The Ministry of Finance has published a comprehensive draft amendment to tax regulations as part of the “Polish Deal” program. A very extensive document (225 pages) includes many changes in various taxes (PIT, CIT, VAT). Below we present a synthetic overview of the most important of them.
1. Principles of tax progression (PIT)
As part of the changes related to tax progression, it is envisaged:
- an increase to PLN 30 thousand tax-free amount for taxpayers settling according to the tax scale (therefore, this does not apply to taxpayers of the so-called flat tax);
- an increase to PLN 120 thousand of the second tax threshold;
- introducing “middle class relief”. It will apply only to individuals who achieve annual income from employment contracts in the range from PLN 68,412 to PLN 133,692. It is a “quasi” free amount, which is to artificially lower the basis of assessment for calculating the health insurance contribution for the indicated persons.
2. Health insurance contribution
The draft assumes that the health insurance contribution, in the case of employees and entrepreneurs taxed according to general rules, will be calculated on the basis of income. The basis for calculating the contribution cannot be lower than the lowest salary. Its amount is to be 9%.
The health contribution is also to apply to income from membership in the company’s management board (based on the so-called appointment). Until now, this was not a title to be charged with the premium.
The above change means, in practice, an increase in the fiscal burden. For some individuals, this increase is to be compensated by a special relief (see the point above).
3. Tax reliefs
The draft provides for the introduction or modification of the following tax credits:
- R&D tax relief (CIT and PIT) – increasing the deduction of wages and salaries;
- tax relief for innovative employees (CIT and PIT) – the possibility of deducting from the advance payments for PIT employees and persons employed under civil law contracts eligible costs that the taxpayer did not deduct from his income in the annual tax return as part of the R&D tax relief;
- IP Box (CIT and PIT) – the project introduces the possibility of using, in a simultaneous way, the R&D relief and IP Box settlement, in particular as regards the deduction by the taxpayer of eligible costs in the R&D relief from the income from eligible rights in the IP Box;
- relief for prototypes (CIT and PIT) – the project provides for the possibility of deducting from the tax base the costs of: trial production of a new product or the costs of introducing such a product to the market. One will be able to deduct 30% of the sum of the costs of: trial production of a new product and its introduction to the market (up to 10% of income from “other sources” / business activity);
- robotization relief (CIT and PIT) – as part of the relief, it will be possible to deduct from the tax base an amount representing 50% of the tax-deductible costs incurred in the tax year for robotization, and the deduction amount may not exceed the amount of income obtained by the taxpayer in the tax year from revenues other than capital gains income;
- consolidation relief (CIT) – according to the proposal, the taxpayer could deduct from the income the amount of expenses for the acquisition of shares (shares) in a company with legal personality, up to the amount of its tax income from the general source, but not more than PLN 250,000 per year;
- IPO relief (CIT) – deductible from income will be expenses for the initial public offering of shares on the regulated market (expenses for the preparation of the prospectus, notary, court, stock exchange fees, as well as expenses for legal, tax and tax advisory services);
- tax relief for investments in AICs (PIT) – introducing the possibility of deducting from the tax base the amount constituting 50% of expenses for the acquisition (acquisition) of shares or shares of an alternative investment company or a company in which the alternative investment company holds at least 5% of shares on condition of holding such shares for a period of at least 2 years;
- “pro-growth” relief (CIT and PIT) – the taxpayer could deduct from income the costs incurred to increase revenues from the sale of products, but not more than PLN 1,000,000 per year (costs of participation in fairs, promotional and information activities, packaging adjustments or preparation of specific documentation);
- relief for the payment terminal (CIT and PIT) – the deduction is intended to cover the expenses for the purchase of the payment terminal and the expenses related to the handling of payment transactions using the terminal in the year when accepting non-cash payments and in the following year. The amount of the deduction is to be PLN 2.5 thousand (taxpayers who do not register sales) or PLN 1 thousand (other);
- relief for taxpayers who obtain income from business activities supporting sports and cultural activities as well as higher education and science (CIT and PIT);
- relief for monuments (PIT) – the possibility of deducting from income expenses for the maintenance and restoration of immovable monuments and the purchase of an immovable monument or premises for a fee in a building like this. The relief will cover, in particular, up to 50% of expenses for: payments to the renovation fund / construction works of a housing community or a housing cooperative established for an immovable monument entered in the register / record;
- “comeback” relief (PIT) – addressed to people who have changed their tax residence to Poland.
The project also provides for a new form of taxation of revenues from sources located abroad, in particular for taxpayers interested in relocating their residences to Poland, with above-average levels of assets (HNWI, high net worth individuals).
Detailed solutions for most of the above reliefs were presented by us in previous alerts.
4. Thin capitalization
So far, taxpayers and some administrative courts have argued that the limitation of the excess of debt financing costs applies only to the excess of over PLN 3 million. In other words, no limit would apply to this amount.
It is proposed to amend the content of this provision and indicate directly that the taxpayer may include as tax deductible costs the surplus of debt financing costs within the limit set by the value of 30% of the EBITDA obtained in the tax year or may use the limit of PLN 3 million. However, he would not be able to ‘combine’ these two limits and apply them simultaneously.
This change will definitely be unfavorable for taxpayers.
Further, a provision is to be introduced according to which non-tax costs will be the costs of debt financing obtained from a related entity in the part in which they were allocated directly or indirectly to capital transactions, in particular: acquisition or subscription of shares, acquisition of all rights and obligations in a company which is not a legal person, making additional payments, increasing the share capital, redemption of own shares for redemption.
In practice, this would mean no cost at all for a group loan for the acquisition of companies from the market.
5. “Modernization” of the WHT regulations
The changes are aimed at creating a “final” model of withholding tax collection so that there is no need to postpone the entry into force of the regulations.
The proposals include, in particular:
- limiting the application of the “WHT refund” mechanism (compulsory collection and refund for receivables over PLN 2 million) – to related entities;
- the current opinion on the application of the exemption will become the opinion on the application of preferences and will also cover the preferences provided for in agreements on the avoidance of double taxation (i.e. reduced rates of withholding tax or exemption from the obligation to collect withholding tax). Currently, it is only possible to claim if the exemption relates to dividends, interest and royalties on eligible affiliates.
The regulations provide for a disturbing mechanism of a specific tax “reclassification” of benefits to a related entity, exceeding PLN 2 million. If a benefit “for no justified economic reason” is not classified as subject to withholding tax, it will be “reclassified” as such.
6. “Sealing” the system – foreign income and capital settlements
Among the proposed changes we can find, inter alia, clarifying the definition of CFC – owning a company also with unrelated entities, extending the catalog of passive revenues.
An important change is the introduction of the concept of the so-called “profit shifting” – it is indicated that the new solutions are primarily intended to prevent optimization with the use of intangible assets in foreign jurisdictions. The “solution” is to introduce a 19% tax on shifted profits. Shifted profit is to be deemed to be costs incurred, directly or indirectly, for the benefit of eligible related entities, in particular with regard to royalties, costs of intangible services, costs of debt financing or restructuring fees. The regulations apply if these costs represent at least 3% of the total tax costs.
The draft also provides for the introduction of regulations limiting the possibility of including artificial costs as tax costs in connection with the payment of benefits that are the so-called “hidden dividend.” Non-tax costs are to be costs related to the provision of services, the beneficiary of which, directly or indirectly, is a partner or entity related directly or indirectly to the taxpayer or to this partner. Examples include, in particular, non-business related payments or non-market transactions. This regulation, in its current shape, creates the risk of broad interpretation by tax authorities.
The definition of a Polish resident will be extended – in terms of the actual management of a foreign company by persons in Poland. This may lead to attempts to question the foreign tax residence of companies that are part of cross-border tax optimization.
7. “Sealing” the system – cost and income issues
It is proposed to introduce, among others the following “sealing” changes:
- introducing taxation in PIT of revenues from the reduction of capital participation in a non-legal person;
- sale of the fixed/intangible assets after their withdrawal / liquidation of the business activity will continue to be the income from this activity. The exemption will no longer apply if the sale occurs within 6 years after the recall or liquidation. It concerns, for example, cars after the leasing period;
- in the case of fixed/intangible assets used privately and then introduced into business activities, the initial value will not be the “historical” value, but the “market” value from the date of introduction (usually lower);
- exclusion from tax costs of depreciation write-offs for buildings and residential premises;
- additional conditions for the tax neutrality of share exchanges or specific restructuring activities;
- introducing changes to the taxation of private use of company cars – the limit of PLN 250 will not be the engine capacity, but the vehicle power (82 kW). This will mean, for the most part, an increase in income.
8. “Grey economy” – sanction
An employer who employs employees illegally will have an “assigned” additional income, equal to the minimum wage for work – for each month of such employment. The employee will not be subject to sanctions.
Additionally, the value of remuneration and contributions will be a non-tax cost in the event of disclosure of illegal employment. The employer is also to bear the entire burden of social security contributions.
9. Cashless turnover
In addition to the above-mentioned tax relief in PIT, the changes include in particular:
- undertaking of entrepreneurs to ensure the possibility of cashless payment;
- establishing an upper threshold for cash settlements, beyond which the consumer will be obliged to use non-cash forms of payment – PLN 20 thousand;
- lowering the upper limit of cash settlements between entrepreneurs – PLN 8 thousand (note: this limit is important, in particular, for tax costs).
10. Lump sum tax rates on revenues
The draft provides for the reduction of the flat rate of taxation for medical professionals to 14% and for some revenues related to the provision of IT services to 12%.
11. Rent / lease – outside business activity
Income from rental, sublet, lease and other similar contracts concluded outside business activity by natural persons is to be taxed only with lump sum tax.
12. Sending books and records by means of electronic communication
The draft provides for the introduction of the obligation for CIT and PIT taxpayers (economic activity) to keep accounting books (tax records) using computer programs.
More importantly, the act introduces an obligation to send them in a structured form to the tax authorities:
- monthly / quarterly – if advances are settled and paid based on the current income;
- along with the annual tax return.
The obligation is to enter into force from the beginning of 2023.
The specific reporting requirements are not known yet, but it may be a very important change, comparable to the introduction of the Standard Audit File.
13. Simplifications – transfer pricing
The draft provides for a number of simplifications and clarifying provisions, in particular:
- the possibility of performing decreasing TP adjustment also when the taxpayer received an accounting document from the counterparty instead of a statement, and it was proposed to waive the obligation to inform about the correction in the annual tax return;
- extension of deadlines for the preparation of local transfer pricing documentation (local file) – by the end of the tenth month after the end of the tax year;
- exemption from the obligation to prepare local transfer pricing documentation (local file) for controlled transactions covered by the safe harbor mechanism for loans, credits, bonds and transactions related to settlements in the scope of clean re-invoicing;
- extension of the deadline from 7 to 14 days for the submission of local transfer pricing documentation (local file) by the taxpayer at the request of the tax authority;
- elimination of the declaration on the preparation of transfer pricing documentation as a separate document and transferring it, in the amended content, to the transfer pricing information (TPR-C / TPR-P).
14. Changes to the “Estonian” CIT
It is proposed to simplify and make this tax regime more accessible, in particular by:
- extension of the catalog of entities entitled to lump-sum taxation to include limited partnerships and limited joint-stock partnerships;
- resignation from the necessity to incur specific capital expenditures as a condition for the application of the lump sum provisions, with the possibility of incurring them in order to benefit from the preferential lump sum;
- resignation from the condition relating to the upper limit of taxpayers’ income taxed with a lump sum;
- making deadlines more flexible repayment of tax liabilities in the scope of the so-called initial correction, and in some cases also lifting the obligation to pay this obligation;
- postponing the taxation of income from retained profits generated in the period of lump-sum taxation to the time of their actual distribution.
15. Tax Capital Groups (PGK)
The draft also provides for simplifications in the field of corporate tax groups (PGK) in CIT, in particular:
- reduction from PLN 500,000 up to PLN 250,000 of the average amount of share capital that the companies forming the PGK must have;
- elimination of the condition of inadmissibility of mutual connections among the subsidiaries making up the PGK;
- resignation from the principle of losing the group status if the required profitability threshold is not achieved;
- facilitating the change of the number of PGK members;
- the option of settling losses by PGK prior to its commencement;
- PGK agreement may be made in writing, not in a notarial deed.
Thanks to these changes, a much larger number of entities will be able to form a PGK. This applies to both smaller entities and those belonging to capital groups with an extensive structure.
16. Polish Holding Company
Tax preferences include:
- CIT exemption of 95% of the amount of dividends received by the holding company from subsidiaries;
- full CIT exemption of profits from the sale of shares / stocks in subsidiaries.
The basic condition for taking advantage of the preferences will be the holding by the holding company of at least 10% of shares in the subsidiary for a minimum of 1 year. Subsidiaries will not be allowed to hold more than 5% of shares in the capital of another company and they will not be allowed to be partners in partnerships that are not CIT taxpayers.
17. Changes in PIZ and SEZ
The act stipulates that only the income from the new investment in the area specified in the decision on support will be exempted. From the investors’ point of view, this is an unfavorable and narrowing change.
A “specific” tax anti-avoidance rule in SEZ and PIZ is also to be introduced. The adopted methods of settling the tax exemption should be analyzed in terms of it.
18. “Abolition” – temporary income tax
This solution will apply to income taxes (PIT and CIT). It is to concern the situation of obtaining tax benefits with possible abuse of tax law (i.e. the situation of applying anti-avoidance clauses). The condition for using the solution will be the payment of an 8% transitional lump sum. The possibility of submitting applications is planned until the end of 2022.
19. VAT group
The draft provides for the introduction of the “VAT Group”, defined as “a group of entities related financially, economically and organizationally, registered as a taxpayer.” The group will be one VAT payer. The most important consequence of being a member of such a group is the lack of taxation of intra-group activities. This means less administrative burdens and better management of VAT liquidity.
20. VAT – the option of taxing financial services
It is proposed to introduce the option of taxing financial services (including loans, banking services, financial instrument services) in a B2B relationship.
Thanks to this solution, taxpayers will be able to deduct input tax in this respect. At the same time, it will not be possible to select the exemption selectively – it will be possible to opt out of the entire exemption. The choice means you have been using taxation for at least two years.
21. Investment agreement
The idea behind this solution is to introduce a specific agreement between the investor and the tax authority on the tax consequences of the planned investment in Poland. The investment value threshold is PLN 100 million in the years (2022-2024) and PLN 50 million (from 2025).
This option is addressed to both domestic and foreign entities.
The concept of “new investment” will be the same as for the purposes of investing within the Polish Investment Zone (in particular investments related to the establishment of a new plant, increasing the production capacity of an existing plant, or diversification of production).
The scope of the agreement will include:
- regulations regarding the arm’s length principle of applied transfer prices – similar to the bilateral APA agreement;
- an assessment that the general anti-avoidance clause will not be applied;
- CN classification of products;
- description and classification of the good or service and the appropriate tax rate;
- interpretation of tax law provisions in the remaining scope.
The application for the conclusion of the agreement is to be subject to a fee in the amount of PLN 50 thousand. zloty. The conclusion itself will depend on the payment of the main fee, depending on the value of the investment (between PLN 100,000 and PLN 500,000).