On 16 November 2021, the President’s office announced that Poland’s President had signed the tax reform bill (Polish Order) on 15 November. This means that the bill has been passed by all statutory bodies and only formal publication in the Journal of Law remains prior to its entry into force.
The changes will significantly affect several areas of taxation including Corporate Income Tax (CIT), Personal Income Tax (PIT), and Value Added Tax (VAT). A majority of the provisions will be effective as of 1 January 2022.
Their potential impact should be assessed by businesses to prepare for the changes as well as to undertake any necessary action.
The final legislation signed by the President, 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).
One of the significant developments, as compared to the Government’s proposal, is related to a minimum tax on corporate taxpayers, which will be calculated based on revenue and certain types of “tainted” expenses, as a top-up over regular CIT 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 will be affected by the changes include:
- 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.
- Withholding pay-and-refund regime, which after several deferrals will finally enter into force from 1 January 2022. The most significant change would be the obligation to collect withholding tax at the statutory rates of 19% or 20%, unless additional formal measures are undertaken to rely on a 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). However, the scope of payments subject to the pay and refund regime has been limited only to so called passive payments (dividends, interest and royalties) to related parties only. Nevertheless, tax remitters also with respect to these payments are obliged to exercise due diligence when applying withholding tax relief at source.
- Changes in the way that a maximum threshold of tax deductible financing cost is calculated, which may reduce deductions and increase the tax base. Deduction will be explicitly limited to one of the parameters set by either a PLN3m annual threshold or 30% of tax EBITDA (adding both limits will be denied).
- Limitations in deductibility of intra-group financing costs, used (directly or indirectly) for so called “capital transactions” including, e.g., share acquisitions, equity contributions or buy back of own shares.
- Non-deducibility of costs considered as so called “hidden dividend” or “constructive dividend” (See EY Global Tax Alert, Poland plans to limit tax deductibility of payments considered hidden dividends, dated 4 October 2021). However, these rules are expected only as of 1 January 2023 and their final provisions could be subject to amendment before implementation.
- 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 will 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 a place of effective management, which is to limit situations whereby Polish residents set up entities in foreign jurisdictions, while not carrying out real business operations in that foreign jurisdiction or foreign companies are managed from Poland.
- 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.
With respect to other areas of taxation, the changes include among others:
- Implementation of a new Tax Incentives Package including:
- Significant enhancement of the existing research and development (R&D) relief and Intellectual Property Box regime, with a possible deduction of additional 200% employment costs for those involved in R&D activity.
- New relief for innovative employees – reduction of monthly PIT advances by a portion of non-utilized R&D deduction, for companies whose low/lack of operating income prohibits them from fully applying the R&D relief.
- New relief for “robotization” – deduction of additional 50% 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).
- Relief for business expansion and consolidation (deduction of up to PLN250k annually), 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 proposed changes impact a broad range of tax areas which generally will come into force in over a month from now. Additional Global Tax Alerts will provide more details regarding the most significant changes for multinational groups.
For additional information with respect to this Alert, please contact the following:
EY Doradztwo Podatkowe Krupa sp.k., Warsaw
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.