Since January 1, 2022, the provisions on the so-called "diverted profits" came into force. The aim of those provisions is to eliminate the possibility of obtaining tax benefits through the transfer of profits to a tax jurisdiction with a marginal effective tax rate. The new regulations on diverted profits replace the existing provisions on the limitation of costs incurred towards related entities (article 15e of the CIT Act).
The Act of October 7, 2022 amending, among others, the CIT Act, also introduced further changes to the provision on diverted profits that will apply as of January 1, 2023. Some of the introduced changes were defined as clarifying ones. As a result, it seems reasonable to consider the impact of the amendments not only on future but also on current settlements, i.e. for the tax year 2022.
An expense should be recognized as a diverted profit if the following conditions are met:
Related entity conditions
Polish taxpayer conditions
The cost must be incurred for the benefit of a related entity within the meaning of the transfer pricing regulations (however, in accordance with the regulations in force from 2023, it was further clarified that only payments to foreign entities are subject to the diverted profits tax).
Such an expense must constitute the tax deductible cost of the Polish taxpayer (the current wording of the provision in force in 2022 only indicates that the regulation applies to the costs in general, but the new wording, to be applied from January 1, 2023, clarifies that "diverted profits" constitute tax deductible costs).
The income tax actually paid by the recipient, for the year in which the due amount was obtained from the Polish taxpayer, is lower by at least 25% than the amount of income tax that would be paid if the recipient was taxed at the Polish standard CIT rate (19%), (from 2023, however, the regulation has been changed in such a way that specific revenue/income obtained by a foreign related entity in relation to a given transaction will have to be taxed at an effective rate lower than 14.25%).
The cost must be included in the list of qualified costs (this is an extended catalogue of expenses known to taxpayers under the article 15e and article 15c of the CIT Act; the catalogue includes e.g. the costs of consulting, market research, advertising, management and control, data processing, insurance services, guarantees and warranties, and services of a similar nature as well as the costs of debt financing, in particular interest, fees, commissions, bonuses, the interest part of the leasing instalment, penalties and charges for delay in payment of liabilities as well as costs of securing liabilities, including the costs of derivative financial instruments).
Revenues of the related entity obtained from the taxpayer and entities related to the taxpayer, resulting from qualified costs incurred by them constitute not less than 50% of the revenue obtained by that related entity (starting from 2023, it was clarified that 50% of revenues must come from Polish tax residents who are related entities).
The sum of qualified costs incurred both for related and unrelated entities amounts to at least 3% of the sum of tax deductible costs incurred by the taxpayer (starting from 2023 only qualified costs incurred towards related entities would be taken into account).
A related entity must transfer an adequate amount of profits received from the taxpayer and its related entities to another entity: (a) recognizing expenses on this account as tax deductible costs, or deducting these expenses/revenues from income, tax base or tax in any form, or (b) via dividend or similar distribution of profits of a legal entity.
With regard to the qualified costs which are incurred towards related entity seated in a member state of the European Union or in a country of the European Economic Area, if such an entity does not carry out substantial real business activities in that member state/country.
If a given cost meets the definition of diverted profit, the Polish taxpayer is obliged to treat it as its additional income and collect 19% tax. The deadline for payment of the tax on "diverted profits" coincides with the date of CIT payment of a given taxpayer.
In particular, we want to underline the fact that for the first time the tax on "diverted profits" should be included in the CIT settlement for 2022. Starting from January 1, 2023 the burden of proving that a given expense does not meet the definition of diverted profit, will rest on all Polish taxpayers making payments to foreign related entities. The Polish taxpayer may be required to pay the tax if it is not proved that conditions were not met.
It is worth pointing out that in accordance with the regulations in force in 2022, costs incurred directly or indirectly towards related entities can be considered as diverted profits. Considering numerous doubts on how to apply the regulations with regard to expenses indirectly incurred for related entities, the legislator decided to eliminate this reference from the provisions of the CIT act starting from 2023. As a result, a diverted profit would be understood as a qualified cost incurred by a Polish company directly towards a related entity. However, the amendment to the CIT Act also introduces the obligation to examine whether the entity to which the related entity further transfers the payment, meets the above-mentioned conditions for recognizing the payment as diverted profit.
The regulations which will enter into force from 2023 also introduce a presumption that qualified costs incurred towards related entities with their registered office / management / location or registration in:
1) a territory or country included on the list of countries and territories applying harmful tax competition or on the list of non-cooperative jurisdictions for tax purposes or
2) in the territory of a country with which the Republic of Poland or the European Union has not ratified an international agreement constituting the basis for obtaining tax information from the tax authorities of that country, constitute diverted profits,
(unless the related entity is a controlled foreign company or the income of this related entity resulting from qualified costs were taxed with income tax in Poland).
Thus, if so far the taxpayer has limited costs in transactions with related entities pursuant to article 15c and/or article 15e of the CIT Act, or if taxpayer has started to make transactions with related entities this year (e.g. the purchase of certain services or royalties or interest payments), it will be necessary to carry out an analysis of being subject to the tax on "diverted profits".
The payments particularly exposed to the new regulations are payments to related entities in countries with preferential taxation that:
- make further payments within the capital group, or
- regularly pay dividends (or distribute profits in another form),
- for example payments to holding companies, companies financing the group's activities, or ‘cost center’ companies.