The provisions of Council Directive (EU) 2022/2523 (hereinafter referred to as the "Directive") impose on international and domestic groups of enterprises whose consolidated global revenues exceed EUR 750 million per year the obligation to pay a top-up tax in order to obtain an effective tax rate (hereinafter referred to as "ETR") in a given country at a minimum level 15%.
As a result, primarily taxpayers benefiting from tax credits and conducting business in the Special Economic Zone (hereinafter: "SEZ") / Polish Investment Zone (hereinafter: "PSI") will be faced with the need to conduct a thorough analysis and verify whether they have achieved a lower-than-required ETR (which may result in the need to pay top-up tax).
Tax credits and preferential zone settlements are one of the key elements of building the tax competitiveness of countries, encouraging entrepreneurs to invest and develop their business in a given country. For this reason, many countries (including Belgium and Hungary), implementing the provisions of Pillar 2, have proposed changes to their tax credit system so that they meet the definition of qualified refundable tax credits.
According to the announcements of the Ministry of Finance, the provisions introducing the principles of the Global Minimum Tax will come into force on January 1, 2025.
Actions aimed at maintaining Polish tax competitiveness have also been announced. Thus, it is possible to rebuild the Polish investment and innovation support system so that the requirements are met allowing for the inclusion of the support received in ETR calculations, which is beneficial for entrepreneurs.
What does the Directive state?
The provisions of the Directive distinguish two types of refundable tax credits, which are treated differently for purposes of calculating the effective tax rate:
a) qualified refundable tax credit,
b) non-qualified refundable tax credit.
A refundable tax credit means that the amount of the credit that has not been used by the company to offset qualified taxes is paid in cash or cash equivalent. In accordance with OECD Administrative Guidance, an acceptable form of refund may also be the possibility of using the relief to discharge tax liabilities other than a Covered Tax liability.
A Qualified Refundable Tax Credit is a tax credit that is paid in the form of a cash payment or cash equivalent to an eligible entity within 4 years from the date the entity becomes eligible to receive the credit. The OECD Administrative Guidance also allow for the introduction of transferable tax credits, within the definition of a Qualified Refundable Tax Credit.
Transferable tax credits are defined as tax credits that can be used by the holder of the credit to reduce the tax liability in the jurisdiction that granted the credit. Transferable tax credits operate, among others: in the United States and may be particularly important for entities from groups whose parent company comes from the United States due to the GILTI regulations applicable there. The OECD guidelines distinguish two types of transferable tax credits in this respect:
- Market-tradable tax credits (MTTC) - tax credits that can be used by the holder of the tax credit to reduce his tax liability in the jurisdiction that granted the tax credit (after meeting market and legal standards marketability). For the purposes of calculating ETR, it is treated as income, i.e., it has a direct impact on increasing ETR (which may result in exceeding the 15% threshold, thus eliminating the need to pay equalization tax).
- Non-marketable transferable tax credits (Non-MTCC) - tax credits that do not meet market and legal transferability standards. When calculating ETR, they are treated as a tax reduction (which may ultimately result in the need to pay equalization tax).
In a separate case, i.e., if a given tax credit within the meaning of the Pillar 2 regulations constitutes a non-qualified refundable tax credit, taxpayers will not be able to classify this credit as income for the purposes of ETR calculation. As a result, this may result in an ETR below 15%, which will result in the obligation to pay a top-up tax.
To sum up, within the meaning of the Pillar 2 regulations, tax credits that are not subject to refund or transfer within the meaning constitute a reduction of the ETR (which may result in the need to pay an equalization tax). The graphic below presents the understanding of tax credits in the light of Pillar 2 regulations and OECD guidelines, depending on their structure.
What will be the direction of change in Poland?
During the January conference, the Ministry of Finance announced its readiness to protect the Polish investment support system by rebuilding the system of tax reliefs and SEZ/PSI. In this respect, it is permissible, among others, possibility of introducing a solution according to which, if the tax credit is not fully used (e.g. if the entitlement to the R&D tax credit exceeds the amount of tax due for a given year), the taxpayer could apply for a refund of the remaining amount or for it to be offset against other tax liabilities.
When analyzing possible directions of changes in the Polish tax credit system, attention should also be paid to changes introduced by other European countries that have already implemented the provisions of the Directive.
Hungary can serve as an example, which, in addition to the previously applicable R&D tax credit, has introduced a new research and development tax credit, which is ultimately intended to meet the definition of a qualified refundable tax credit. Due to the existence of two research and development reliefs at the same time, taxpayers have the opportunity to choose which relief they want to use.
Under the new R&D tax credit in Hungary, taxpayers are entitled to receive a cash refund of the tax credit amount (which was not used as a reduction in output tax) in the fourth year after incurring eligible costs. The amount of the new R&D relief is 10% of eligible costs and is limited in amount, depending on the nature of the research and development activity. Eligible costs in this respect include, among others: personnel costs of employees involved in R&D work, costs of obtaining and maintaining patents, and operational and operational costs/expenses incurred directly during the implementation of R&D projects.
It should be noted, however, that there is a risk that the changes made by the legislator of a given country will be questioned by the European Commission, which, as part of the inspection, may assess the timely transposition of the provisions of the Directive into the national legal order.
To sum up, the reconstruction of the tax credit system in Poland, through the introduction of cash refunds of the unused tax credit amount or the possibility of offsetting them against other tax liabilities, may result in the need to analyze the activities conducted in international capital groups. The introduction of cash refunds of unused tax credits will be particularly important for entrepreneurs whose income has not yet allowed them to fully benefit from the tax credit they received.
The Polish draft legislation implementing Pillar 2, published on April 26, 2024, does not currently include changes to the mechanisms of Polish tax credits.
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