On 28 June 2022, a draft bill amending the act on personal income tax and certain other acts was published on the Government Legislation Centre’s website.
The bill primarily seeks to amend the Polish Deal program in terms of CIT provisions, but the changes brought are very extensive, stretching from modification and postponement of minimum income tax provisions to the repeal of hidden dividend provisions.
A review of the key amendments can be found below.
1. Modification and postponement of minimum income tax provisions (CIT Act)
The bill provides for suspension or repeal of the new provisions of Article 24ca of the CIT Act for a year, i.e., from 1 January 2022 to 31 December 2022.According to the explanatory memorandum thereto, the intention behind the postponement/repeal is to protect Polish businesses against any possible negative impact of the new levy, in face of political and economic unrest affecting the global economic environment and entities operating in it.
At the same time, however, the bill introduces modifications to the form of the new tax, mainly consisting in:
a) increasing the profit level indicator to 2%, with simultaneous amendments to the indicator calculation method consisting in:
- excluding fees under lease contracts from tax-deductible costs;
- excluding factoring receivables and excise duty amounts from revenue,
- excluding y/y increases in the value of remuneration and social security contributions and y/y increases in the value of energy as well as the equivalent of the excise duty from tax-deductible costs;
b) introducing an alternative method for establishing the taxable base, which can be opted for by taxpayers at their own discretion, namely:
- 4% of revenue - with the tax rate set at 10% - or, alternatively,
- 2% of revenue + the items presently considered when calculating the taxable base, including passive costs, such as debt financing, intangible services, and disclosed intangible assets - with the tax rate set at 10%.
c) extending the list of exempt entities with:
- small taxpayers with annual revenue below EUR 2 million,
- municipal companies,
- taxpayers with most of their revenues generated in connection with the provision of healthcare services,
- taxpayers whose profitability in one of the last three tax years exceeded the 2% profit level indicator, including taxpayers who went bankrupt or were liquidated.
2. Change of the date of updating individual taxpayer data (CIT Act)
Amendments to Article 27b(8) of the CIT Act seek to streamline the process of updating individual data collected on taxpayers.
At present, individual taxpayer data that have been made public are updated quarterly, as at the first day of the month in which the given quarter of a calendar year ends. Instead, under the bill, publicly available data are to be updated annually (every 30 September), as at the first day of the month in which individual data are about to be made publicly available (i.e., as at 1 August).
3. Repeal of hidden dividend regulations (Act of 29 October 2021)
The bill repeals Article 2(31)(a)(3)(b) of the Act of 29 October 2021 amending the Personal Income Tax Act, the Corporate Income Tax Act, and certain other acts (Journal of Laws, item 2105, as amended), pursuant to which:
item 15b should be added after Article 16(1)(15a) of the CIT Act in the following wording:
"15b) costs incurred by a taxpayer being a company in connection with a service provided by a related entity within the meaning of Article 11a(1)(4) or with a partner of this company, if the cost incurred constitutes a hidden dividend, subject to section 1d and 1e herein;"
- items 1d and 1e should be added after item 1c in the following wording:
“1d. The costs referred to in section 1(15b) constitute a hidden dividend, if:
- the amount of these costs or the date of their incurring in any way depend on the profit made by the taxpayer or the amount of this profit, or
- a rationally operating taxpayer would not incur such costs or could bear lower costs in the event of choosing a comparable service provided by an unrelated entity within the meaning of Article 11a(1)(3), whereas for determining the amount of these costs, the provisions of Article 11c and Article 11d shall apply accordingly, or
- these costs include remuneration for the right to use the assets that were owned or jointly owned by the partner or an entity related to the partner prior to the formation of the taxable person.
1e. The provisions of section 1d(2-3) shall not apply where the sum of the costs incurred in the tax year, constituting the hidden dividend under these provisions, is lower than the amount of gross profit within the meaning of the accounting provisions, obtained in the financial year in which these costs were included in the taxpayer's financial result”.
4. Amendments to regulations on controlled foreign companies (CIT and PIT Acts)
The bill amends regulations on controlled foreign companies (CFCs), primarily by bringing provisions eliminating double or multiple taxation of CFCs making dividend payments within holding structures (Article 24a(2)(4)(12) of the CIT Act).
Moreover, it introduces clarification of the prerequisite set forth by Article 24a(3)(5) (concerning high profitability of a CFC in relation to the assets held) in the event of a potential sale of assets during the year (Article 24a(3f)) as well as clarification of the definition of controlled foreign company (Article 24a(2)(3)) through editorial changes and supplementation.
Corresponding solutions are also to be implemented into the PIT Act (Article 30f thereof).
5. Amendments to provisions on profit shifting taxation (CIT Act)
To dispel substantial interpretation doubts related to the tax on shifted profits, the following amendments were proposed:
a. clarification of conceptual network provided by Article 24aa of the CIT Act and introduction of provisions on taxable base,
b. adding a clarification that a related entity for which the costs are incurred has no seat or management in the territory of the Republic of Poland,
c. clarifying the condition relating to 50% of revenues obtained by a related entity and the condition relating to the shifting of revenues to another entity (at least 10%),
d. simplifying the condition relating to preferential tax treatment in the country of the related entity’s seat, management, registration or location (the condition for applying lower taxation relates directly to the related entity's revenues from a specific receivable, and not to the total activity or income thereof), preferential taxation is determined primarily based on an effective income tax rate lower than 14.25%; in this respect, deductions from the taxable base, tax or tax refunds for a related entity, directly associated with the revenue on account of this specific receivable, are taken into account.
Other amendments cover, inter alia, correct application of provisions on profit shifting taxation to specified arrangements involving tax-transparent entities or foreign entities shifting revenue to other foreign entities benefiting from low taxation.
6. Amendments to the WHT regime (CIT and PIT Acts)
The main purpose behind amending withholding tax (WHT) provisions is to relax the rules for tax collection - commonly referred to as the pay & refund mechanism - and make it more feasible (Article 26(2e) et seq. of the CIT Act; Article 41(12) et seq. of the PIT Act). The amendments consist in releasing remitters (including issuers, being direct remitters, and entities acting as intermediary remitters) from a raft of obligations related to WHT collection on interest and discount on securities (i.e., bills or bonds issued by the State Treasury) and extending the time range covered by the remitter’s statement excluding the obligation to apply the pay & refund mechanism.
To achieve it, it is proposed to:
- firstly, extend the scope of the exemption of non-resident taxpayers from income tax, provided by Article 17(1)(50) of the CIT Act and 21(1)(130) of the PIT Act, to Treasury bonds offered in the domestic market and Treasury bills, and to accordingly amend rules for exempting remitters from collecting the tax, as provided by Article 26(1aa) of the CIT Act and Article 41(24) of the PIT Act; these changes aim at standardizing the income tax exemption for interest and discount on treasury securities and the related exemption from the obligation to collect tax (in terms of payment to non-resident taxpayers), and consequently - at releasing remitters from the obligation to establish the existence of relations between the issuer (remitter in the strict sense) and the stakeholder (non-resident taxpayer) and whether the amount of PLN 2 million has been exceeded, as part of the pay & refund mechanism,
- secondly, extending the time range covered by the remitter’s statement under Article 26(7a) of the CIT Act and Article 41(15) of the PIT Act until the end of the remitter’s tax year instead of the two supplementary months; importantly, new regulations are to be applied to payments of receivables, benefits, money, and pecuniary values made, rendered available or disbursed after 31 December 2022.
7. Changes to the method of charging debt financing costs into tax-deductible costs (CIT Act)
The purpose of introducing amendments in terms of charging debt financing expenses into tax-deductible costs is to dispel interpretation doubts raised by taxpayers in relation to Article 15c of the CIT Act, especially in the context of amendments made to it by the Act of 29 October 2021 amending the PIT Act, CIT Act, and certain other acts (Journal of Laws, item 2105, as amended).
In turn, the goal of making amendments to Article16(1)(13f) of the CIT Act in terms of costs related to debt financing of capital transactions is to exclude the application of these provisions in situations where the financing entity is a bank, or a credit union seated in an EU or EEA state. Importantly, the provisions would not apply to debt financing granted for acquisition or take-up of shares or general rights and obligations in entities unrelated with the taxpayer.
8. Changes to regulations on IPO relief (CIT Act)
Amendments to Article 18ed of the CIT Act aim at excluding the possibility of deducting the taxable base by the cost of making an initial public offering (IPO) for taxpayers earning revenue from eligible intellectual property rights.
9. Simplified regulations on bad-debt relief (CIT and PIT Acts)
The amendment provides for repealing Article 18f(19) of the CIT Act and Article 26i(19) of the PIT Act, pursuant to which taxable persons performing an increase or reduction under the bad debt relief are obliged to indicate in their tax returns which of the claims or liabilities are affected by such an increase or reduction. This means that taxpayers will be relieved from the obligation of enclosing the relevant appendix to the tax return, in which such data has been disclosed so far, which will simplify administrative obligations on their part.
10. Amendments to the provisions on the Polish Holding Company (PHC) regime (CIT Act)
One of the goals of the bill is to clarify and improve the regulations on the PHC regime and to make it available to a larger group of businesses. This is to be achieved, inter alia, through extending the catalogue of legal structures under which a holding company may operate with joint-stock companies. The requirement of not to use exemptions provided by Articles 20(3) and 22(4) of the CIT Act (exemptions on dividends under the Parent-Subsidiary Directive) is to be removed from the definition of holding company. Moreover, the definition will be stripped of the conditions prohibiting (i) holding more than 5% of shares in the equity of another company, (ii) holding all rights and obligations in a company other than a legal person, and (iii) using the exemption under Article 17(1)(34) or (34a) of the CIT Act, i.e., an exemption provided for entities operating in a special economic zone or the Polish Investment Zone.
To prevent any possible doubts as to the period in which the conditions necessary to benefit from CIT exemption of dividends or profits from the sale of shares should be met, the provisions of Article 24m of the CIT Act have been properly clarified.
Importantly, the 95% CIT exemption for dividends of holding companies is to be replaced by a full (100%) exemption. In order to dispel any doubts as to the scope of the possible duties of a domestic subsidiary paying dividends to a holding company, Article 26 of the CIT Act was accordingly supplemented with provisions excluding the WHT obligation (in Article 26 of the CIT Act, after paragraph 1o, it was proposed to add paragraph 1p, reading as follows: “a domestic subsidiary within the meaning of Article 24m(1)(1) is not obliged to collect tax on dividends exempt from tax pursuant to Article 24n hereof”).
11. Amendments to the provisions on lump-sum tax on corporate income (CIT Act)
It is proposed to:
a) fix the deadline for submitting notifications on the choice of lump-sum taxation of corporate income before the end of the tax year adopted by the taxpayer,
b) make changes to the method of determining income from expenses outside business activity in the case of using assets (e.g., passenger cars) for business purposes and other purposes not related to business activities,
c) clarify the condition for the expiry of the tax liability following the preliminary adjustment - clarification that a tax liability under preliminary adjustment fully expires with the elapse of at least one full period of applying the lump-sum scheme, i.e., after 4 tax years,
d) clarify the provision determining the deadline for paying tax on income from transformation – clear indication that taxpayers willing to pay the tax on income from transformation in full are obliged to do so within the time limit provided for submitting the CIT-8 return for the tax year preceding the first year of lump-sum taxation,
e) change the deadline for paying the lump-sum tax on income from distributed profit and income from profit intended to cover losses (this also applies to advances against the expected dividend) as well as the lump-sum on allocated income from net profit. The goal thereof is to eliminate the obligation to pay interest in the event of distributing or covering the net financial result, payment of advances towards the expected dividend or distribution of income from net profit after the end of using the lump-sum scheme, after the sixth month of the tax year. At present, the deadline for paying the tax elapses with the 20th day of the 7th month of the tax year. The bill provides for extension of the payment deadline until the end of the 3rd month of the tax year after the tax year of distributing or covering the net financial result, payment of advances towards the expected dividend or distribution of income from net profit or the end of using the lump-sum scheme,
f) fine-tune provisions on the conditions for applying the corporate income lump-sum tax scheme in terms of expenses related with engaging individuals on a basis other than employment contract.
12. Amendments to the provision on the deadline for remitting premiums arising from the receivables from service relationship and equivalent, in the part financed by the tax remitter, premiums paid to the Labour Fund, the Solidarity Support Fund, and the Guaranteed Employee Benefits Fund (CIT Act)
Amending Article 15(4h) of the CIT Act has for purpose standardizing regulations on keeping the deadline for paying the contributions indicated in the provision, i.e., premiums on the revenue from service relationship and equivalent, in the part financed by the tax remitter (meaning receivables under service relationship, employment relationship, outwork relationship, agricultural production co-operative or other co-operative dealing with agricultural production, and cash benefits from social insurance paid by work establishments) and premiums paid to the Labour Fund, the Solidarity Support Fund, and the Guaranteed Employee Benefits Fund.
According to the proposed wording of Article 15(4h) of the CIT Act , the above-mentioned premiums will be treated as tax-deductible costs in the month for which the receivables are due, provided that the premiums are paid within the time limit specified in separate regulations. Therefore, it is proposed to refer to separate regulations specifying the deadlines for payment of contributions.
13. Changes to the provisions on the refund of tax on revenue from buildings (CIT and PIT Acts)
The amendment relates to the rewording and subsequent simplification of the procedure for refunding the tax on revenues from buildings upon the application referred to in Article 24b(15) and (16) of the CIT Act, through clarifying that tax refund will take place without the need to issue individual decisions, provided that the refund amount raises no concern (corresponding changes are to be made to Article 30g(15) and (16) of the PIT Act).
14. Amendments to the provisions on the obligation of documenting tax haven transactions (CIT and PIT Acts)
The amendment in this regard consists in increasing documentation thresholds (materiality thresholds) for direct and indirect tax haven transactions, which, in practice, means narrowing the group of entities required to submit the relevant documentation and the number of transaction it covers. It is proposed to double the documentation materiality threshold for direct haven transactions, while in the case of indirect transactions the threshold is to depend on the transaction type (regarding the proportions stipulated by the material provision). It is expected that the basic materiality threshold will remain at the level of PLN 500,000, however, for financial and commodity transactions it will be five times higher and amount to PLN 2,500,000. It was also proposed to clarify that the material provision relates to the beneficial owner of the receivable under transaction. Moreover, it was proposed to depart from the construction of the presumption of the residence of the beneficial owner in a tax haven in favour of the exclusion of the documentation obligation in certain cases.
15. Clarification of provisions on the scope of the Minister of Finance’s duties in terms of providing return templates (CIT, PIT, and Lump-Sum tax Act)
The purpose of the amendment is to clarify the provisions pertaining to the obligation of making income tax return templates available to the public. The intention behind the provisions imposing on the minister competent for public finance the obligation to provide income tax return templates was, in fact, to enforce the obligation to provide a visualization of the model of an electronic document, and not the template itself, in the sense that it is provided for by the provisions of the Act of 17 February 2005 on computerization of the activities of entities performing public tasks. According to regulations in force, the template of electronic return must be made available by a minister competent for computerization in the Central Repository for Electronic Documents (CRWDE). Providing the same template of an electronic document by the minister competent for public finance is not justified under the applicable regulations.
Following the amendments, there will be no doubt that the obligation to share return templates is limited to providing their visualization and not their scheme, which is, in turn, made available by the Minister of Digitization in CRWDE.
16. Clarifying the obligation of entities bound to submit transfer pricing reports to provide the head of office competent for the taxpayer with information on contracts with non-residents (Tax Code)
The bill is also expected to bring systemic changes in terms of clarifying the obligation of entities bound to submit transfer pricing reports to provide the head of the tax office competent for the taxpayer with information on contracts with non-residents. Obligation to prepare and file a report on contracts entered into with non-residents will exclude entities required to establish transfer pricing reports under Article 23zf(1) of the PIT Act and Article 11t(1) of the CIT Act. This means that exemption from the obligation to prepare and file a report on contracts entered into with non-residents does not cover entities which, when submitting transfer pricing reports under Article 23zf(1) of the PIT Act and Article 11t(1) of the CIT Act, disclose tax haven transactions. Consequently, such entities, after meeting the statutory conditions provided for by the Polish Tax Code and the above-mentioned tax acts, will be required to submit both the ORD-U file and transfer pricing report.
Moreover, pursuant to the bill, the currently existing provision of Article 11k(2a) of the CIT Act (Article 23w(2a) of the PIT Act) will be transferred to the amended Article 11o of the CIT Act (Article 23za of the PIT Act).
Because of the retroactive effect of amendments to Article 11k(2a) and 11o of the CIT Act (Article 23w(2a) of the PIT Act and Article 23za of the PIT Act), adding relevant interim provisions to the bill seems justified. To prevent acting to the detriment of entities so far exempt from the obligation to submit ORD-U forms in the scope of controlled transactions carried out pursuant to Article 11k(2a) of the CIT Act (Article 23w(2a) of the PIT Act) in the wording in force before the date of entry into force of the bill, the transitional provision provides for keeping the exemption from the obligation to submit ORD-U file for entities engaged in the above-mentioned controlled transactions in the tax year beginning after 31 December 2020, but not later than 31 December 2022.
17. Amendments to provisions of the Act on healthcare services (Act on healthcare services)
The bill brings amendments to Article 81(2zc) of the Act on healthcare services to rectify the situation of insured entrepreneurs (using the lump-sum scheme) who fail to provide ZUS (Polish Social Security Administration) with information on monthly revenue from business activity.
18. Clarification of provisions on settling losses by tax group members (Act of 29 October 2021)
The provision added to Article 69b of the Act of 29 October 2021 amending the Personal Income Tax Act, the Corporate Income Tax Act, and certain other acts (Journal of Laws, item 2105, as amended) concerns the principles of loss settlement in companies forming tax groups brought by this Act (effective as of 1 January 2022). When amended, these rules will apply to the so-called new losses of companies that make up tax groups, i.e., incurred in tax years starting after 31 December 2021 and further on.
19. Ordering amendment to the provisions of the PIT Act regarding statements and applications submitted by taxpayers for the purpose of collecting tax advances (Act of 9 June 2022 amending the PIT Act and certain other acts; Journal of Laws, item 1265)
The purpose behind the amendment is to clarify the provisions of the PIT Act on statements and applications submitted by taxpayers to remitters for the purpose of collecting tax advances, to make it subject - wherever possible - to the general provision of Article 31a of the PIT Act.
It is proposed to extend the list of exceptions provided by Article 31a(7) of the PIT Act to Article 41(11) of the PIT Act on non-application of 50% of tax-deductible costs by taxpayers referred to in Article 41(1) thereof, and to make it possible for the taxpayers to submit the relevant application according to the formula established by the Minister of Finance (amendment to Article 45b(1)(3) of the PIT Act).
20. Expected entry into force
The proposed amendments are to become effective on 1 January 2023, except for provisions within the scope of establishing Local Files for tax haven transactions. These provisions are to enter into force on the day of their announcement. This is necessary due to the possibility of retroactive use of new, more advantageous solutions by entities subject to reporting obligation by the end of 2022. The entry into force of these regulations on 1 January 2023 would deprive these entities of the possibility of applying more favourable solutions.
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