The draft law implementing Directive 2022/2523, currently subject to public consultations, provides for the introduction of an undertaxed profit top-up tax (the equivalent of UTPR). This tax may cover Polish subsidiaries even if the country of the ultimate parent entity has implemented a minimum tax in accordance with the OECD model rules.
The draft law on top-up taxation of members of international and domestic groups introduces, in addition to the global top-up tax (which is the equivalent of IIR), undertaxed profit top-up tax (which is equivalent to UTPR). Both are focused at ensuring that multinational groups pay at least 15% of effective tax in each jurisdiction in which they operate. For this purpose, if in any jurisdiction the effective tax rate is lower than 15%, a top-up tax is to be levied.
The basic mechanism for collecting the top-up tax is the IIR Rule. According to it, the top-up tax on low-taxed entities is paid at the level of the ultimate parent entity (UPE), in proportion to its ownership shares in entities generating low-taxed income.
The UTPR serves, in part, as a backstop to the IIR by providing a mechanism for making an adjustment in respect of any remaining top-up tax in relation to profits of a Constituent Entity that is not in scope of an applicable IIR. The UTPR also has the purpose of addressing base erosion through deductible intra-group payments.
When a subsidiary may be required to pay undertaxed profit tax?
Undertaxed profit tax is calculated when the ultimate parent entity is located in a country other than the Republic of Poland and:
a) Ultimate parent entity is excluded entity - this category includes, among others, governmental entities, international organizations, non-profit organizations and pension funds (including entities providing pension services). Excluded entities also include investment funds and entities investing in real estate, provided, however, that they are the ultimate parent entity of a given group,
b) there is no qualified income inclusion rule (IIR) in the country of the ultimate parent entity, or
c) the effective tax rate in UPE jurisdiction is lower than 15%, and the qualified income inclusion rule (IIR) applicable in the jurisdiction of this entity does not cover entities located there.
Polish companies will have to examine whether they meet these conditions.
Investment entities are excluded from the obligation to pay undertaxed profit tax.
The lack of application of IIR to entities from the UPE jurisdiction may mean need to apply undertaxed profit top-up tax in Poland
It should be noted that the OECD Model Rules do not impose an obligation to apply the IIR principle in relation to the ultimate parent entity and entities located in the jurisdiction of the ultimate parent entity. The above means that even if the jurisdiction of the ultimate parent entity has implemented the provisions on the global minimum tax, Polish subsidiaries may still be subject to undertaxed profits top-up tax.
The regulations provide for a temporary safe-harbour in a situation where the nominal corporate income tax rate in the jurisdiction of the ultimate parent entity is at least 20%. In such a case, based on the election made, the Polish entity’s top-up tax under UTPR for tax years no longer than 12 months ending no later than December 31, 2026 may exclude amounts relating to low-taxed entities located in the country of the ultimate parent entity.
UTPR tax calculation
UTPR requires first calculation of the total amount of top-up tax due under UTPR. Than this amount is allocated to jurisdictions, for by multiplying UTPR top-up tax by the share of given jurisdiction in such top-up tax.
Therefore, in accordance with the above-mentioned regulations, the UTPR taxpayer is obliged to calculate, for the tax year, both:
- total top-up tax due under UTPR in respect of all low-taxed members of the international group as well
- the so-called “share for the Republic of Poland”, i.e. a specific percentage of the UTPR tax allocated to the Republic of Poland based on the number of employees and the value of assets in that country.
Polish entities are jointly and severally obliged to pay the tax so allocated to the Republic of Poland.
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