On 26 July 2021 the draft amendments to the Polish CIT Act (as well as other tax acts including the VAT Act and the Tax Ordinance) were published on the Government Legislation Centre’s website. A number of these changes are likely to have a significant, direct impact on the taxation of the real estate investments in Poland.
Proposed CIT Law changes
Tax depreciation of the real estate assets
Based on the draft amendments, tax depreciation write-offs recognized in relation to buildings cannot be higher than depreciation write-offs made for accounting purposes. In practice this may mean that if a given entity does not depreciate the building for accounting purposes (but rather revaluates this property to its fair market value) tax depreciation of such a building should be excluded.
Moreover, it has been proposed that tax depreciation should be specifically excluded in relation to residential buildings and apartments (irrespective of their accounting treatment). It is likely that for existing premises this change will enter into force as of 2023. Also, it is not clear how these provisions could apply to premises in technically non-residential buildings which formally do not constitute apartments, but are used e.g. for short-term lease purposes.
Thin capitalization rules
It is planned to specify that the thin capitalization deductibility threshold should be understood as 30% EBITDA or PLN 3m (whichever is higher). So far, the above was not clear based on current rules but the prevailing interpretation (supported also by the judgements of the administrative courts) assumed that the above limit should rather be calculated as 30% EBITDA plus PLN 3m. As such, the amendment could lead to a significant change in this area and limit the deductibility threshold for the taxpayers.
Withholding tax rules (“pay-and-refund” mechanism)
The draft amendments propose certain changes to the WHT “pay-and-refund” mechanism for foreign payments exceeding PLN 2m per year. This mechanism was introduced to the Polish CIT Law already in 2019, but its application has been suspended until 2022. The currently proposed changes assume that the mechanism would apply only to interest, dividend and royalties payments to related parties. As such, other payments (e.g. service payments or payments to non-related entities) should not be currently captured.
As another important change, it is proposed that the formal ruling on the applicability of preferential WHT regime can be obtained not only in relation to WHT exemption resulting from the EU Directive, but also in relation to the WHT exemptions or reduced rates resulting from the respective double tax treaties.
Also, the draft amendments will specifically clarify that:
- for the purpose of assessing the business substance of the payment recipient the nature of the business activity of such an entity should be taken into account;
- for the purpose of verifying whether the tax remitter fulfilled his „due care” obligation it should be taken into account what is the nature of his activity and what are his relations with the payment recipient.
“Hidden dividends” rule
The draft amendments include provisions intending to exclude from tax deductible costs so-called “hidden dividends”, i.e. certain payments made for the benefit of shareholder (or entities related to shareholder/taxpayer) which could be seen as aimed at replacing dividends.
Based on the current draft, this can be the case e.g. if the amount / timing of the payment is correlated with the profit generated by the taxpayer or if the conditions of the payment are not arm's length (i.e. a reasonably acting entity would not incur the cost or would incur it in a lower value if a similar payment is made to a non-related party). The latter condition should not apply if the amount of the potential "hidden dividend" is lower than the gross accounting profit of a taxpayer.
It is likely that the “hidden dividends” rules should enter into force as of 2023.
Introduction of a “diverted profits tax”
Moreover, the draft amendments provide for new regulations introducing so-called “diverted profits tax”. This tax can be imposed @19% on “diverted profits” understood as costs (such as intangible services, royalties, debt financing cost or payments for transfer of functions, assets or risks) incurred - directly or indirectly - for the benefit of related entities (provided that certain conditions are met).
However, as a “safe harbour” mechanism, the “diverted profits tax” should not apply if the above costs are incurred for the benefit of a related entity subject to taxation on its worldwide income in the EU / EEA (assuming that this entity conducts a genuine and material business activity).
New type of a "minimum CIT"
A new type of „minimum tax” is proposed to be applicable to all taxpayers declaring tax losses or negligible income (<1% of the revenue) - subject to a reservation that the tax depreciation write-offs should be disregarded for the purpose of determining the above loss / share of income in the revenue.
As a rule, the new "minimum CIT" should be calculated as 10% of a „hypo basis” including i.a. (i) 4% of the revenues plus (ii) excess of the intra-group financing costs over 30% tax EBITDA plus (iii) excess of the intra-group service costs over 5% tax EBITDA plus PLN 3m. Certain deductions or exempt categories of income may reduce the above “hypo base”.
Also, certain exemptions from the “minimum tax” regime will be available e.g. for new companies (within the first 3 years of activity) or for companies recognizing a sudden decrease of revenue (at least 30%). Moreover, it is assumed that ”minimum tax” paid by a taxpayer can be potentially set-off against "regular" CIT payable in the same year or within 3 subsequent tax years.
It is not clear how the new type of „minimum tax” should correspond with the already existing "minimum CIT" for the real estate companies (payable monthly based on the value of the property). As of today, there is no specific exclusion in this area which means that - at least theoretically - the real estate owners may be subject simultaneously to two types of "minimum tax" (if all the conditions are met).
On top of the above, other proposed changes include e.g.:
- changes regarding the taxation of mergers, demergers and share-for-share exchanges (to be considered in case any group restructurings are planned);
- elimination of the current, EBITDA-based rules limiting the deductibility of intra-group services above the threshold of 5% tax EBITDA plus PLN 3m (however, note that certain mechanisms in this area will be incorporated into the calculation mechanism for the new type of "minimum tax");
- obligation to provide the Polish tax authorities with the accounting books along with the annual CIT return itself;
- simplifying / clarifying changes in the area of transfer pricing (TP).
The proposed draft was already approved by the lower chamber of the Parliament and will be currently subject to legislative process at the level of the higher chamber of the Parliament. As such, further changes cannot be still excluded and any further works should be closely monitored.