Revolutionary changes in CIT from 2021
Limited partnerships taxed with CIT
Tax alert (22/2020) | 18 September 2020
On Wednesday, September 16th, 2020, a draft amendment to the income tax acts and some other acts was published on the Government Legislation Center website. The project envisages revolutionary changes in income taxes, introducing new taxation rules and imposing new obligations for many businesses. What and how will change from January 1st, 2021?
Limited partnerships and selected general partnerships will pay CIT
The key issue included in the project of new regulations is application of CIT taxation to limited partnerships. From January, 1st, 2021, the project envisages changing one-stage taxation of income from the activity of a limited partnership at the level of its partners into two-stage taxation, i.e. once at the level of the limited partnership's income, and secondly - at the level of profit distribution to its partners. The draft also provides for a partial exemption from taxation of revenues from participation in the profits of limited partners of such companies (up to 50% of revenues, not more than PLN 60,000), however, it is conditioned by the lack of an "optimization goal" underlying establishment of such company. A similar taxation system will apply in some cases to general partnerships (pol. spółka jawna, sp.j.) - when income tax payers participating in the profits of the general partnership are not disclosed.
The new taxation rules will apply from January 1st, 2021.
The largest ones will make their tax policy public
In addition to the above, special attention should be paid to the introduction from January 1st, 2021 of a general obligation to prepare and publish a report on the implementation of the tax strategy. The obligation will cover:
- taxpayers whose revenues exceeded EUR 50 m in the tax year,
- tax capital groups and its member companies,
- real estate companies.
The scope of the report is comprehensive and covers an open catalog of information. In addition, although it does not result directly from the new regulations, the above obligation may indirectly indicate the necessity to prepare such a corporate tax strategy in advance, as well as to structure and formalize processes and procedures for managing and ensuring the correct performance of obligations under tax regulations. The taxpayers will now have 9 months from the deadline for submitting the annual CIT return, to publish the report.
Those who fail to meet the above obligations will pay an administrative fine of up to PLN 1,000,000. In practice, noncompliance may also result in potential Penal Fiscal Code liability.
A series of further changes to tighten the tax system
Other solutions provided for in the draft act include, among others:
- Stricter tax depreciation rules, in particular for entities operating on the basis of income tax exemption;
This regulation will primarily apply to entities benefiting from tax exemptions for operating in the SEZ or under the Decision on Support. Until now, the CIT Act has provided for the freedom of the taxpayer to reduce or increase the depreciation rates in certain cases. According to the new draft, with regard to fixed assets and intangible assets entered into the records after January 1st, 2021, the regulations completely exclude this possibility for entities in SEZ/under DoS, and introduce restrictions on the use of individual rates for used fixed assets.
- Transfer of the tax settlement obligation on the sale of shares in real estate companies from the seller to the real estate company;
Introducing a revolutionary mechanism in which the entity being the subject of the transaction acts as a tax remitter. The amendment also provides for a number of other obligations for real estate companies, such as the obligation to appoint a tax representative in specific cases and the obligation to provide information on shareholders in real estate companies.
- Changes in terms of transfer pricing - tightening and expansion of the so-called anti-national legislation and the reduction of the TP burden during a pandemic;
The proposed changes assume the extension of the obligation to apply the arm's length principle - the changes will apply to situations in which the so-called beneficial owner is based in a ‘tax haven’. On the other hand, due to the epidemiological threat, the exemption from the obligation to prepare TP documentation for a wider range of domestic transactions and loosening of the requirements for signing the declaration will apply.
- Limiting the possibility of utilizing tax losses by taxpayers who have taken over the assets of other entities constituting an enterprise or an organised part thereof as a result of a merger, in-kind contribution or purchase financed by a cash contribution;
As a result of the implementation of the proposed changes, the possibility for a given enterprise to use the tax losses of another enterprise that is unable to settle them, will be completely limited.
- Taxing division of assets of a liquidated legal person;
In this context, the amendment equates taxation of the operation of handing over the assets of the liquidated company to the sale transaction. As such, this regulation is a response to the existing disputes between the tax authorities and taxpayers in the context of the application of Article 14a of the CIT Act in the event of the division of property of a liquidated legal person.
- Introduction of amendments to the commercial property tax to extend the exemption from this tax in the event of further COVID-19 pandemic;
According to the proposed changes, this solution entitles taxpayers to benefit from the exemption from tax on revenues from buildings also in case when after December 31st, 2020 (the end of the current exemption period), the state of epidemic related to the spread of SARSCoV-21 virus will be active.
- Increase of the income limit entitling to 9% CIT to EUR 2 million;
Implementation of the announced change to make the level of revenues limit equal to the conditions of the so-called "small taxpayer". According to the announcements of the Ministry of Finance, as a result of this, entrepreneurs will have about PLN 400 m more in the pockets.
- Removal of the phrase "legally and factually" from the definition of beneficial owner;
In the light of the justification for the draft changes, the modification in question is to eliminate interpretation doubts related to the verification of the fact of being an intermediary, representative, trustee or other entity obliged to transfer all or part of the receivables to another entity. In practice, it appears that such a change may lead to even wider taxpayers' doubts as to whether the payment receiver meets the beneficial owner criterion.
As planned, the proposed modifications will come into force on January, 1st, 2021. It must be emphasized that further changes to the CIT law have been already announced. Therefore, we recommend that discussions and actions to prepare for the new regime be taken as soon as possible.
In case of any questions, please contact Deloitte experts.