit is considered to be entities in which passive income is at least 30% lower than the sum of the values held:
- shares (stocks) in another company, all rights and obligations in a company that is not a legal person, participation titles in an investment fund, collective investment institution or other legal person, receivables resulting from the possession of these shares (stocks), rights of a similar nature to these shares (stocks), all rights and obligations or participation titles, all rights and obligations or participation titles,
- the value of real estate or movable assets owned or jointly owned by the taxpayer or used by him under a leasing contract,
- intangible assets,
- receivables from the titles referred to in the above to related entities, or
- movable and immovable assets, used under a lease agreement and intangible assets constitute at least 50% of the value of its assets.
As regards the regulation of the decision on support for new investments, the planned amendments concerns, inter alia:
- introducing a regulation according to which only the income obtained from the implementation of a new investment specified in the decision and in the area specified in the permit would be exempted,
- changes to the small clause by adding to the catalog of legal activities, whose sole purpose is to avoid taxation, activities other than the conclusion of a contract, the effect of which is the artificial taking of actual activities performed primarily to recognize the income tax exemption.
The planned amendment also provides for a number of changes to the Act on supporting new investments and the Act on special economic zones.
In the planned amendment, the scope of exclusions from tax deductible costs was extended to include costs related to the provision of services, the beneficiary of which is directly or indirectly a partner or entity related directly or indirectly to the taxpayer or this partner, if the benefit or obligation from which this benefit arises would not be granted for the same conditions, in whole or in part, to that entity or partner.
According to the current wording of the draft amendment, such a cost will not be considered a tax deductible cost also in a situation where, if the service was not provided, the taxpayer would have a net profit within the meaning of the accounting regulations for the financial year in which the benefit was included in the financial result. Due to the fact that the entire provision is not specified in the draft Act, a change in its proposed content should be expected in this respect.
The draft of the Polish Deal also provides for solutions to prevent from the so-called shadow economy. On the basis of CIT, it is planned to introduce a new regulation concerning treated as a taxpayers’ revenues the amount of the work value of an illegally employed person, determined for each month in which illegal employment was found, in the amount equivalent to the minimum remuneration for work. This revenue would arise on the day the illegal employment was discovered.
In accordance with the proposed changes, revenues will include the market value of the company's assets received by its partners, determined on the day preceding the date of liquidation or withdrawal from a company that is not a legal person, in excess of the value adopted for tax purposes, not higher than the value of these assets - in the case of dissolution of a partnership without liquidation, as a result of which the Republic of Poland loses the right to tax income from the sale of property or part of the property taken over by a partner of such a company.
Such income will be classified as a source of revenue from the source of capital gains.
The draft amendment also introduces changes to the regulations concerning research and development tax relief. Planned changes in this area relate, among others, to:
- the possibility for a taxpayer who is a payer of income tax advances and flat-rate income tax, deducted receivables from the income (revenue) of natural persons employed by the taxpayer on the basis of an employment contract or civil law contracts, due to eligible costs of research and development activities, which the taxpayer did not deduct because he suffered a loss or the amount of income was lower than the amount of his deductions,
- increasing the amount of the deduction - introducing the possibility for a taxpayer who is a payer of income tax advances and flat-rate income tax, deducted receivables (revenues) of natural persons employed by the taxpayer on the basis of an employment contract or civil law contracts, for eligible costs of activity research and development, which the taxpayer did not deduct because he suffered a loss or the amount of income was lower than the amount of his deductions,
- introducing the possibility of simultaneous use of the R&D and the IP Box tax relief for the same income.
The robotization relief, in accordance with the assumptions of the draft amendment, is to function on the basis of a tax principles provided for R&D tax relief. A taxpayer conducting industrial (production) activity will be entitled to deduct from the tax base costs that have already been classified as tax deductible costs. The additional deduction cannot exceed 50% of the costs.
The following are considered to be tax deductible costs incurred for robotization:
- purchase costs of brand new: industrial robots, machines and peripheral devices for industrial robots functionally related to them, machines, devices and other things functionally related to industrial robots, used to ensure ergonomics and work safety in relation to workplaces where human interaction takes place with an industrial robot, in particular sensors, controllers, relays, security locks, physical barriers (fences, guards), or optoelectronic protective devices (light curtains, area scanners), machines, devices or systems for remote management, diagnosis, monitoring, or servicing industrial robots, in particular sensors and cameras, devices for human-machine interaction for industrial robots;
- costs of purchasing intangible assets necessary for the proper commissioning and acceptance for use of industrial robots and other fixed assets referred to above;
- capital charges, set out in the financial lease agreement, for industrial works and other fixed assets, if, after the end of the basic period of the leasing agreement, the financing party transfers the ownership of these fixed assets to the user.
Only the taxpayer who obtains revenue other than revenue from capital gains will be entitled to the additional deduction of the tax deductible costs referred to above. The amount of the deduction may not exceed the amount of income earned by the taxpayer in the tax year from revenue other than revenue from capital gains.
The additional deduction of tax-deductible costs is to apply to tax-deductible costs incurred for robotization from the beginning of the fiscal year, which will start in 2022, until the end of the fiscal year, which will start in 2026.
As it results from the justification for the draft amendment, the proposed regulations regarding the consolidation relief are intended to create a tax incentive for taxpayers wishing to expand economically on domestic and foreign markets by acquiring shares in capital companies operating on these markets.
According to the draft of the Polish Deal, the taxpayer who incurs the so-called "eligible expenses" for the acquisition of shares or stocks in a foreign capital company (sp. z o.o.[limited liability company] or S.A. [joint stock company]), is to be entitled to reduce its tax base by these expenses in the year they are actually incurred. The maximum amount of such a reduction in a tax year will not exceed the amount of PLN 250,000.
The following expenses will be considered as "eligible":
- expenses for legal services related to the purchase of shares or stocks, including their valuation (due diligence),
- taxes charged directly on this transaction,
- notary, court and tax fees.
Such expenses will not include the price paid by the taxpayer for the acquired shares (stocks) and the costs of debt financing related to such acquisition.
The taxpayer will be entitled to the deduction under the following conditions:
- a company whose shares (stocks) would be acquired by the taxpayer would be a legal person having its registered office or management board in a country with which the Republic of Poland has a binding double tax treaty containing the legal basis for the Polish tax authority to obtain tax information from the tax authority of that other country,
- the main subject of activity of such a capital company would be identical to the subject of activity of the taxpayer purchasing its shares (stocks) or the activity of such company could be rationally considered to be an activity supporting the activity of the taxpayer (the activity of such a company would not be a financial activity).
The draft amendment also introduces the possibility of deducting from the tax base an amount of 30% of the costs of trial production of a new product and placing such a product to the market, the value of the deduction in a tax year may not exceed 10% of income obtained from non-agricultural economic activity.
In accordance with the proposed regulations, the trial production of a new product will be understood as the stage of technological start-up of production that does not require further design and construction or engineering works, the purpose of which is to perform trials and tests before launching the production process of a new product, resulting from research and development works carried out by the taxpayer. The technological start-up stage covers the period from incurring the first cost associated with this stage to the moment of starting the production of a new product. On the other hand, launching a new product on the market is to be understood through activities that are undertaken in order to prepare documentation aimed at obtaining certificates and permits for the product resulting from research and development by the taxpayer, enabling the product to be sold.
The new regulations are also to introduce a catalog of costs of test production of a new product, which will include:
- purchase price or production cost of brand new fixed assets necessary to start trial production of a new product,
- expenses for improvement, incurred to adapt the fixed asset to launch trial production of a new product,
- costs of materials and raw materials purchased solely for the purpose of trial production of a new product.
On the other hand, the costs of placing a new product to the market are:
- tests, expert opinions, preparation of documentation necessary to obtain a certificate, approval, CE mark, safety mark, obtaining or maintaining a marketing authorization or other obligatory documents or markings related to the admission to trading or use, and the costs of fees charged in order to obtain, renew or extend them;
- product life cycle studies;
- Environmental Technologies Verification (ETV) system.