Poland: Parliament passes bill, tax measures in “Polish Deal” pending enactment

The Polish Parliament on 29 October 2021 passed a bill amending the income tax laws affecting corporations and individuals and also amending the value added tax (VAT) and other tax legislation.

The bill as ultimately passed contains tax provisions under the “Polish Deal.” Once signed by the president, the measures will be enacted. The provisions generally have an effective date of 1 January 2022.

The Polish Deal provides for imposition of a new minimum income tax due form corporate income taxpayers, including tax capital groups and foreign entities having their establishments in Poland, reporting losses from a source of revenue other than capital gains or for which a share of income from a source of income other than capital gains in revenue other than capital gains amounts to 1% or less.

The new minimum tax rate is set at 10% of the taxable base, calculated as the sum of:

• 4% of the value of revenues from sources other than capital gains
• “Excessive” debt financing costs incurred for the benefit of related entities (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 of purchase of particular services or intangible rights (with a scope and definition similar to those provided by the currently existing Article 15e of the corporate income tax law, which is also to be repealed) incurred for the benefit of related entities, in the part exceeding 5% of tax-EBITDA, plus PLN 3 million

The amendments also limit the shifting of profits—i.e., transfer of income to related entities from jurisdictions of low effective taxation.

Furthermore, the amendments reflect new provisions addressing “hidden dividends” and prevent companies from deducting costs incurred in connection with payments made by the entity related to the company or to the shareholder or partner of the entity, if such costs can be considered to be a hidden dividend. The provisions on hidden dividends are to be effective 1 January 2023.

Other corporate income tax amendments include:

• Extending the “Estonian corporate income tax” scheme application to limited partnerships and limited joint-stock partnerships and relaxing the conditions for using it
• Changes related to tax consequences of reorganizing and restructuring proceedings, introducing the Polish holding company scheme under which holding companies will be authorized to apply an exemption from taxation of gains from the sale of shares in subsidiaries (but, at the same time, use a participation exemption for dividends amounting only to 95% instead of a 100% relief under general terms)
• Introducing regulations regarding the place of effective management, as well as changes to withholding tax provisions, primarily consisting in narrowing the scope of application of the pay and refund mechanism to passive payments made to related entities
• Clarifying the definition of a beneficial owner
• Extending the scope of an opinion confirming a taxpayer’s entitlement to use a withholding tax exemption to cover reliefs provided for under income tax treaties

The bill also includes certain innovation-targeted tax relief such as:

• Relief for entities hiring innovative employees, with relief offered to taxpayers that obtain income from 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 the product
• Pro-growth relief to increase revenues from product sales
• IPO relief offered to companies making initial public offerings or investing in such companies
• Robotization relief, consisting in reducing the tax burden of the purchase of brand-new industrial robots as well as software and accessories needed to operate such robots

Amendments are also introduced to R&D relief provisions, under which taxpayers having the status of R&D centers may benefit from a deduction of eligible costs incurred in a given tax year in relation to R&D activities amounting to 200%, including eligible costs of obtaining and maintaining a patent. Importantly, the amendments provide for simultaneous use of the R&D relief and IP “box scheme.”

Furthermore, the bill introduces measures concerning VAT groups. Under the new provision, entities having financial, economic, and organizational relationships will be able to make joint VAT settlements. A VAT group may be established by taxpayers with their registered office in Poland and entities conducting business activity in Poland through a branch. The provisions on VAT groups have an effective date of 1 July 2022.

Changes also introduce the option of taxing financial services that currently benefit from a VAT exemption. A taxpayer conducting business in the financial services sector will be able to elect whether to take advantage of the exemption or to elect the option of subjecting the provided services with VAT.

Among the amendments with regard to individual income tax and health insurance premiums introduced under the Polish Deal include:

• Increasing the income tax-free allowance to PLN 30,000 annually for taxpayers using tax scale
• Increasing the threshold for entering the highest personal income tax bracket of 32% to PLN 120 thousand
• Eliminating the tax-deductibility of health insurance premiums and increasing health insurance premiums for entrepreneurs (generally, up to 9% of the actual income) or applying to entrepreneurs a flat individual income tax rate (up to 4.9% of the actual income) or the lump-sum income tax (the amount of the premium is to depend on the income and the average remuneration in national economy)
• Extending the mandatory health insurance contribution scheme to individuals receiving remuneration for performing board functions—read a November 2021 report

The Polish Deal program introduces “middle-class relief” for individuals working under a contract of employment and entrepreneurs applying the tax scale with annual revenue between PLN 68,412 and PLN 133,692, to neutralize the negative effect of revoking deductibility of health insurance premiums.

Other individual income tax relief or incentives under the bill include the “return relief” (to be offered to individuals moving their place of tax residence to Poland, having a Polish citizenship or holding a Polish charter (Karta Polaka)  who remained non-Polish tax residents for the last three years), the “0” incentive for pensioners (a tax exemption for individuals who, despite reaching the retirement age, decide to remain professionally active, with revenue of up to PLN 85,528 annually) and “0” for large families (a tax exemption for taxpayers with at least four children, with revenue of up to PLN 85,528 annually).

There are also amendments that would affect provisions on tax depreciation by extending the catalog of assets used in the conducted business activity, the sale of which, once they cease to be used in business activity, would be classified under income tax as revenue from business operations; excluding write-offs on residential buildings and premises from tax-deductible costs; and excluding the possibility of taxing the so-called private lease on general principles to replace it with lump-sum taxation.

Other tax-related amendments under the bill include:

• Consolidation relief for entities bearing eligible expenses for the acquisition of shares in companies, allowing such entities to reduce their tax base by expenses incurred up to PLN 250,000
• Introduction of transitional lump-sum taxation (for corporate and individual taxpayers who, from October 2022 to March 2023, disclose their income and the amount of tax they were to have paid, as well as provide information on the source of this income and who, in return, will be able to take advantage of taxing this income with a lump-sum tax of 8%)
• Extension of the deadline for submission of the Local file to 14 days (from seven days) and clarification of financial safe harbor provisions and simplified rules for making transfer price adjustments
• Changes to the lump-sum taxation of recorded revenues
• Limiting depreciation of assets of real estate companies
• Enabling investment deals between investors and tax authorities, setting forth tax consequences of a new investment planned or commenced in Poland

Read a November 2021 report [PDF 316 KB] prepared by the KPMG member firm in Poland