On 19 November 2024, the Act dated 6 November 2024 on top-up taxation of members of multinational and domestic enterprise groups, implementing – with almost a one-year delay – Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union (hereinafter: “Directive”), was published in the Polish Journal of Laws.
The Directive introduces GloBE rules in the EU which aim to put a floor on competition over corporate income tax rates through the establishment of a global minimum level of taxation at 15% rate. These rules are also jointly referred to as Pillar 2.
In principle, the new regulations are to come into effect on 01 January 2025.
Who will be affected?
The new tax is to be levied on constituent entities of international and domestic groups which have an annual revenue of EUR 750 000 000 or more in their ultimate parent entity’s consolidated financial statements in at least two of the four fiscal years immediately preceding the tested fiscal year.
How will it work?
The regulations passed provide for three separate types of top-up tax:
- domestic top-up tax – levied on income earned by domestic low-taxed constituent entities and taking precedence over other rules of top-up taxation. On the one hand, it ensures that earnings from the top-up tax are retained in Poland as the jurisdiction where constituent entities are located. On the other hand, it curtails the effectiveness of tax exemptions and deductions provided under the Corporate Income Tax Act, thereby reducing tax competitiveness and altering the investment incentive policy previously implemented.
- global top-up tax (reflecting the Income Inclusion Rule – IIR – outlined by the Directive) – a fundamental type of top-up tax. It imposes an obligation on the parent entity of a group (typically the ultimate parent entity) to pay tax on the income of the group’s low-taxed constituent entities. In practice, this primarily applies to foreign entities, given the introduction of a domestic top-up tax in Poland, and only those which are located in jurisdictions that have not implemented equivalent domestic top-up taxes aligned with international arrangements.
- top-up tax on undertaxed profit (reflecting the Undertaxed Profit Rule – UTPR – outlined by the Directive) – this category of tax is intended to apply when the parent entity operates in a jurisdiction where the global top-up tax is not enforced and which, at the same time, qualifies as a low-tax jurisdiction. In such a case, the obligation to pay tax on low-taxed entities is shifted to constituent entities from other jurisdictions. This enhances the efficiency of top-up taxation and makes tax avoidance more challenging. However, it may present difficulties, such as the need to obtain detailed data from the ultimate parent entity to calculate the tax and, in many cases, the funds required for payment.
Groups of companies subject to the global top-up tax will be required to calculate an Effective Tax Rate (ETR) on income for each jurisdiction in which they operate. This, in turn, comes with the necessity to collect extensive data and make adjustments to the previously reported financial information, both regarding the numerator, which reflects the level of taxation, and the denominator, representing the qualifying net income from the relevant jurisdiction.
There will be many instances in which the ETR will have to be computed not only for each jurisdiction individually, but also separately for each part of the group. This is particularly relevant in the case of a joint venture entity owned by the group within a specific jurisdiction, where the ETR will be calculated separately for that entity and, if applicable, its entire sub-group.
Exclusions and safe harbours
The Directive includes several exclusions that permit certain companies to delay the application of the new rules.
For domestic groups, the domestic top-up tax will not be calculated for the first five taxable years, starting from the first day of the fiscal year in which the domestic group falls within the scope of the top-up tax. In turn, constituent entities of international groups situated in the territory of Poland do not need to calculate the domestic top-up tax and the tax on under-taxed profits for the first five taxable years of the initial phase of the international activity of that group, provided that they meet a set of supplementary requirements.
Notwithstanding the above, irrespective of the passage of time, the obligation to compute the global or domestic top-up tax will not apply, at the election of the authorized constituent entity, to constituent entities located in a given jurisdiction if, for a given taxable year, the following conditions are cumulatively met:
• the average three-year qualifying revenue of all constituent entities located in such jurisdiction is less than EUR 10 000 000; and
• the average three-year qualifying income of all constituent entities in such jurisdiction is less than EUR 1 000 000 or all such entities in a given jurisdiction reported qualifying loss.
On top of the exclusions transposed from the Directive, the Act establishes safe harbours consistent with agreements made at the international level during OECD discussions. Among these, the Transitional CbCR Safe Harbour is particularly significant. When selected, the CbCR Safe Harbour releases entities from the obligation to compute the global top-up tax, domestic top-up tax, and top-up tax on undertaxed profit in the given jurisdiction.
The CbCR Safe Harbour applies for one year and can be renewed, but its use is limited to fiscal years starting no later than on 31 December 2026 and ending no later than on 30 June 2028. Moreover, it is limited by the rule, according to which, if a group has not applied the Transitional CbCR Safe Harbour in a fiscal year in which it is already subject to the provisions of the Act, it does not qualify for that safe harbour in subsequent years (“once out, always out” approach).
Administrative obligations
Constituent entities of groups subject to top-up tax located in the territory of Poland will be obliged to submit information on top-up tax for the given taxable year to the competent head of the tax office by the end of the 15th month following the end of that taxable year (the deadline has been extended to 18 months with respect to the first year of application of the rules).
Furthermore, entities subject to global top-up tax, domestic top-up tax, and top-up tax on undertaxed profit will be obliged to submit relevant tax returns for the given taxable year to the competent head of the tax office by the end of the 18th month following the end of that taxable year (the deadline has been extended to 21 months with respect to the first year of application of the rules).
Final remarks
In principle, the new regulations will come into effect on 1 January 2025; however, entities may choose to voluntarily apply the new rules to taxable years beginning after 31 December 2023.
Full text of the Act (in Polish) can be found at: Polish Journal of Laws of 2024, item 1685
The implementation of the global top-up tax system in Poland will come with numerous challenges for many taxpayers, particularly when it comes to collecting and processing large volumes of financial data. It is estimated that up to 7,000 companies in Poland are among those taxpayers, including approximately 40 ultimate parent entities required to assess and comply with both domestic and global top-up taxes.
This may render using the available tax incentives (such as tax exemptions related to special economic zones and the Polish investment zone as well as R&D tax reliefs) particularly challenging. In this context, the anticipated regulatory changes from the relevant ministries are awaited.
Our KPMG Team remains at your disposal for any further information you might require.
