On 24 April 2024, a draft act on top-up taxation of entities from international and domestic groups was presented, commonly referred to as Pillar 2 (hereinafter referred to as the "Act"). The entry into force of the provisions proposed under the draft may have a significant impact on taxpayers of Corporate Income Tax (hereinafter referred to as "CIT"), in particular those who currently benefit from CIT exemption mechanisms based on decisions on support issued within the Polish Investment Zone (hereinafter referred to as "PIZ") or as part of Permits to conduct business activity in Special Economic Zones (hereinafter referred to as "SEZ").
Introduction
The draft Act implements into the Polish legal system provisions aimed at ensuring a global minimum level of taxation of international groups of enterprises and large domestic groups in the European Union. The described provisions are part of the Council Directive (EU) 2022/2523 of 14 December 2022, resulting from the implementation within the European Union of the results of the work of the Organization for Economic Co-operation and Development (OECD).
The content of the Act regulates the taxation of CIT taxpayers with a top-up tax, divided into:
- global top-up tax,
- domestic top-up tax,
- top-up tax on under-taxed profits,
which, in principle, are to oblige the said taxpayers to pay a minimum CIT rate of 15%, in each jurisdiction in which the group operates. The provisions of the Act are to apply to groups whose annual revenue in at least two of the last four tax years, shown in the group's consolidated report, will amount to at least EUR 750,000,000.
Therefore, new regulations will particularly apply to taxpayers whose effective CIT tax rate at the group level in a given jurisdiction is lower than 15%.
We have described the detailed principles of Pillar 2 in previous publications (in Polish language). In this article, we will focus on the impact of Pillar 2 regulations on taxpayers benefiting from CIT exemption under PIZ or SEZ.
Pillar 2 and taxpayers benefiting from CIT exemption
A doubt has arisen among CIT taxpayers benefitting from the CIT exemption mechanism in PIZ or SEZ whether, in connection with the use of the mentioned tax relief instruments, they will be obliged to pay the above-mentioned minimum CIT rate of 15%, due to the fact that using the CIT exemption mechanism, the effective CIT rate for these taxpayers may be lower than 15%.
It should be noted that the provisions of the Act do not explicitly provide for the exclusion of its application to taxpayers benefiting from CIT exemption under PIZ or SEZ. Even though the effective CIT tax rate for these groups operating in Poland may be lower than 15% due to the use of state aid under the support instruments introduced by Poland and the European Union, and not due to their optimization activities, there is no explicit provision in the regulations of the Act to exclude its application to such taxpayers.
Consequently, CIT taxpayers operating in Poland (or their parent companies operating abroad) may be obliged to pay domestic or global top-up tax. The consequence of implementing the described mechanism may be a significant decrease in the attractiveness of the instrument of CIT exemption under PIZ, which may translate into a reduction in the number of new investments flowing into Poland, as well as the number of new investments by taxpayers already operating in Poland.
Substance-based income exclusion as a way to offset the effects of Pillar 2
However, the draft Act provides for a mechanism that may reduce the impact of Pillar 2 regulations on taxpayers conducting actual business in Poland. The Act includes provisions regarding exclusion from qualified income constituting the basis for taxation with top-up tax, the so-called substance-based income exclusion.
According to the content of the presented draft regulations, taxpayers of top-up tax will pay this tax in the amount of the individual top-up tax rate (constituting, in principle, the difference between the minimum rate of 15% and the effective tax rate paid by a given group of taxpayers operating in Poland) multiplied by qualified income reduced by the substance-based income exclusion.
The substance-based income exclusion, by which qualified income may be reduced, is based on:
- costs incurred directly in connection with the employment of employees (the concept of employee is understood broadly, in addition to employees employed under an employment contract, it also includes, inter alia, persons "employed" by the taxpayer under civil law contracts or the so-called B2B contracts) and
- the net value of the taxpayer's tangible fixed assets.
In order to calculate the amount of the substance-based income exclusion, the amount of costs related to employing employees and the net value of the taxpayer's tangible fixed assets (calculated on the basis of accounting regulations, not tax regulations) should be multiplied by the appropriate percentage provided for in the Act. Ultimately, it will be 5%, while this percentage will be higher in the first years of the Act's validity (for example, for employee costs it will be 9.6% in 2025, and for fixed assets it will be 7.6% in 2025, these values will gradually decrease to the target of 5% in 2033).
The value of the substance-based income exclusion will therefore reduce the income constituting the basis for calculating the amount of top-up tax.
In practice, this may result in the above-mentioned groups of taxpayers operating in Poland not having to pay the top-up tax, or it may result in the amount of the top-up tax being lower than if the substance-based income exclusion rules were not applied.
However, it is worth noting that the value of the substance-based income exclusion will decrease in subsequent years due to the lower percentage used to calculate the exclusion in subsequent years, as indicated above, and due to the fact that tangible fixed assets of taxpayers will be subject to depreciation, and therefore their book value will decrease in each subsequent year. Consequently, a situation may arise in which the taxpayer will not pay the top-up tax for a given year, but will have to pay this tax in subsequent tax years. It is also worth adding that, in our opinion, the net value of tangible fixed assets should be calculated not only on the basis of the value of fixed assets resulting from investments carried out within the PIZ or SEZ, but on the total assets of taxpayers, regardless of the investment from which the fixed asset is derived.
Amendment of exemption provisions
The current wording of the proposed provisions of the Act is mainly based on the content of the provisions contained in the above-mentioned Directive and is quite general in nature, and does not directly refer to the CIT exemptions specified in the CIT Act.
In this respect, the Ministry of Finance has declared a review of the Polish legal system in order to verify the current content of the provisions specifying tax reliefs and CIT exemptions. This measure, as indicated by the Ministry, will be aimed at considering the possibility of limiting the impact of Pillar 2 on taxpayers benefiting from tax preferences. However, the details in this regard are not yet known.
Therefore, due to the lack of exclusion of the application of Pillar 2 to taxpayers benefiting from CIT exemption and the need to apply regulations on the substance-based income exclusion relating to specific balance sheet data of a specific taxpayer, the impact of Pillar 2 regulations on taxpayers benefiting from CIT exemption may be different depending on their individual situation, but also on the interpretation of the final provisions of the Act in the context of the Polish legal order and depending on how the provisions regarding these exemptions will be amended in the future.
The effects of implementing the Pillar 2 regulations may therefore be particularly acute for taxpayers who implemented PIZ or SEZ investments years ago, because many of them have already depreciated their assets, and therefore in their case the value of the substance-based income exclusion calculated on the basis of the value of tangible fixed assets will be much lower. In the past, such taxpayers committed themselves when applying for the exemption to make an investment and meet certain criteria, expecting in return a certain level of CIT exemption. However, as a result of the currently proposed provisions, they may lose the right to benefit from part of the exemption (due to the top-up tax), which may effectively result in the lack of incentive effect of the state aid received under these mechanisms.
Summary
Due to the lack of a direct exclusion of the application of the provisions of the Act to taxpayers benefiting from CIT exemption under state aid instruments such as PIZ or SEZ, and due to the lack of clarity as to the interpretation of the Act and the possible future amended content of the provisions regarding CIT exemption instruments, the case of each taxpayer should be analyzed separately, with reference to their specific situation, and the results of such analysis may vary significantly, depending on many factors.
Therefore, in our opinion, it is worth calculating the projected impact of the Act on the basis of historical data now, even before the regulations enter into force, to verify whether, despite the right to CIT exemption obtained in PIZ or SEZ, the taxpayer will be obliged to pay the tax in question. It is worth conducting such an analysis now in order to properly prepare for the entry into force of the new regulations, which is scheduled to take place on 1 January 2025.
However, the final analysis of the consequences of the entry into force of the Act should be based on the final wording of the Act, due to the fact that the draft of the new regulations may still be amended.
We therefore suggest conducting an individual analysis of the impact of the Pillar 2 regulations on your situation, due to the fact that the wording of the Act itself does not leave clarity as to the situation of taxpayers benefiting from CIT exemption. If you are interested in conducting such an analysis, please contact us.
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