On July 26th 2021, a draft law introducing significant changes into i.a. Polish Corporate Income Tax Law and the Polish Tax Ordinance was published. The proposed bill includes a number of amendments that may affect international entrepreneurs, including foreign companies investing in Poland or Polish entrepreneurs with subsidiaries located abroad.
Changes to the withholding tax (‘WHT’) regulations
The draft of the new regulations provides for the introduction of further changes to the WHT collection mechanism for payments exceeding 2 million PLN per year. Currently, the WHT collection and refund mechanism (the so-called ‘pay and refund’) has been suspended until 2022. The Ministry of Finance has proposed that the new collection mechanism should apply if the following conditions are jointly met:
(i) the payment will be classified as passive (i.e. dividends, interest, license fees), and
(ii) will be made with respect to related entities.
This means that, in particular, payments for certain intangible services will no longer fall within the scope of the new mechanism. Similarly to interest or royalties paid to unrelated parties.
Payments qualified as passive or exceeding 2 million PLN per year to related entities will be able to benefit from reduced rates or exemptions at source, provided that:
- a ruling (binding opinion) on the application of reduced rates / exemptions will be obtained, or
- a certification process will be carried out by the payer, which will be concluded with the submission of a designated statement.
Furthermore, according to the draft bill, the taxpayer will be obliged to collect the tax if the total amount of receivables paid in one tax year to one taxpayer exceeds 2 million PLN and, additionally, when transactions without justified economic reasons will not be classified as passive payments (e.g. a payment will be artificially classified as a service).
The draft act also extends the scope of the binding ruling (opinion) on the application of the WHT exemption also to passive payments benefiting from a reduced tax rate or exemption under double taxation agreements (so far it only covered payments benefiting from exemptions under the relevant EU directives).
Modifications in the definition of a beneficial owner
Another modification is the change in the definition of a beneficial owner. As it stands, one of the conditions for being considered a beneficial owner assumes constituting an entity that ‘is not an intermediary, representative, trustee or other entity legally or factually obliged to transfer all or part of the receivables to another entity’. The amendment proposes deleting the words ‘legally or factually’.
Extension of the definition of a controlled foreign entity (‘CFC’)
The proposed changes include extending the application of the CFC rules through:
- extending the definition of a foreign entity to entities whose co-owners with at least 25% of shares in the capital or voting rights in the bodies controlling, constituting, managing or having the right to participate in profit are Polish tax residents who, in the wording of the proposed regulations, no longer have to be related entities (currently only the participation of related entities is taken into account);
- modification of the current CFC definitions through:
- extending the catalogue of passive revenues, and;
- increasing the minimum effective tax rate that implies the taxation of CFCs;
- adding two new tests determining the existence of CFC (ultimately their number will increase to 5).
The above changes mean that the CFC status of foreign entities, which were not recognised as CFCs under the current regulations, may change. As a consequence, it will have a significant impact on the obligations of Polish taxpayers and their future tax settlements.
With regard to the modification of the current rules, the planned regulations change the current definition of a CFC by extending the scope of the so-called list of passive revenues, by taking into account revenues such us, among others, those for intangible services, rental, sublet, lease, sale of rights in a partnership, investment fund, or even in some cases the sale of goods. The test of the low effective income tax rate paid by the the controlled entity has also been changed, by increasing it from 50% of the standard CIT rate to 75% of the standard CIT rate (hence the effective income tax rate condition determining the CFC status will be increased from the current 9.5% to 14.25%).
Finally, it was proposed to add two additional CFC definitions introducing completely new conditions that must be examined in order to qualify as a CFC. These tests are related to the value of assets (i.e. shares in other companies, real estate, movable property, intangible assets, receivables) owned by a foreign entity. The introduction of new regulations in the proposed wording will require Polish taxpayers to constantly monitor not only revenues but also foreign balance sheets subsidiaries.
Extending the definition of a Polish tax resident
The provisions in the proposed wording also extend the scope of entities with tax obligations in Poland to companies, taxpayers not having their registered office in the territory of the Republic of Poland. Within the meaning of the draft bill, these entities will have an effective place of management in the territory of the Republic of Poland, if: persons or entities being members of the control bodies, constituting or managing the foreign taxpayer, will have their place of residence or registered office or management in Poland, or actually conduct current affairs directly or through other entities located in Poland (including on the basis of an agreement, a court decision or other document regulating its establishment or functioning, powers of attorney granted or factual connections).
Introduction of a new regulation - tax on the so-called ‘shifted income’
Undoubtedly, an innovative aspect of the discussed reforms is the introduction of a new regulation - taxation of the so-called shifted income in the amount of 19%, which depends on the amount of costs incurred directly and indirectly for related entities, among others, for intangible services, license fees or debt financing costs. Taxpayers making such payments may, under certain conditions, be required to pay additional tax, which will have a significant impact on future CIT settlements.
The rationale of the current amendment is to counteract tax avoidance caused by intermediary companies, which in the draft act is regulated by taxing certain costs that are considered ‘shifted’ if they constitute at least 3% of the sum of all tax deductible costs.
However, the regulations provide for certain exemptions to the application of the regulations, if the related entity for which the costs are incurred is established in an EU / EEA country and conducts an actual (genuine) economic activity in that country.
The draft contains provisions aimed at combating the creation of artificial costs that may be perceived as "hidden dividends" by excluding from tax-deductible costs of payments (benefits) whose beneficiary is a shareholder or entity directly or indirectly related to the taxpayer or shareholder. The exclusion concerned mainly two situations:
- the benefit is not granted on market terms;
- the benefit affects the financial result (i.e. in the event of non-performance of the benefit, the taxpayer would achieve a profit).
The proposed provision has not been precisely formulated, which may complicate the situation of many taxpayers and mean that each payment made to a related entity may potentially be the subject to limitation.
Restrictions on the use of debt financing
According to the draft, the taxpayer will have to exclude from tax deductible costs the excess of debt financing costs over 3 million PLN or exceeding 30% of EBITDA. This change constitutes a clarification of the existing provisions aimed at removing any emerging interpretational doubts on whether the amounts of 3 million PLN and 30 percent of EBITDA should be added together.
The draft also introduces a limitation of recognizing debt financing costs obtained from a related entity as tax deductible costs in the part intended (directly or indirectly) for equity transactions, including, among others, the purchase of shares / stocks or all rights and obligations in a general partnership, additional payments, buying out shares for redemption.
Introduction of a Polish holding company
Pursuant to the wording of the draft act, regulations establishing a holding company will be introduced. The benefits from conducting business activity in this form cover:
- exemption from taxation of capital gain from the sale of shares in subsidiaries (not real estate companies) to an unrelated entity, and
- an exemption from withholding tax on 95% of the amount of dividends paid to this holding company by subsidiaries (meeting certain specific conditions).
It is important to note that the draft regulations introduce certain limitations on preferential taxation of the holding companies such as: these entities would need to conduct an actual (genuine) economic activity, would not be permitted to benefit from Special Economic Zone based exemption or decision on support for new investments as well as would not be permitted to benefit from a separate withholding tax exemption on dividends.
It should also be emphasized that the project includes a number of additional changes that may directly or indirectly affect international entrepreneurs, including:
- simplifying / clarifying changes in the field of transfer pricing (TP);
- introducing the institution of an investment agreement between the investor and the tax authority on the tax consequences of a planned or commenced new investment in the territory of Poland;
- changes in regulations regarding the reorganization of entities (mergers / divisions), including those of a cross-border nature.
What does it mean for me?
According to the plan, the proposed changes will enter into force on January 1, 2022. Their final shape will have a significant impact on future tax settlements. We recommend monitoring the progress of work on the project, including the result of the ongoing public consultation, which will last until August 30, 2021, and undertaking discussions and preparatory activities for the upcoming changes.