On 8 September 2021, representatives of the Polish Government submitted draft legislation to the Polish Parliament on the major tax reform referred to as the “Polish Order." The changes would affect several areas of taxation including Corporate Income Tax (CIT), Personal Income Tax (PIT), and Value Added Tax (VAT). A majority of the provisions are expected to come into force as of 1 January 2022.
The draft legislation will now be discussed in the Polish Parliament. Their potential impact should be assessed by businesses in order to prepare for change and undertake necessary action.
The draft legislation submitted to the Polish Parliament, to a large extent, is similar to the previous government proposal (See EY Global Tax Alert, Poland’s proposed tax reform include significant changes to tax system, dated 3 August 2021).
Nevertheless, the most significant development as compared to the previous draft is related to a minimum tax on corporate taxpayers, which would be calculated based on revenue as a top-up over regular corporate income tax that is based on income (See EY Global Tax Alert Poland proposes new revenue-based minimum tax for corporate taxpayers, dated 10 September 2021.)
Other CIT areas that would be affected by the proposed changes include:
- Withholding pay-and-refund regime, which after several deferrals would finally enter into force from 1 January 2022. Despite some adjustments as compared to the previous version, the most significant change for taxpayers remains the obligation to collect withholding tax at the statutory rates of 19% or 20% regardless of potential relief (See EY Global Tax Alert, Polish Ministry of Finance publishes decree deferring certain provisions of the new withholding tax reform to 31 December 2021, dated 30 June 2021).
- Changes in the way that a maximum threshold of tax deductible financing cost is calculated, which may reduce deductions and increase the tax base.
- Limitations in deductibility of costs, including intra-group debt, financing share acquisitions or costs of certain services provided by shareholders and board members.
- Taxation of so-called “shifted profits” (also referred to as taxation of undertaxed payments), which would impose a CIT of 19% in Poland on certain qualified payments made directly or indirectly to related entities, if effective taxation is lower by at least 25% of the hypothetical CIT rate of 19% (i.e., lower than hypothetical 14.25% CIT). Additional tests and exceptions could apply.
- Tax depreciation of real property could not exceed write-offs for accounting purposes – for CIT purposes it applies only to a company classified as a “Real Estate Rich Company.”
- Tax depreciation of residential properties would be disallowed.
- A new form of agreement with the tax authorities available for strategic investors (See EY Global Tax Alert, Poland announces plans to introduce an investment agreement for strategic investors, dated 26 July 2021).
- New tax exemptions for Polish holding companies, including an exemption for 95% of dividends received from qualified subsidiaries and a capital gains tax exemption on sales of shares of such qualified subsidiaries, subject to certain conditions. The status of “holding company” will depend on, among other things, conducting real economic activity (assessed based on controlled foreign company (CFC) regulations).
- New definition of place of effective management to include more foreign taxpayers as taxed in Poland on their worldwide income. It would limit situations whereby Polish residents establish entities in foreign jurisdictions, while not carrying out actual business operations in those foreign jurisdictions.
- Changes to the CFC regime.
- Amendments to the CIT consolidation regime (See EY Global Tax Alert, Poland plans to simplify requirements for corporate income tax consolidation regime, dated 28 July 2021).
- Obligation to provide an electronic version of accounting books to the tax authorities on a regular basis (to be effective from 2023).
- Changes to the transfer pricing compliance obligations.
- Amendments to the alternative CIT model (based on taxation deferred until distribution), which so far has not been well received due to various limitations. The changes include removing the PLN100m (approx. US$26m) revenue limit and investment cost requirements, but still upholding many other restrictions.
With respect to other areas of taxation, the changes include among others:
- Implementation of a new Tax Incentives Package including:
- Enhancement of the existing research and development relief and Intellectual Property Box regime
- New relief for “robotization” – deduction of costs of brand new industrial robots, their machines and peripheral devices, and intangible assets to use these robots, including related training services
- New relief for prototypes – deduction of 30% of costs of trial production of a new product and introducing it to the market (up to 10% of operating income)
- New relief for innovative employees – additional deduction of employee related costs for employers whose low / lack of operating income prohibits them from applying the B+R relief in this respect
- Relief for business expansion and consolidation (deduction of up to PLN 250k per annum), initial public offerings (including advisory costs to some extent)
- Far-reaching changes regarding PIT taxation and Social Security burdens related to employment, self-employment, and entrepreneurs, which can significantly impact employments costs.
- Changes in the area of VAT, including:
- Optional taxation of financial services
- VAT consolidation mechanism (VAT grouping)
- Amendments in VAT compliance and reporting obligations
The majority of the changes are expected to be effective as of 1 January 2022.
The proposed changes impact a broad range of tax areas. This Alert provides a general overview of certain selected issues covered by the new provisions. Additional Global Tax Alerts will provide more details regarding the most significant changes for multinational groups as well as progress in the legislative process.
For additional information with respect to this Alert, please contact the following:
EY Doradztwo Podatkowe Krupa sp.k., Warsaw
- Andrzej Broda
- Marcin Opilowski
- Magdalena Zalech
- Michal Koper
EY Doradztwo Podatkowe Krupa sp.k., Wroclaw
- Sebastian Ickiewicz
Ernst & Young LLP (United States), Polish Tax Desk, New York
- Sylwia Migdal
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.