New Polish Deal

Limitations on tax deductibility of real estate depreciation write offs

Up until now taxpayers have been allowed to recognize tax depreciation write-offs on real estate in accordance with the general principles established for tax purposes, while accounting depreciation has not been directly related to the tax one. According to the current version of the planned amendments, only the portion of depreciation write offs which does not exceed accounting depreciation may be recognized as tax deductible. In other words, tax-deductible depreciation should not exceed the accounting one. In our opinion, this regulation may have a negative impact on not only entities whose tax depreciation write offs are higher than the accounting ones but also those which recognize their investments at fair value, without depreciating them for accounting purposes.
What is more, the draft amendments impose limitations on tax depreciation of residential properties, which may affect those business entities which use buildings and residential premises in the course of their operations.
 

Changes affecting tax deductibility of debt financing costs

According to the new legislation, the provisions imposing a limitation on tax deductibility of debt financing costs will be clarified, leading to negative consequences for taxpayers, who will not be able to apply the current limits simultaneously (i.e., it will not be possible to determine the limits as PLN 3M + 30% EBITDA and only the higher amount will be allowed for tax purposes).
What is more, taxpayers will not be allowed to recognize the costs of debt financing obtained from related parties in the part in which they were allocated directly or indirectly to equity/M&A transactions as tax deductible.
 

Changes in the pay-and-refund WHT regime

Although introduced in 2019, the pay-and-refund WHT regime has been suspended until 2022 and the first proposal of new WHT rules has been published. The draft amendments impose a limitation on this regime, so that it should apply only to certain payments that are passive in nature (dividends, interest and royalties), exceed PLN 2 million and are made between related parties only.
 

Restrictions on hidden dividends

According to the draft amendments, expenses incurred by a company for the benefit of its shareholders, referred to as “hidden dividends”, may not be regarded as tax deductible from the perspective of the taxpayer. Although this regulation is not particularly clear, we understand that the aim of the change is to exclude payments which in fact should be treated as profit distributions – dividends (which are not tax deductible) but were established commercially as, for example, services.
 

Minimal taxation on revenues recognized by taxpayers

It is considered to introduce new minimal taxation for CIT taxpayers reporting tax losses or profitability below 1%. According to the proposed changes, minimal tax at a flat rate would be levied on the specific amount of revenues and other positions (e.g. incurred debt financing costs). Some categories of taxpayers will be excluded from this minimal taxation i.e. new taxpayers, financial institutions, taxpayers with a simple holding structure. At this stage it is hard to assess whether the proposed amendment will be finally introduced and what will be the final wording of the changes.