Polish Deal 3.0 adopted by the Sejm | Tax Focus

On 15 September 2022, the Sejm passed Polish Deal 3.0[1], a bill amending the Corporate Income Tax Act and certain other acts. Below please find the most important tax solutions provided for in the bill.

CIT & PIT

Modification and deferred application of the minimum income tax regulations

• The application of the minimum income tax regulations has been suspended until 31 December 2023[2];
• The profitability ratio has been increased from 1% to 2%, and the methodology for its calculation has been modified by excluding:
• from deductible costs – payments under leasing contracts, 20% of employment costs[3] and increases in electricity, heat or mains gas purchase costs compared to the previous tax year;
• from revenue and deductible costs – the value of trade receivables sold to factoring companies;
• from payments made – excise duty (also taking into account trade in excise goods), retail sales tax, gaming tax, fuel and emission charges[4].
• The existing revenue ratio for the purpose of determining the tax base has been changed and an alternative tax base has been introduced, which can be opted for by taxable persons at their own discretion, i.e.:
  • 5%[5] of revenue + passive costs, i.e. costs of debt financing and intangible services – with the tax rate set at 10%;
  • 3%[6] of revenue – with the tax rate set at 10%.
• In addition, the following groups have been excluded from the minimum tax:
  • CIT taxable persons whose annual revenue does not exceed EUR 2,000,000 (i.e. small taxable persons);
  • utility companies;
  • taxable persons with the majority of revenue generated in connection with the provision of health care services;
  • taxable persons whose profitability in one of the last three tax years exceeded 2%;
  • taxable persons that have gone into bankruptcy or liquidation or those undergoing restructuring proceedings.

Repealing the “hidden dividend” regulations

The “hidden dividend” regulations aimed at countering corporate profit transfers have been repealed following numerous interpretative doubts.

Changes in recognizing debt financing costs as tax deductibles

• The excess of debt financing costs over the higher of PLN 3,000,000 or 30% of EBITDA obtained by taxable persons being excluded from tax deductible costs has been clarified;
• In addition, the following types of financing have been excluded from the scope of the regulations limiting the possibility of recognising debt financing costs as tax deductibles:
  • financing granted by banks or cooperative savings and credit unions established in a European Union Member State or in a European Economic Area state;
  • financing for the acquisition or take-up of shares or of all rights and obligations in entities unrelated to a taxable person.

Changes in profit shifting taxation rules

A number of changes have been made to the calculation of profit shifting tax, in particular:

• only tax deductible costs are covered;
• the condition concerning preferential taxation in a state of residence, management, registration or location of a related entity has been simplified, i.e. it has been indicated that taxation at an effective rate lower than 14.25% should be applied directly to a related entity’s revenue falling within one of the categories listed in Article 24aa(3) (1)-(5) of the CIT Act, e.g. revenue from interest, advisory services or royalties[7] (and not to its entire income),
• a number of conditions for related entities have been clarified:
  • a related entity for which costs are incurred will not have its registered office or place of management in the Republic of Poland;
  • the condition of 50% of revenue coming from passive receivables has been clarified;
  • related entities should transfer at least 10% of revenue obtained from Polish companies to a different entity.

Changes in the regulations on controlled foreign companies (CFCs)

• The method of determining the income of CFCs (Article 24a(6c) of the CIT Act) has been clarified with regard to taking into account the revenues and costs of incorporated companies and the non-application of reliefs and exemptions under the CIT Act, i.e. a provision has been added that confirms that, for the purposes of determining the income of a CFC:
  • income and costs allocated in accordance with Article 5 of the CIT Act shall be taken into account, i.e.:
    • taxable persons are allocated revenues from an interest in an incorporated company and the corresponding costs if that company holds relevant shares or voting rights in, or exercises effective control over, a CFC (in effect, taxable persons are required to pay tax on the control of a CFC if such control is exercised via an incorporated company);
    • CFCs are allocated revenues from an interest in an incorporated company and the corresponding costs;
    • the reliefs and exemptions under the CIT Act, except for those set out in the CFC regulations, do not apply (including exemptions from taxation under Article 17 of the CIT Act)
  • The prerequisite concerning a CFC’s high profitability in relation to held assets in the event of potential disposal of assets during the year has been clarified by providing for a more specific manner of calculation of the profitability ratio in the case of such potential disposal;
  • The definition of the term “subsidiary” has been clarified (editorial/complementary change).

Changes in the regulations on Polish holding companies (PHCs)

• The condition of not benefiting from so-called participation exemptions, i.e. tax exemptions under Articles 20(3) and 22(4) of the CIT Act, has been deleted from the definition of a holding company;
• The definition of a subsidiary no longer includes the condition of not:
  • holding more than 5% of shares in other companies;
  • holding all rights and obligations in a company that is not a legal person;
  • benefiting from the exemption under Article 17(1) (34) or (34a) of the CIT Act, i.e. within a special economic zone or the Polish Investment Zone;
• The income tax exemption of 95% of dividends received by holding companies has been replaced by the full CIT exemption.

Clarification of the regulations concerning the loss relief procedure for companies forming tax capital groups (TCGs)

It has been confirmed that the amended loss relief rules will apply to losses arising from the tax year beginning after 31 December 2021.

Changes in the regulations on lump tax on company income, i.e. Estonian tax

• The regulations on the manner of determining income from non-business expenses in the case of using assets exclusively for business purposes and in the case of using assets also for other non-business purposes have been clarified;
• The regulations on the deadline for taxable persons to submit a notification of opting for lump tax on company income (ZAW-RD) have been clarified, allowing for choosing lump taxation prior to the end of the tax year;
• It has been confirmed that a tax liability under a so-called preliminary adjustment also expires in full after at least one full lump taxation period, i.e. four tax years;
• It has been confirmed that the deadline for filing a return and paying the tax expires at the end of the third month of the tax year of lump taxation on company income;
• The tax payment deadline has been extended to the end of the third month of the tax year following the year in which net profit / loss is distributed / covered, an advance payment is made on anticipated dividends or net profit income is distributed after lump taxation ceases.

Change in the rules on relief for initial public offerings (IPOs)

The deductibility from the tax base of expenses for making an initial public offering has been excluded for taxable persons earning income from qualified intellectual property rights, which is taxed at a preferential rate of 5%.

Change in the regulation on the procedure for the refund of tax on revenue from buildings

The obligation to issue a tax refund decision whenever the amount of the refund is not in doubt has been abolished.

WHT

Changes in withholding tax (WHT)

• The deadlines for filing initial and follow-up declarations have been extended and the validity of the former has been extended until the end of the tax year. In practice, this means that taxpayers will have more time to prepare for filing those declarations and, after the submission of the initial declaration, will be allowed to opt out of the pay & refund mechanism until the end of the tax year;
• Extended deadlines for filing the above declarations have been applied in relation to receivables paid in 2022;
• The condition for taxpayers not to collect withholding tax on interest and discount on certain bonds has been relaxed.

VAT

Regulatory change due to the need to extend the anti-inflation measures in place and to maintain the existing VAT rates

• The anti-inflation shield has been extended until the end of 2022:

• • the temporary reduction in VAT rates on food, motor fuels, natural gas, electricity and heat, fertilisers and other agricultural inputs has been maintained;
  • the temporary reduction in excise duty rates on motor fuels (diesel, motor gasoline, LPG), electricity and light fuel oil, as well as the temporary exemption from retail sales tax on the sale of fuels (motor gasoline, diesel, biocomponents being self-contained fuels, gases for combustion engines) have been maintained;
  • the exemptions from excise duty for electricity used by households have been upheld;

• The 23% and 8% VAT rates have been maintained.

Any questions? Contact the authors

Agata Dziwisz-Moshe, Katarzyna Pustułka

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Slim VAT 3.0 | Tax Focus

[1] For the first version of the bill published on the Government Legislation Centre website on 28 June, please visit Polish Deal 3.0 | Tax Focus

[2] The initial bill was to defer the application of the minimum income tax regulations until 31 December 2022.

[3] The first version of the bill provided for excluding increases in employment costs compared to the previous tax year.

[4] According to the first version of the bill, it was only possible to exclude the excise duty paid (without taking into account trade in excise goods).

[5] 2% in the initial bill.

[6] 4% in the initial bill.

[7]According to the first version of the bill, taxation at an effective rate lower than 14.25% was to be applied only to revenue coming from a specific receivable.