Poland - Taxation of cross-border mergers and acquisitions
Taxation of cross-border mergers and acquisitions for Poland.
Taxation of cross-border mergers and acquisitions for Poland.
Poland has fully incorporated the EU Parent-Subsidiary Directive [90/435/EC], Merger Directive [90/434/EC], Interest and Royalties Directive [2003/49/EC] and the EU-Swiss Savings Agreement, as well as the main assumptions resulting from the EU Anti-Tax Avoidance Directive (ATAD) [2016/1164/EC] and EU Directive with respect to mandatory automatic exchange of information in the field of taxation [2014/107/EC]. Poland is also the third country to have ratified the Multilateral Instrument (MLI) to Modify Bilateral Tax Treaties. Recently, the legislation implementing ATAD 2 [2017/952] regarding hybrid structures and instruments was finalized and respective provisions entered into force since 1 January 2021. Poland is also the first country to have implemented Mandatory Disclosure Rules (MDR) procedures based on the DAC 6 (EU Directive on cross-border tax arrangements).
Recent developments in the Polish tax law have substantially affected the tax environment and could have a major impact on mergers and acquisitions (M&A). These changes relate primarily to extending CIT (Corporate income tax)of certain partnerships, introducing an alternative taxation scheme, new reporting obligations for CIT payers and amendments impacting the real estate sector.
Many of the recent changes in the Polish tax law are related to the COVID-19 pandemic. The Polish government introduced several so-called Anti-crisis Shields, which included, in particular, the extension of deadlines for annual CIT and PIT reconciliations, MDR reporting, submission of transfer pricing information and issuing tax rulings, as well as exemption from social security contributions and payments of tax on income from buildings.
As of 1 January 2021, major amendments to the Polish tax law came into force, including (among others) the following.
- CIT taxation was extended to limited partnerships and certain general partnerships. Essentially, this means that instead of one-level taxation applicable to partners, two-level taxation was introduced; the income generated by limited partnerships (and certain general partnerships) is to be covered by CIT at the partnership level and PIT or CIT at the partner level.
- An alternative taxation scheme dubbed ‘Estonian CIT’ was introduced (i.e. a flat rate on gains of certain commercial companies with the main assumption to provide CIT payers with the possibility to pay income tax only when they decide to distribute the company’s earnings). The Estonian CIT may be applied only by the entities meeting a number of criteria and conditions.
- Amendments in taxation of gain on disposal of real estate companies were made. In the case that the seller of shares (or interest of similar nature) is a non-resident and the transaction covers at least 5% of the voting rights/interest of the real property company, the obligation to settle the capital gains tax (i.e. compute, collect and remit) will be imposed on the real property company (whose shares are sold).
- An obligation was introduced for taxpayers whose revenue exceeded 50 million Euros (EUR) to prepare and publish a report on the tax strategy executed in the given tax year.
- An obligation was introduced for real estate companies and taxpayers holding directly or indirectly at least 5 percent of shares in a real estate company to provide information on the share structure of such company to the Head of the National Revenue Administration.
- The utilization of tax losses carried forward in the case of certain restructuring events was excluded.
- A so-called ‘sugar tax’ was introduced on sugary drinks and small alcoholic beverages.
- A retail tax was introduced.
- The annual maximum revenue threshold to apply the 9% instead of the 19% CIT rate was increased from EUR1.2 million to EUR2 million.
Further, on 29 October 2020, the protocol amending the convention between the Republic of Poland and the Kingdom of the Netherlands on the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income was signed. The protocol introduces the so-called real estate clause and a principle purpose test, which serves as an anti-abuse clause.
Asset purchase or share purchase
An acquisition in Poland could take the form of a purchase of the shares of a company, its business or particular assets. However, there is no one preferential form for the acquisition, as the chosen form could depend on many circumstances and the objectives of the entity concerned.
Purchase of assets
Minimal formalities usually mean a purchase of single assets is a swift procedure unless real estate is involved. Only technical issues related to the transfer of the assets affect the timing and signing of the sale agreement.
The sale price should be based on the market value of the assets.
No goodwill arises for tax purposes on such transactions.
For the buyer, the acquisition price of the fixed assets and intangibles is the base for tax-depreciation purposes. Individual depreciation rates (higher than the standard rate) can normally be applied to second-hand assets.
Tax losses are not transferred on an asset acquisition; they remain with the seller.
For the seller, a profit on the sale of assets is added to the mainstream income subject to corporate or personal income tax at normal rates. On disposal, the taxpayer can deduct the net value of the assets. No relief is available to reduce the tax burden. Any losses of the selling company can be used to offset any profit (subject to the normal restrictions).
Value-added tax (VAT)
VAT arises on the sale of goods (e.g. stock, equipment) and certain intangibles. Currently, the standard VAT rate is 23 percent.
Generally, sales of buildings, constructions and their parts are VAT-exempt (except where the sale is performed in principle before the period of 2 years from the first occupation expires). However, in most cases, the taxpayer can waive the exemption where certain conditions are met. Supplies of buildings, constructions and their parts are also VAT-exempt if the seller has no right to deduct input VAT on the sale and certain other conditions are met.
Based on the Polish VAT Act in its current wording, the term ‘first occupation’ should be understood as letting for use to the first acquirer or first user, or commencement of own use, of buildings or structures, after completion of their construction or improvement (if the expenses incurred on the improvement constituted at least 30% of their initial value).
Where the sale is VAT-exempt, it is usually exempt from transfer tax on civil law activities (PCC), except for land and buildings. The purchase of real estate is subject to 2 percent PCC even if VAT-exempt.
A sale of assets outside the scope of VAT is subject to PCC of 1 percent or 2 percent, payable by the buyer. There is no separate PCC land tax in Poland.
Purchase of a business or organized part of a business
The sale of a business or an organized part of a business gives rise to taxable income for the seller on the difference between its acquisition cost for tax purposes and the sale price taxed at normal corporate rates. For an individual, such profit is taxed in the same way as normal business income.
The purchase of a business or organized part of a business is very quick if land is not included. The main complication is the need to prepare detailed lists of assets and liabilities and arrange for the transfer of agreements. In certain cases, permission of the competition authorities and/or the European Commission is required. The buyer is usually the legal successor for most purposes, but administrative decisions and permits generally do not automatically transfer.
The purchase of a business or an organized part of a business is generally advantageous where the disposing company has tax losses to offset against any potential taxable gain arising on the transaction and the acquiring company can benefit from tax-depreciable goodwill.
The buyer can depreciate the assets purchased based on their market value if goodwill arises. If no goodwill arises, the depreciation base of fixed assets and intangibles is the difference between the purchase price and current assets less liabilities. Goodwill can be depreciated for tax purposes over a minimum of 5 years. Where the assets are regarded as secondhand (more than 6 months old for movable property or 5 years old for buildings), individual depreciation rates (higher than standard rates) can be applied. Difficulties can arise if liabilities are included, especially in connection with the deductibility of interest on assumed debt.
VAT and transfer taxes
Where a whole business or an organized part of a business is sold, the transaction should be outside the scope of VAT. Instead, it is subject to PCC of 2 percent on movable property and real estate and 1 percent on rights. The buyer is liable for the PCC payment.
Responsibility for tax liabilities
The buyer of a business or an organized part of a business is jointly and severally liable with the seller for the tax liabilities relating to the acquired business activity that arose prior to the purchase, up to the amount of the purchase price (unless, despite acting with appropriate care, the buyer was not able to identify such tax liabilities). The seller or the buyer (with the seller’s consent) can seek a certificate from the tax authorities confirming the seller’s outstanding tax liabilities. In this case, the buyer would not be responsible for any liabilities not included on the certificate (which is valid for 30 days).
Purchase of shares
The purchase of a target company’s shares does not cause an increase in the base cost of that company’s underlying assets.
Any gain arising on the sale of shares is subject to CIT as income from capital. Any associated costs of acquisition that were previously disallowed are also deductible within this source of income. Gains on the sale of shares by an individual are subject to 19 percent income tax.
Tax indemnities and warranties
In a share acquisition, the buyer is taking over the target company together with all related liabilities. Therefore, the buyer normally requires more extensive indemnities and warranties than in the case of an asset acquisition.
Tax losses normally stay with a company (there is no change of ownership rule in Poland). Tax losses can be lost if the company is merged or split unless the loss-making company remains in existence. As of 2018, capital losses generated in 2018 and later years cannot be offset against operating income. Tax losses can be carried forward for up to 5 years. Only 50 percent of a tax loss from each previous period can be used in any 1 tax year. However, starting from 1 January 2019, taxpayers are entitled to a one-off utilization of tax losses up to PLN5 million.
Additionally, new regulations, introduced as of 1 January 2021, preclude the possibility to deduct the tax base for the taxpayer’s loss on acquisition of an entity, an enterprise or an organized part of an enterprise, including acquisition through in kind contribution, or reception of a cash contribution, for which the taxpayer purchased the enterprise or an organized part of the enterprise, and as a result:
- following such purchase or acquisition, the scope of the core business activity actually carried out by the taxpayer became different, in whole or in part, from the scope of the core business activity actually conducted by the taxpayer prior to such purchase or acquisition
- at least 25 percent the taxpayer’s shares are owned by the entity or entities that did not have such rights at the end of the tax year in which the taxpayer incurred a loss.
Generally, a sale of shares is subject to PCC of 1 percent, calculated on the shares’ market value (in practice, the sale price). The buyer is liable for the PCC. Generally, PCC tax applies regardless of the nationality of the buyer and the seller if the transaction includes shares in a Polish company (some tax-effective arrangements may be considered).
Purchase of partnership interest
Partnerships (except for joint stock partnerships, limited partnerships and certain general partnerships) are regarded as fiscally transparent for income tax purposes, with the profits and losses being allocated directly to the partners. On the sale of the business of a partnership, each partner is regarded as selling their allocable share of the partnership assets. The sale proceeds are taxable together with the value of any liabilities assumed by the buyer, but the net tax value of the assets being sold is deductible. Any profit is subject to tax at the normal rates.
Based on the recent approach of tax authorities, the sale of an interest in a partnership is not subject to PCC.
Partnerships are taxpayers for purposes of other taxes (e.g. VAT, PCC).
Choice of acquisition vehicle
Several potential acquisition vehicles are available to a foreign buyer, and tax factors often influence the choice. A 0.5 percent capital duty/PCC applies on capital contributions to a Polish company (share premium is not subject to capital duty in Poland).
Local holding company
Given the limitation on deductibility of interest incurred within debt pushdown structures introduced as of January 2018, arrangements that use a Polish special-purpose vehicle acquiring debt to purchase the shares, followed by a merger with the target, are not tax-efficient. Moreover, Poland does not provide participation exemption upon the sale of shares.
Foreign parent company
The foreign buyer may choose to make the acquisition itself, perhaps to shelter its own taxable profits with the financing costs. Non-residents are not subject to tax in Poland on gains on the disposal of shares in a Polish company (unless a so-called ‘real estate clause’ in a relevant tax treaty applies or stocks are quoted). All transactions concerning real estate companies should be carefully analyzed.
Non-resident intermediate holding company
Where the foreign country taxes capital gains and dividends received from overseas, an intermediate holding company resident in another territory may be used to defer this tax and perhaps take advantage of a more favorable tax treaty with Poland.
However, in an official 2017 letter, the Ministry of Finance indicated that a structure interposing an EU holding company between the Polish company and a non-EU ultimate parent would potentially lead to tax avoidance on the taxation of dividends if the structure lacks substance.
As of 2019, a tax remitter must maintain due care when verifying the recipient of dividends (holding) from the substance perspective and as a beneficial owner.
Acquisitions via a Polish branch are unusual in the Polish market. It is more common to conduct the business activity of a foreign entity through a branch.
Joint ventures can be either corporate (with the joint venture partners holding shares in a Polish company) or unincorporated (e.g. a partnership). Partnerships that are tax-transparent are generally considered to provide greater flexibility from a tax viewpoint. For example, where the joint venture is initially expected to make losses, the partners should be able to use their shares of those losses against the profits of their existing Polish trades.
In practice, non-tax reasons may lead a buyer to prefer a corporate joint venture. In particular, a corporate body may enable the joint venture partners to limit their liability to the venture (assuming that lenders do not insist on receiving guarantees from the partners).
Choice of acquisition funding
A buyer needs to decide whether an acquisition will be funded with debt or equity. The main concern is often to ensure that the interest on any funding can be offset against the profits of the target to reduce the effective Polish tax rate.
The principal advantage of debt is the potential tax- deductibility of interest (see ‘Deductibility of interest’), as the payment of a dividend does not give rise to a tax deduction. Until the end of 2017, a typical scheme consisted of using a debt pushdown structure. As of 1 January 2018, an amendment was introduced that denies tax deductions for interest on credits and loans incurred to acquire shares in a company, insofar as they would reduce income related to the continuation of the business of that company, in particular in connection with a merger and transformation of the legal form. Because of these limitations introduced on the deductibility of interest incurred within such structures and the new distinction between types of income, these scenarios are no longer tax-effective.
The costs of a share issue are generally not tax-deductible. However, according to an interpretation of the administrative courts, this treatment relates only to direct costs (e.g. court fees). Still, the tax authorities’ interpretation of the tax-deductibility of these costs should be carefully observed case-by-case.
PCC is levied on loans (from non-shareholders) at a rate of 0.5 percent but can be mitigated if properly structured.
Loans from banks or financial institutions are PCC-exempt. Shareholder loans granted to corporates are PCC-exempt. Loans granted by partners to partnerships generally are subject to 0.5 percent PCC.
Cash injections to increase the share capital and additional payments to a company’s equity are subject to PCC at 0.5 percent (except for share premium).
Deductibility of interest
Interest incurred to earn revenue is normally deductible when paid within the respective source of income. However, according to Polish CIT provisions (and confirmed in various interpretations and court verdicts), the capitalization is a form of payment. The exception to this rule is when the loan is used to purchase fixed assets. In this case, interest up to the time the assets are brought into use should be capitalized as part of the acquisition cost of the assets.
Interest on a loan to buy shares is currently considered to be tax-deductible when incurred and should be classified within the capital gain source.
When financing is to be taken by the Polish company, Poland’s earnings-stripping rules should be taken into account.
As of 1 January 2018, the amount of debt-financing costs exceeding 30 percent of EBITDA (or PLN3 million if higher) is not tax-deductible.
For purposes of the limitations, debt-financing costs include all costs related to obtaining financial resources from other entities, including unrelated parties, and using such resources. In particular, this includes interest, including interest capitalized or included in the initial value of the fixed or intangible asset, fees, commissions, bonuses, the interest component of leasing instalments, penalties and charges for delays in paying liabilities, and the costs of securing liabilities, including the costs of derivative financial instruments, without regard to the recipient of the payment.
Interest-like revenues include interest revenues, including interest capitalized to the loan principal and other revenues economically equal to interest that could fall into a category of debt-financing costs.
Surplus debt-financing costs are the excess of debt-financing costs deductible in the tax year over the interest-like revenues subject to the tax in that year. Debt-financing costs related to loans used for financing a long-term public infrastructure projects are excluded (where certain conditions are met). In a Tax-consolidated groups (TCG), debt-financing costs and interest-like income resulting from agreements concluded between group entities are also excluded.
According to the legislation, the restrictions do not apply where the surplus debt-financing costs do not exceed PLN3 million in the given tax year (12 months). In the case of TCGs, the threshold applies to the whole group.
Where debt-financing costs exceed the amount of financing that the taxpayer could obtain from a third party, the tax authority is entitled to adjust the taxpayer’s income or loss.
Withholding tax on debt and methods to reduce or eliminate it
Interest, royalties and certain payments for services (including advisory, advertising, and accounting services and guarantee fees) paid to a foreign entity are subject to 20 percent WHT under domestic legislation. This is reduced or eliminated under most Polish tax treaties. To qualify for the reduced rate, the payer must have a certificate of the beneficiary’s tax residence and maintain due care while conducting verification of the recipient as a beneficial owner and from the substance perspective. In addition, the entity receiving interest must be the beneficial owner. Where the interest is WHT-exempt under the domestic legislation, the status of the beneficial owner must be confirmed with a written statement.
A definition of ‘beneficial owner’ was added to the Polish Corporate Income Tax Act and subsequently amended as of 1 January 2019. An entity may be perceived as the beneficial owner if it:
- receives the payment for its own benefit, and decides independently on its use and bears the related economic risk
- is not an intermediary, representative, or trustee, or any other entity legally or factually obliged to hand over a part or the whole payment to another entity
- runs genuine business activity in the country of its registered seat in the case of receivables transferred in connection to the business activity carried out.
Under current law, if the certificate confirming the tax residence of the payment’s recipient does not include the period of its validity, then it should be considered as valid for only 12 calendar months following its date of issuance (as the data included in the certificate must be up-to-date). Where the recipient’s seat changes during the 12-month period, a new certificate should be obtained immediately.
This practice applies only where the respective tax treaty includes an exchange of information clause.
The EU Interest and Royalties Directive is fully in force in Poland. Consequently, interest and royalties paid to EU-resident companies or EU permanent establishments (PE) can be exempt from WHT in Poland. In order to apply the exemption, the Polish company paying the interest or royalties should have appropriate documentation, which includes the beneficiary’s certificate of residence and a written statement that the beneficiary’s revenues are not CIT-exempt (regardless of their source). Similar provisions apply to Switzerland.
The new WHT collection rules are in place as of 2019 (part of them are currently postponed until end of June 2021 on the basis of Decree of the Ministry of Finance). As of July 2021, the possibility to apply exemption or reduced WHT rate would only be, as a rule, applicable if the aggregate qualifying payments to the given recipient (interest, royalties, fees for certain intangible services and dividends) being the taxpayer — regardless of whether it is a related or unrelated party — do not exceed the threshold of PLN2 million.
Based on the general rule, if the aggregate qualifying payments to the given taxpayer exceed PLN2 million, as a rule, the Polish WHT remitter will be obliged to collect and pay WHT at domestic rates (i.e. at 19 percent for dividends and 20 percent for other qualifying payments), ignoring the WHT domestic exemptions and tax treaties reliefs. This would apply to the payments in excess of PLN2 million. The taxpayer (or the tax remitter for cases where they would pay tax from their own resources and bear the economic burden of tax) would subsequently be entitled to seek a WHT refund.
Nevertheless, there are the following exceptions from this rule allowing application of the reduced WHT rates or WHT exemption even when the PLN2 million threshold is exceeded: (i) providing the tax authorities with the WHT remitter’s statement on fulfilling the conditions to apply a relief; or (ii) obtaining a WHT clearance opinion from the tax authority.
The tax remitter is obliged to assure due care, which should take into account the nature and scale of its business activity. The concept of the due care indicated in the new Polish WHT rules has not yet been established.
WHT collection matters together with the due care concept are currently subject to public discussions with the Ministry of Finance. Draft guidelines were issued in this respect, but it is expected that the Ministry of Finance will issue further guidelines on WHT. Currently, the Ministry of Finance proposes that the pay and refund mechanism should cover only ‘passive’ payments (i.e. interest, royalties and dividends, and also apply only to payments between related entities).
Checklist for debt funding
- The use of bank debt may eliminate transfer pricing problems and should obviate the requirement to withhold tax from interest payments. (The relevant tax treaties and the new beneficial ownership of interest rules should be analyzed.) A certificate of tax residence and, where the exemption claim is based on the EU directives, a shareholder statement is required.
- Deductibility of interest over PLN3 million on debt (including both related and unrelated) is limited to 30 percent of EBITDA. Currently, there are two approaches: tax authorities claim the limit is effectively the higher of PLN3 million or 30 percent tax EBITDA; however, the Polish tax courts in a few recent verdicts presented a different approach and stated that the threshold of 30 percent of tax EBITDA should increase the limit of PLN3 million of safe harbor deduction.
- WHT of 20 percent applies to interest payments to non-Polish entities unless a lower rate applies under the relevant tax treaty or EU directive.
- Potential foreign exchange implications.\
- PCC implications on providing funds.
A buyer may use equity to fund its acquisition, possibly by issuing shares to the seller in satisfaction of the consideration. Further, the buyer may wish to capitalize the target post-acquisition.
Any establishment (or increase) of the share capital in the Polish company is subject to 0.5 percent PCC in Poland (a share premium is not subject to PCC). Dividend payments from a Polish company may be exempt from WHT if the conditions of the EU Parent-Subsidiary Directive are met. Dividends are not deductible for Polish tax purposes.
Although equity offers less flexibility should the parent subsequently wish to recover the funds it has injected, the use of equity may be more appropriate than debt in certain circumstances, such as:
- low EBITDA of the borrowing entity
- utilizing to the maximum extent the notional interest deduction (discussed in ‘Other considerations’)
- where the target is loss-making, in which case it may not be possible to offset the cost of interest
- where the funding company prefers not to recognize taxable revenue arising from interest.
Generally, dividends paid by a Polish company are subject to 19 percent WHT, which is reduced under most of Poland’s tax treaties. To qualify for the reduced rate, the payer should have a certificate of tax residence for its shareholder.
In principle, foreign dividends received by a Polish company are subject to normal CIT, unless a tax treaty stipulates otherwise. The Polish company receiving the dividend can offset the WHT against its mainstream corporate tax liability where the treaty includes the respective provisions.
For 75 percent shareholdings in non-EU, non-European Economic Area (EEA) and non-Swiss tax-residents, a credit can also be claimed for underlying tax paid on the profits from which the dividend is paid. This only applies where the subsidiary is resident in a country with which Poland has concluded a tax treaty and the Polish entity has held the shares for at least 2 years. The total foreign tax credits cannot exceed the Polish tax payable on the dividend income. However, this applies only where the relevant treaty includes an exchange of information clause.
Domestic dividends and dividends paid to an EU- or EEA- resident company (or its PE), where the shareholder owns at least 10 percent of the payer, are exempt from Polish WHT, provided the shares have been owned for more than 2 years. In order to apply the exemption, the Polish company paying the dividend should have appropriate documentation, which includes the beneficiary’s certificate of residence and a written statement that the beneficiary’s revenues are not CIT-exempt (regardless of their source). Dividends can qualify conditionally even where the holding period has not been met. This treatment also applies to dividends paid to Swiss shareholders (the required shareholding threshold is 25 percent) and European cooperative societies (societas cooperativa Europaea (SCE)). The tax remitter must maintain due care when verifying the dividend recipient from the substance perspective and as a beneficial owner.
Dividends paid by an EU or EEA subsidiary to its Polish parent company are exempt from income tax in Poland where the 2-year holding period is met and the subsidiary is taxable on its worldwide income in an EU or EEA member state. The participation requirement for a Polish parent company is a shareholding of at least 10 percent.
This treatment also applies to dividends paid from a Swiss subsidiary to its Polish parent company. In this case, the required shareholding threshold is 25 percent. These parent-subsidiary provisions also apply to SCEs.
The new WHT collection mechanism introducing a pay and refund system to payments over PLN2 million was suspended until the end of June 2021.
The Polish tax system used to be very form-driven and generally classified hybrid instruments by their legal form. Currently, due to the legislative amendments aimed at artificial tax avoidance schemes, the Polish tax authorities have adopted a more substance-oriented approach. Not only are the tax authorities authorized to recharacterize the transaction based on the substance-over-form principle, but they are also empowered to apply the General Anti-Abuse Regulation. As the set of instruments granted to the authorities by the legislator expands, a need to have sufficient business justification before implementing planned transactions is even more essential.
Recently, the legislation implementing ATAD 2 [2017/952] with respect to hybrid structures and instruments was finalized and respective provisions of the CIT act entered into force since 1 January 2021. The key objective of the new provisions is to prevent hybrid mismatches giving rise to a double deduction or to a deduction without taxation in different tax jurisdictions.
Any discount on the issue of securities is recognized as a deduction for tax purposes when the security is redeemed. This is only treated as income for the buyer on redemption.
Any deferred settlement must be analyzed in detail case-by- case as its tax treatment in Poland depends on the wording of the agreements and circumstances of the transaction.
Based on the CIT law, in principle, any method of settling liabilities (e.g. by offset of mutual receivables/liabilities between the parties) should be treated as a payment and result in the recognition of foreign exchange differences for tax purposes (provided other conditions are met).
Many of the recently introduced regulations to the Polish CIT law are likely to have a significant impact on the CIT position of the Polish companies. As some aspects of the changed rules are ambiguous, the potential loopholes arising are yet to be established in the Polish tax authorities’ practice. Therefore, when making the decision about undertaking a transaction involving any Polish-based company, it is recommended to observe how the market practice evolves in this respect.
Limitation of deductibility of fees for intangible services
Fees paid for certain intangible services (e.g. consultancy, advertising, marketing, data processing), royalties and insurance costs, guarantees and suretyships are excluded from tax-deductible costs if they exceed 5 percent of EBITDA. The limitation covers payments made directly or indirectly to related parties. The restrictions do not apply if the taxpayer obtains an advance pricing agreement (APA) from the Polish Ministry of Finance in that regard. The restriction does not apply to the fees for intangible services up to PLN3 million annually.
Separation of sources of income and loss
As of 2018, a concept of two sources of income — capital gain (e.g. from a sale of shares) and income from business activity — was implemented. As a result, taxable profits and tax-deductible costs are to be separately settled for CIT purposes. Taxpayers must recognize tax losses incurred within each income source separately, except for the tax losses incurred before the provisions entered into force, which can be settled with both sources of income.
As a result of the implementation of the ATAD Directive, as of 1 January 2019 the exit tax has been introduced to the Polish tax law. Consequently, transfer of assets by a taxpayer from Poland to another country, including those owned by a PE, triggers in Poland taxation of unrealized gains generated in the period during which the assets were located in Poland. The basic exit tax rate is 19%; however, there is a lower tax rate of 3% for exit taxation of personal income.
Mandatory Disclosure Rules
The reporting obligations in Poland were imposed on taxpayers based on the changes implemented in the Polish Tax Code that came into force on 1 January 2019, with a retroactive effect in certain cases from 25 June or 1 November 2018 depending on the event in question.
These provisions transposed the (EU) Directive of the Council of the European Union no. 2018/822 of 25 May 2018 amending the Directive 2011/16/EU with respect to mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (DAC 6).
The Polish MDR provisions went further and extended the reporting obligations compared to DAC 6; the Polish MDR provisions include additional hallmarks that may be triggered by a tax arrangement. As a result, the Polish MDR regulations cover not only those tax arrangements that include hallmarks under DAC 6 but also other transactions (including domestic and other cross-border transactions, and VAT transactions).
Due to the complexity of the new rules, the Polish Ministry of Finance issued guidelines to MDR, which unfortunately are still inconsistent and in many cases contradictory to the law. Another set of guidelines is expected to be released by the Ministry of Finance, but the timing is not yet known.
Starting from 2019, a reduced CIT rate of 9 percent is applicable for taxpayers whose revenues in a given tax year did not exceed the equivalent of EUR1.2 million and who have ‘small taxpayer’ status (i.e. their revenue (including VAT) in the preceding tax year did not exceed the equivalent of EUR2 million). As of 1 January 2021, the annual maximum revenue threshold to apply the 9% instead of the 19% CIT rate has been increased from EUR1.2 million to EUR2 million. The preferential rate may be applied to revenues other than from capital gains.
As of 1 January 2019, new regulations provide for a preferential 5 percent CIT rate from the profits from commercialization of intellectual property rights that were created or developed by the taxpayer.
In January 2017, the Polish legislator reinstated VAT sanctions, including an additional tax liability of 20 percent, 30 percent and 100 percent of the understated VAT liabilities or overestimated refund for certain infringements of the VAT Act provisions.
In July 2018, a voluntary split payment system for VAT was introduced and, in November 2019, the mandatory split was broadened to selected sectors giving buyers the choice of paying VAT amounts into a dedicated bank account of the seller. In some cases, entities that decide to apply the split payment mechanism are expected to receive a number of incentives (e.g. lack of VAT sanctions).
From 1 January 2020, the Notional Interest Deduction (NID) mechanism has been introduced into the Polish CIT Act. NID allows companies to increase tax-deductible costs by the amount of notional (not incurred) interest calculated on additional equity contributed by the shareholder (in the form of additional payments) and/or retained earnings transferred to supplementary capital or reserve capital (by multiplying these balances by a prescribed rate). NID regulations apply to the equity funding made on or after 1 January 2019. The maximum deduction is capped at PLN250,000 per financial year and is limited to the 3 consecutive years.
Concerns of the seller
Sale of assets
Capital gains are subject to tax at the normal Polish CIT rate. In principle, the sale of assets is subject to VAT. The buyer is liable for any PCC payment. A capital gain obtained by an individual seller that runs business activity is taxed at a 19 percent flat rate. However, in other cases it is subject to tax at normal progressive PIT rates.
Sale of shares
Based on Polish income tax provisions, the seller is subject to CIT on a gain on the sale of shares of a Polish company. However, non-residents should not be subject to income tax in Poland under most Polish tax treaties (unless a so-called ‘real estate’ clause in the treaty applies). Generally, a disposal of shares in a company whose value is derived mainly from real estate is taxable in Poland, provided that the relevant tax treaty contains a real estate clause. Additionally, indirect transfers of such shares may be taxable in Poland where the relevant tax treaty contains a real estate clause. Because Poland ratified the MLI, the wording of real estate clauses in certain tax treaties may be subject to change. In certain cases, capital gain tax is paid by the real estate company being sold, and not by the seller.
Where the shares are acquired in exchange for a contribution in kind to an enterprise or an organized part of an enterprise, a gain may be deferred until the shares are sold. A compulsory redemption of shares is treated as a dividend and the income derived thereupon is deemed as an income of a capital nature; however, no EU Parent Subsidiary Directive exemption can be applicable upon such redemption.
A share buyback is treated in the same manner as a gain on a sale of shares.
Gains on the sale of shares obtained by an individual are subject to 19 percent tax, settled within the capital source of income.
In principle, most investments in Poland do not require advance approval for non-strategic sectors. On an acquisition, the most common approval required is that of the Office for the Protection of Competition and Consumers, often referred to as the anti-monopoly office. The EU competition rules apply.
Where the Polish target company owns land, the buyer must obtain advance permission from the Ministry of the Interior to acquire more than 50 percent of the shares. This requirement does not apply to EU/European free trade area buyers.
In the case of agricultural and forest lands, there are still some restrictions.
Company law and accounting
Based on the Polish Commercial Companies Code, the main forms of reorganizations are mergers and demergers of the companies. Another popular form of reorganization is the contribution in kind of a business or organized part of the business.
Two types of mergers are possible in Poland: a takeover by an existing company and a merger of two companies into a new company. From a legal perspective, the merger is the most complete method of integration because the acquiring company is the legal successor to all rights and obligations of the acquired company. A merger also generally ensures that administration decisions, concessions and permits are automatically transferred to the acquiring company. This is the general position, but other legal issues may be involved, and each case should be analyzed separately. The interpretations of tax law issued by the Head of National Tax Information to the company being subsequently merged into another entity (the acquiring entity) do not protect the latter after the merger.
Most mergers between Polish companies are tax-free for the merging companies and their shareholders, provided that certain conditions are met.
The amendments to the CIT Act that came into force as of 1 January 2017 introduced a presumption according to which if a merger was not carried out for valid business reasons it should be deemed as executed with the main objective (or one of the main objectives) of avoiding or evading taxation. Where it can be shown that the merger was not carried out for bona fide commercial reasons and that there was intent to avoid tax, the transaction is no longer tax-free.
Mergers do not affect hidden tax values, such as goodwill or increases in the value of assets. Existing prior-year tax losses are eliminated unless the loss company survives and its core business operations would be unchanged after the merger execution (see ‘Tax losses’). Generally, a merger may be beneficial where the business being transferred is profitable because unrealized gains are not taxed on the merger. A merger may also be beneficial where the company taken over has no significant tax losses (which would be lost on a merger). On the other hand, income derived upon mergers qualifies as income from the capital source and therefore cannot be offset against tax-deductible costs resulting from an ongoing activity.
Poland has fully adopted the EU Tax Merger Directive, so mergers between Polish companies and entities resident in EU member states are treated the same as domestic mergers.
Thus, under the commercial law, cross-border mergers can take place where a European company is being created. Also, domestic corporations (and limited joint stock partnerships) can be merged cross-border with the EU-based company described in the directive (although a limited joint stock partnership cannot be the acquiring entity).
Where the acquiring company has a shareholding of less than 10 percent of shares of the company being acquired, the value of the net assets acquired in excess of the acquisition costs of this shareholding is treated as a dividend. However, gains realized upon merger cannot benefit from the WHT exemption provided in the Polish CIT Act. The other shareholders of the entity being taken over are treated as realizing a gain equal to the difference between the acquisition cost of those shares and the issue value of new shares, but taxation is deferred until the new shares are disposed of.
Where a merger is accounted for using the acquisition method, the books should be closed on the date of the merger and the tax year of the entity taken over ends. There is no such obligation where the merger is accounted for using the pooling of interest method. In this case, the merged entity can file a single year-end return.
Mergers are outside the scope of VAT and, in principle, create no negative VAT consequences.
A merger of a Polish corporation and an SCE is not subject to PCC. Generally, any increase in share capital as a result of the merger is subject to PCC at 0.5 percent (provided the increase was not previously taxed in the merging entities, unless, in the case of a corporation, such non-taxation of contributions was allowed by the domestic law of the EU country of one of the merging companies).
Due to complex legal procedures, the process can take 6 to 8 months, although a merger of a parent and a 100-percent owned subsidiary or a merger of sister companies usually takes 4 to 6 months.
KPMG in Poland notes that the timeframes for cross-border mergers vary, depending on the local jurisdictions and the direction (inbound or outbound) of the merger. During recent years, cross-border mergers become more popular in Poland.
A company may be divided into two or more companies.
A division of a joint stock company is not possible unless the initial capital is fully paid-up. Partnerships cannot be divided. A company in liquidation that has started distributing its assets to shareholders or a company in bankruptcy cannot be divided.
A division may be effected by:
- transferring all the assets of the company
- being divided to other companies in exchange for shares in the acquiring company, which are taken up by the shareholders of the divided company (division by takeover)
- forming new companies to which all the assets of the divided company are transferred in exchange for shares in the new companies (division by formation of new companies)
- transferring all the assets of the divided company to an existing company and a newly formed company or companies (division by takeover and formation of a new company) transferring some of the assets of the divided company to an existing company or a newly formed company (division by separation).
No CIT obligation usually arises for the demerged entity or its shareholders as long as an organized part of the business is transferred to the receiving entity and, in a division by separation, an organized part of the business remains in the company being demerged and an organized part of the business is transferred to the receiving entity. This does not apply where the main purpose of the demerger is to evade or avoid tax. In addition, the demerger is not tax-free if the acquiring entity has less than 10 percent of the shares of the company being demerged and/or the cash is distributed. Where the demerger is not carried out for valid business reasons, it should be deemed as executed with the main objective (or one of the main objectives) of avoiding or evading taxation.
If the transaction is not tax-free, the following income tax implications arise.:
- Shareholders of the company (companies) being divided: The difference between the value of the shares received and the acquisition costs of the original shares established in proportion to the transferred assets is treated as a dividend. However, gains realized on the demerger may not be subject to the domestic WHT exemption.
- Demerged company: The difference between the market value of the assets being transferred and the tax written-down value is taxable or tax-deductible. The WHT exemption is not applied.
- The entity receiving part of the demerged business: The difference between the value of assets received and the issue value of the shares issued to the shareholders of the demerged company is treated as taxable income or tax-deductible.
Generally, a demerger should not be subject to VAT. Any increase in share capital is subject to PCC at the rate of 0.5 percent. Whether the increase of the share capital covered by assets that were previously taxed in the demerging entity is subject to 0.5 percent PCC should be analyzed on a case-by-case basis.
Contribution in kind
The contribution in kind of a business or an organized part of a business in exchange for shares is not subject to corporate tax at the time of contribution. The tax-neutrality of such events depends on having valid business justification. A contribution of assets (including shares) is regarded as a taxable disposal. The contributor is regarded as having received proceeds equal to the value of contribution determined in the articles of association or another document of a similar nature. However, if the value of contribution is lower than the market value of contributed shares or the value is not indicated in the above documents, the income would be equal to the market value of the contribution performed.
For companies, any gain is added to the capital source of income and subject to corporate tax at normal rates. For individuals, a profit from a contribution of assets other than a business or organized part of a business in exchange for shares is subject to 19 percent tax. The contribution of shares carrying an absolute majority of voting rights in companies by a Polish company to another EU- or EEA-resident company is not subject to tax. In order to benefit from the preferential taxation for such events, valid business justification should exist.
For tax-depreciation purposes, taxpayers receiving a contribution in kind of a business or organized part of a business generally should use the initial value of the fixed assets in the books of transferring party (the continuity principle). Special care should be taken if liabilities are included.
Contributed goodwill, knowhow and assets allocated to reserve capital cannot be depreciated for tax purposes.
The contribution in kind of a business or an organized part of a business is not subject to VAT. A contribution of assets or rights is subject to VAT if the supply of such goods would be subject to VAT. An increase in share capital is subject to PCC at the rate of 0.5 percent (a share premium is not subject to PCC). By contrast, the contribution in kind of a business or an organized part of the business to a capital company is currently not subject to PCC.
Generally, each company is taxed on a stand-alone basis. A fiscal group can be created for corporate tax purposes, consisting of a Polish parent and its 75 percent Polish subsidiaries with an average qualified share capital per company of PLN500,000. The subsidiary companies cannot own shares in other companies that are members of the group.
An agreement must be signed by the members to form a fiscal group for at least 3 years. This should take the form of a notarized deed, which is then registered with the tax office. A fiscal group is regarded as one taxpayer. Losses arising before the group is formed cannot be offset against the group’s profits.
A number of conditions need to be met. Operationally, the most significant requirement is that the taxable income of the group for tax purposes must be equal to at least 2 percent of gross taxable revenue.
The arm’s length principle generally applies to transactions between related companies. The Organisation for Economic Co-operation and Development’s (OECD) transfer pricing guidelines are followed in applying domestic transfer pricing legislation. The provisions apply to transactions between related parties in circumstances where the taxpayer does not carry out transactions on an arm’s length basis. In these cases, the tax authorities have the right to adjust the level of declared income.
Since 1 January 2019, the new transfer pricing regulations had been introduced, which changed the rules for determining the obligation to prepare transfer pricing documentation.
Further reporting requirements are imposed on domestic taxpayers whose consolidated revenue exceeds the equivalent of EUR750 million — they are required to prepare and submit to the tax authorities a report on the amount of income and tax paid and the places of business activity of their subsidiaries and foreign establishments.
A taxpayer may conclude an APA with the Minister of Finance to confirm the appropriateness of the taxpayer’s transfer pricing policy. The purpose of an APA is to agree in advance on the arm’s length nature of the terms of the transactions between related parties. APAs also cover the attribution of profit to PEs. Once an APA is concluded, the local tax authorities will not be able to question the arm’s length nature of the covered transactions. As of 1 January 2018, restrictions on the deductibility of fees for intangible services do not apply to entities that have obtained an APA. At the end of September 2020, the Minister of Finance had concluded only 88 APA agreements.
Foreign investments of a local target company
Poland recently amended controlled foreign company (CFC) provisions: controlled CFC status currently depends on, among other things, the effective tax rate imposed on the foreign company (in lieu of a nominal tax rate). The passive profits threshold has decreased to 33 percent (from 50 percent), and the required ‘controlling’ stake has increased to 50 percent (from 25 percent).
Comparison of asset and share purchases
Advantages of asset purchases
- The buyer may depreciate the assets acquired at market value. If goodwill arises (it is possible to acquire only part of the business) on assets under an asset deal, the price constitutes the depreciation base.
- The tax liabilities assumed by the buyer (for which they are jointly and severally liable with the seller) can be eliminated or limited if a special certificate is obtained from the tax authorities (where a business or organized part of a business is acquired, no such liability arises on purchases of single assets).
- If the purchase is funded by debt, the interest can be offset against the profits of the acquired business.
- Loss-making companies within the buyer’s group can absorb profitable operations (or vice versa), reducing the effective tax rate.
- If the purchase is subject to VAT, the input VAT can be deducted.
- Where a business or organized part of the business is purchased, goodwill is subject to tax depreciation.
Disadvantages of asset purchases
- Possible need to renegotiate supplier agreements and employment contracts.
- Pre-acquisition losses and other tax attributes of the target company are not transferred with the business. They remain with the target company or are lost.
- Higher capital outlay is usually involved.
- Higher capital taxes if ongoing business is purchased (usually) or a cash flow disadvantage if the transaction is subject to VAT.
- Possible VAT clawbacks (if the transaction is VAT-exempt).
- May be unattractive to the seller, thereby increasing the price.
- Usually involves more formalities because each individual component needs to be transferred.
- Structure of transaction must be carefully examined; re-classification may trigger adverse tax consequences.
Advantages of share purchases
- Likely more attractive to seller, so the price is likely lower (if properly structured, no capital gains tax arises for the seller).
- Tax losses and other attributes of the target company can be used post-acquisition.
- May gain the benefit of existing supply and technology contracts.
- Lower capital taxes payable (usually).
- Not subject to VAT, so simpler and quicker to execute.
- Purchased company is not subject to taxation on the transaction.
Disadvantages of share purchases
- Liable for any claims or previous liabilities of the entity, including tax liabilities.
- No immediate deduction for the purchase price.
- More difficult to finance tax-efficiently.
- Lack of effective tax consolidation means that post-acquisition integration with the buyer’s existing Polish operations can be complex; no step-up on assets is possible.
- 1 percent PCC payable by the buyer on the acquisition but no recognition of tax-deductible goodwill.
KPMG in Poland
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T: +48 22 528 1153; +48 604 496 370
This country document does not include COVID-19 tax measures and government reliefs announced by the Polish government. Please refer below to the KPMG link for referring jurisdictional tax measures and government reliefs in response to COVID-19.
Click here — COVID-19 tax measures and government reliefs
This country document is updated as of 31 January 2021.