In our article, we show how to navigate through the new regulations in practice – especially how to check whether the taxpayer will be subject to the minimum income tax and what needs to be done to calculate the amount of this tax.
The signed by the President of Poland on 15th of November 2021 amendments to tax regulations – the so-called Polish Deal – provide for regulations introducing a new minimum income tax in the Corporate Income Tax Act (art. 24ca) (CIT Act).
The idea and the structure of the minimum income tax constitute a novelty as far as Polish tax regulations are concerned and constitute yet another breach in the principles of standard CIT.
Let’s start from the key point – the changes do not provide for any exemption from the minimum income tax for smaller enterprises, which, for example, do not achieve certain level of revenue or which employ a limited number of people. The minimum income tax will apply basically to all companies and tax capital groups that meet the conditions indicated in the relevant regulations.
However, it is planned to exclude certain – narrowly defined – groups of entities from application of regulations concerning the minimum income tax, i.a.:
- Taxpayers starting a business (up to 3 tax years from the start of a business);
- Financial enterprises;
- Taxpayers who gained 30% less revenue in a tax year compared to the previous year;
- Taxpayers owned only by natural persons and who at the same time do not have specific participation rights in other entities (including, particularly, shares in the capital in another company);
- Taxpayers operating in the mining sector or in international transport using ships or aircrafts (whose main revenues come from such activity);
- taxpayers belonging to a group of at least two companies, in which one company holds directly 75% of shares / stocks in other companies from this group throughout the tax year, provided that the tax year of the companies from this group covers the same period and the share of total income in total revenues of all these companies* in a given tax year is higher than 1%. This group of taxpayers will be obliged to provide the tax office with information about the companies of the group that meet the above-mentioned conditions.
* while verification of meeting the above-mentioned conditions, we take into consideration only entities that are taxpayers referred to in art. 3 ust. 1 of the CIT Act (i.e. Polish residents, without foreign establishments).
While verifying who is subject to the minimum income, we do not take into account the result on transactions if the price of such transactions is determined on the basis of legal provisions and at the same time additional conditions specified in the art. 24ca ust. 2 pkt 2 lit. b) of the Corporate Income Tax Act is met. In practice, the above-mentioned mechanism is supposed to allow another group of entities not to pay the minimum income tax – namely, entrepreneurs operating in the energy sector.
If you are not in the above group, it does not mean that you will pay the minimum income tax. Not every taxpayer of the standard CIT will be required to calculate the tax. In practice, however, every company and tax capital group (with the exceptions described above) should check each year whether it will be subject to the minimum tax or not.
Verification will be based on finding:
- Whether the proportion of income to revenues (other than from capital gains) was less than 1%, or
- Whether the entity made a loss for a given tax year (other than from capital gains).
Importantly, for the purpose of calculating the above-mentioned losses and the proportion of income in revenues you do not take into account costs resulting from the acquisition, production or improvement of fixed assets, including depreciation write-offs, recognized in the given tax year. Therefore, if a low level of income or loss of the entity results from incurring higher costs of acquisition, production or /improvement of fixed assets (depreciation write-offs), then such entities may not be obliged to calculate the minimum tax.
If the above-mentioned criteria are not met, for example if the company has achieved a share of income in its revenues – taking into account the appropriate part of depreciation write-offs – at the level of at least 1%, then the regulations on the minimum tax will not apply at all.
After the verification that the company meets the conditions to be subject to the minimum income tax regulations, it will have to determine its amount. The first step is to establish the tax base, which is specifically understood in the minimum income tax.
The tax base of the minimum income tax is the sum consisting of the following four items:
- 4% of operational revenues (other than from capital gains) plus
- "excessive" debt financing costs paid to related entities (generally exceeding 30% of the so-called tax EBITDA), plus
- costs of intangible services or royalties paid to related entities (with the scope and definition similar to the current art. 15e of CIT Act), exceeding PLN 3 million plus 5% of the so-called tax EBITDA, plus
- the value of deferred income tax resulting from the disclosure of unamortized intangible assets in tax settlements to the extent that it results in an increase in gross profit or a decrease in gross loss.
The tax base determined in the above-mentioned way can be reduced by the following amounts:
- The amount of deduction decreasing (in the tax year) the tax base determined according to the art. 18 of the CIT Act (e.g. the amounts of donations or R&D relief) and also new reliefs announced in the Polish Deal (e.g. for prototypes and robotization). It will not be possible to decrease the tax base with a deduction for the so-called bad debt relief;
- The value of income included in the calculations of income exempt from tax, due to the activity in the Special Economic Zone (on the basis of the permission) or the Polish Investment Zone (on the basis of the decision to support).
Theoretically, most of the deductions that can be made by standard CIT taxpayers will therefore also be available to entities subject to the minimum income tax. Entities benefiting from the exemption under the SEZ/PSI will be able to deduct appropriate income from the tax base as well.
Nevertheless – due to the construction of the minimum income tax, as well as the regulations – such deduction may not ensure full neutrality of the minimum income tax.
The next step is to multiply the tax base, determined according to the principles indicated in the Step 4, by 10% – as this is the minimum income tax rate.
The provisions also regulate the situation in which the taxpayer has to pay for a given tax year both the minimum and standard tax CIT (calculated in accordance with art. 19 of the CIT Act). Entities subject to the minimum tax regulations will not be exempt from general CIT tax – they will still be obliged to settle income tax with the tax office.
However, in such case, they may reduce the minimum income tax by the value of a standard CIT. They should pay the reduced minimum tax within the time limit provided for CIT to the account of the competent tax office. Taxpayers will also be required to present the tax base, any deductions made, and the amount of the minimum income tax in the tax return. The amended regulations, however, do not provide for the obligation to make advance payments for the minimum income tax.
The amount of tax paid for a given tax year can be deducted from the standard tax in subsequent years. However, the deduction can be made in the annual tax return only for the next 3 consecutive tax years following the year for which the taxpayer paid the minimum income tax.
We prepared the above summary based on the signed amendments to the tax regulations concerning the minimum income tax, which however has already raised a number of doubts. In case of changes in the scope of the minimum income tax, we will update the document.
We hope that the summary has helped you to understand better the construction of the minimum income tax and to estimate the impact of the amended regulations on your business. We also would like to encourage you to use the minimum income tax calculator created by us.
If you have any additional questions about the minimum income tax, do not hesitate to contact us.