Poland: Review of proposed legislative changes for corporate and individual taxpayers under “Polish Deal”

A bill that would implement the tax measures under the “Polish Deal” was passed by the Sejm at the beginning of October 2021 and is currently pending consideration by the Senate.

The bill would amend the corporate and individual (personal) income tax laws, as well as other tax laws.

Most of the measures are expected to be effective 1 January 2022.

The bill includes the following measures that could affect corporate income taxpayers:

• Consolidation relief for entities with eligible expenses for the acquisition of shares or stocks in a company, allowing these entities to reduce their tax base by expenses incurred up to PLN 250,000
• A new “Polish holding company” regime, under which the holding companies would be allowed to apply an exemption from taxation of capital gains from the sale of shares in subsidiaries and, at the same time, use only a 95% participation exemption for dividends (instead of the 100% relief under general terms)
• Rules regarding the place of effective management, to prevent the practice of Polish residents from establishing foreign entities that are effectively managed from Poland, but the income is taxed in the other country
• Changes regarding the tax consequences of corporate reorganization and restructuring, including the introduction of the principle of tax neutrality only for the first exchange of shares and making application of tax neutrality of mergers or divisions by companies dependent on the fact that the shares in the acquired or divided entity were not purchased or acquired as a result of an exchange of shares or allocated in the result of another merger or division of entities
• Changes in transfer pricing, consisting of extending the deadline to 14 days (from seven days) for the submission of Local documentation by the taxpayer at the request of the tax authority, and clarification of the provisions on the so-called safe financial harbor or simplification of the rules for making transfer pricing adjustments
• Limitation of tax depreciation in real estate companies

The bill would introduce a new minimum income tax, payable by corporate taxpayers (including tax capital groups and foreign entities having permanent establishment for tax purposes in Poland) if the taxpayers:

• Report losses from the sources of income other than capital gains or
• Report the share of income in the revenues (other than capital gains) amounting to 1% or less.

The rate of the minimum income tax is to be set at 10%.

The taxable base would be calculated as the sum of:

• 4% of the value of revenues from the sources other than capital gains
• “Excessive” debt financing costs, incurred for the benefit of related entities (in principle, exceeding 30% of tax EBITDA (earnings before interest, taxes, depreciation, and amortization))
• The value of deferred income tax resulting from the disclosure of non-depreciated intangible assets in tax settlements, to the extent it increases gross profit or decreases gross loss
• The value of costs regarding purchasing of some services and intangible rights (within the scope and definition similar to the existing Article 15e of the corporate income tax law) in the part exceeding 5% of tax-EBITDA plus PLN 3 million

The amount of the minimum income tax due would be deductible from the corporate income tax calculated according to general rules for three consecutive tax years after the given tax year in which the tax was paid.

The current rule under Article 15e of the corporate income tax law would be repealed. The taxpayers that before the end of the tax year starting before 1 January 2022 acquired the right to deduct non-deductible costs in a given tax year based on Article 15e would retain the right to the deduction after 31 December 2021. The interim provision would prohibit the possibility to renew advance pricing agreements (APA) concerning acquisition of intra-group services, which start to apply in the period from 1 January 2018 through 31 December 2021 and which exclude the limitation resulting from the current Article 15e.

The minimum income tax would not apply to: (1) taxpayers starting their business activity (in the year in which they commence their activity and for the two consecutive tax years); (2) taxpayers that are financial enterprises; (3) companies in which shareholders or members are natural persons and do not possess shares in other companies; and (4) the groups of at least two companies being the Polish tax residents, in which one company possesses for the entire tax year directly 75% share in the capital of the other companies forming the group, the tax year of the companies is the same and calculated for the tax year share of the total income of the companies in their total revenues is greater than 1%.

The bill would introduce in the corporate income tax law a provision concerning a “hidden dividend” in order to block the treatment tax deductible the costs incurred by a company “in connection with the supply” provided by an entity related to the company (or to the shareholder or member) if such costs could be considered to be a hidden dividend.

Costs could be considered to be a hidden dividend, if:

• The amount or the moment in which they are incurred depends in any way from generating the profit by the taxpayer or the amount of the profit;
• The taxpayer “acting rationally” would not incur such costs or would incur such costs in a lower amount, if comparable supply would be performed by unrelated entity; or
• The costs encompass the remuneration for the right to benefit from the assets, which were the property of the shareholder or the entity related to the shareholder before the taxpayer was incorporated.

The effective date for the hidden dividend provisions would be 1 January 2023.

The bill would introduce a provision limiting the shifting of the profits to related entities from “low-tax” jurisdictions. The measure would constitute a new source of income subject to taxation at source.

By shifted profits, it would be understood that the costs incurred directly or indirectly for the benefit of related entity, if:

• The tax actually paid by this entity is lower by 25% from the amount of tax that would be due from this entity according to the Polish law; and
• The subject costs constitute at least 50% of the revenues earned by this entity.

The measures concerning the tax on shifted profits would not apply to costs incurred for the benefit of related entity that is subject to tax on all its income in the EU or EEA Member State and conducts “real” economic activity in this state.

The bill would include long-awaited amendments to the withholding tax collection system. Read TaxNewsFlash

The scope of the "pay and refund" mechanism would be narrowed down to passive receivables, paid mainly as interest, dividends, and royalties, only to related entities (within the meaning of transfer pricing regulations). Dividends paid to Polish residents would also be excluded from the "pay and refund" mechanism.

The bill would extend the scope of the opinion on the application of withholding tax exemption (clearance opinion) on the preferences provided for in income tax treaties. The definition of the beneficial owner would be made more precise. It would be possible to use a copy of the certificate of residence, regardless of the value of the transaction, provided that the information resulting from the submitted copy of the certificate of residence does not raise reasonable doubts as to compliance with the facts.

The bill would provide certain innovation-targeted tax reliefs, including:

• Relief for entities hiring innovative employees, for taxpayers that obtain income from a business activity and that incur costs related to employing highly qualified employees involved with research and development (R&D)
• Prototype relief covering test production of a new product or of marketing such a product
• Pro-growth relief to increase revenues from product sales
• “IPO relief” for companies making initial public offerings (IPOs) or investing in such companies
• “Robotization relief” of reduced tax burden of the purchase of brand-new industrial robots as well as software and accessories needed to operate such robots

The bill would update the R&D provisions by providing for the possibility to jointly use the R&D relief and the IP Box scheme. Moreover, taxpayers having the status of research and development centres (R&D Centres) may benefit from a deduction of eligible costs incurred in a given tax year in relation to R&D activities amounting to 200 percent, including eligible costs of obtaining and maintaining a patent.

The bill would extend the Estonian corporate income tax scheme to limited partnerships and limited joint-stock partnerships. At the same time, the requirement to incur capital expenditures would be abandoned, as well as the condition regarding the upper limit of taxpayers' revenues taxed with a lump sum (and consequently also from the additional tax liability).

The bill would postpone the taxation of income from retained profits generated in the period of scheme application to the time of their actual distribution.

The measures in the Polish Deal also provide a solution encouraging disclosure of the income which has not been subject to taxation. Corporate income taxpayers and individual income taxpayers who, from October 2022 to March 2023, disclose their income and the amount of tax they should have paid, as well as describe the source of this income and the way it was transferred abroad, would be able to benefit from taxation of this income at the rate of 8%.

This measure would not apply to the income that generally arose as a result of committing a fiscal crime or fiscal offense.

The legislation would introduce provisions for value added tax (VAT) groups so that entities having financial, economic, and organizational relationships would be able to make joint VAT settlements.

A VAT group could be established by taxpayers having their registered office in Poland and entities that conduct business activity in Poland through a branch located in Poland.

The VAT groups would be available from 1 July 2022.

The changes would also introduce the ability of taxing financial services that currently benefit from a VAT exemption. A taxpayer conducting business in the field of financial services would be able to elect whether to take advantage of the VAT exemption or to choose the option of taxing the provided services with VAT.

Among the individual (personal) income tax and health insurance contribution measures are provisions that would:

• Increase the individual income tax-free allowance
• Increase the threshold for entering the highest individual income tax bracket of 32% to PLN 120,000
• Repeal the deduction of the health insurance contribution from the individual income tax
• Increase the amount of the health insurance contribution for entrepreneurs
• Introduce “middle-class relief”
• Provide a new tax incentive, to encourage individuals to move their place of tax residence to Poland and for the last three years

Read an October 2021 report prepared by the KPMG member firm in Poland