Taxation of companies

A range of tax benefits, but also new taxes which apply to legal persons. The Polish Deal introduces many changes and new solutions that will apply to most CIT-paying entrepreneurs.

• Tax relief for expansion

• The Polish Deal enables taxpayers to deduct from their tax base any costs incurred in the relevant tax year to increase revenues from the sale of products. Since such costs also represent a tax cost, the tax relief will enable the same expenses to be deducted twice for tax purposes.
• The tax relief also applies to costs incurred on promotional activities, provided that at least one of the following conditions is met:

• in the two tax years following that in which the costs were incurred, the taxpayer increases income from the sale of the products that are already available;
• the taxpayer earns income from the sale of products that are not yet available;
• the taxpayer earns income from the sale of products that are not yet available in a given country.

• The maximum value of the deduction is capped in each tax year at PLN 1 million.

• Consolidation tax relief 

Consolidation relief enables a taxpayer’s tax base to be reduced by the value of costs incurred to acquire a majority stake in a company which has legal personality.

• The qualified costs are those paid for legal services, notary fees, court and stamp fees connected with purchasing the shares (stocks).
• The costs of paying for the acquired shares (stocks) and paying for any related debt financing do not qualify as tax-deductible costs.
• The maximum value of the deduction is capped at PLN 250,000.

• Tax relief for socially beneficial expenses

From 2022, socially beneficial activities conducted by CIT taxpayers can benefit from a special tax relief.

• This relief will allow the taxpayer’s tax base to be reduced by 50% of the value of costs incurred by the taxpayer on sports and cultural activities, or activities which support higher education and science. The reduced amount must be lower than the value of operating income in the given tax year.

• Taxation of holding companies

• The Polish Deal creates a preferential CIT taxation system for entities performing holding functions.
• Holding companies based in Poland will, provided that they fulfil certain statutory requirements, only pay 5% income tax on dividends obtained from their subsidiaries (i.e. 95% of the amount of dividends obtained will not be subject to CIT).
• Additionally, any income earned by holding companies from selling shares (stocks) in their subsidiaries will be fully exempt from income tax, provided that the following conditions are jointly fulfilled:

• the holding company holds at least 10% of the subsidiary’s shares for a period exceeding one year,
• the buyer of the shares / stocks is an unrelated entity,
• the company whose shares or stocks are sold is not a so-called real estate company,
• the seller submits an appropriate declaration to the tax authority.

• IPO tax relief

• From 2022, a tax relief will apply to encourage joint-stock companies to debut on the stock exchange and make their shares available for public trading – so-called “IPO relief”.
• The tax relief allows 150% of the IPO-related expenses incurred to be deducted from the taxpayer’s tax base. These include costs in connection with preparing the prospectus, notary, court, stamp and stock exchange fees. Furthermore, 50% of the costs incurred inter alia for legal and financial advice are tax-deductible, up to a maximum of PLN 50,000.

• Facilitating the creation of tax capital groups 

• The Polish Deal introduces changes to simplify the possibility of a parent company and its subsidiaries operating as a Tax Capital Group (TCG).
• The average value of share capital of the companies forming part of a TCG was reduced from PLN 500,000 to PLN 250,000.
• The prohibition on the existence of mutual connections between the subsidiaries within the TCG has been removed.
• It is no longer necessary for the contract establishing the TCG to be concluded as a notarial deed – ordinary written form suffices.
• It will be possible to restructure activities within the TCG without losing TCG status.
• It will no longer be necessary for the TCG to maintain an appropriate level of profitability (the ratio of the TCG’s turnover to income).
• It will be possible to reduce the TCG’s taxable income by the value of any losses incurred by the TCG’s member companies in the period prior to the TCG’s establishment.

• Estonian CIT – new principles

• The Polish Deal introduces changes to simplify the possibility of capital companies to take advantage of lump sum taxation (so-called Estonian CIT).
• The range of entities entitled to use the Estonian CIT regime will be extended to include limited partnerships and limited joint-stock partnerships.
• The obligation to incur capital expenditures will be abolished.
• Maximum income levels will no longer limit a taxpayer’s ability to use the Estonian CIT regime. To date, only taxpayers with an income not exceeding PLN 100 million could use this regime.
• The flat-rate tax rates will be lowered to 10% for small taxpayers and 20% for other taxpayers.
• Changes are made to the lump sum amount which can be deducted from the income of a partner in a company using the Estonian CIT regime. From 1 January 2022, it will be possible to deduct 90% (in respect of payments made by small taxpayers) or 70% (in respect of payments made by others) of the amount of flat-rate tax previously paid by the company.

• Changes in withholding tax (WHT)

• The general rules applicable to exemptions from withholding tax or lower withholding tax rates will apply only to payments which do not exceed PLN 2 million per year to a single recipient.
• If this threshold is exceeded, the payer will be required to collect withholding tax at the statutory basic rate (19% / 20%), and will then be entitled to apply for a reimbursement thereof (the pay-and-refund procedure);
• Payments to unrelated entities or to domestic entities and payments for the provision of intangible services will be excluded from the pay-and-refund procedure.
• The range of situations entitling a taxpayer to apply for an opinion on whether the exemption applies will be extended to include the provisions of agreements to avoid double taxation.

• Taxation of buildings and residential premises – new principles

• From 1 January 2023,  tax depreciation cannot be applied to buildings and residential premises.
• Costs incurred to purchase or construct such properties only become tax deductible when they are disposed of in exchange for payment.

• Limited real estate tax depreciation for real estate companies

• The Polish Deal introduces restrictions on the ability of so-called real estate companies to apply tax depreciation to real estate.
• Tax depreciations applied to real estate by real estate companies may not exceed the value of depreciation or amortization write-offs made in accordance with accounting regulations.

• Changes to the deduction of debt financing costs

• Any excess of a taxpayer’s debt financing costs may be recognized as tax-deductible costs up to a maximum of PLN 3 million or 30% of the tax EBITDA. To date, the prevailing interpretation of the existing rules on this issue meant that such costs were tax-deductible if they did not exceed PLN 3 million and 30% of tax EBITDA.
• It will also not be possible to classify as tax costs any interest payable on debt financing obtained from related entities and used to finance capital transactions, such as the purchase of shares or to increase the subsidiary’s share capital.

• Expanding the range of CFC entities

• The Polish Deal extends the application of the provisions on taxing Controlled Foreign Companies.
• The new provisions state that the concept of Controlled Foreign Companies shall also include entities in which a taxpayer owns – independently, jointly with related entities or with other taxpayers residing or having a registered office or management board in Poland – directly or indirectly over 50% of the share capital or more than 50% of the voting rights in the entity’s management. The “other taxpayers” referred to above are those which own at least 25% of the share capital, or at least 25% of the voting rights in the company’s management, or 25% of the rights to participate in the company’s profits.
• The definition of passive revenues is also expanded, which influences the qualification of a foreign entity as a CFC. Such revenues include benefits received in consideration of so-called intangible services.
• The range of Controlled Foreign Companies is also expanded to include entities which do not exceed the threshold of 33% of passive revenues, provided that certain conditions (specified in the draft legislation) are fulfilled regarding the gross/net income of the relevant entities.
• There is an increased threshold of effective taxation which must apply to a foreign entity before it can avoid being categorised as a CFC. The new rules stipulate that the effective taxation of a foreign entity may not be lower than 14.25% (to date, this threshold was set at 9%).
• Additionally, the draft legislation will introduce two additional categories of Controlled Foreign Companies:
  • entities whose passive income is lower than 30% of the total value of the classes of assets it holds (inc. shares, stocks, real estate, intangible assets), if such assets constitute at least 50% of the total value of the foreign entity’s assets.
  • entities that achieve excessively high rates of return on their assets.

• Tax on so-called shifted income

• From 1 January 2023, the Polish Deal introduces a new tax on so-called shifted income for CIT taxpayers who incur (directly or indirectly, for the benefit of foreign related entities) expenses for intangible services (e.g. advisory services, market research, advertising, management, data processing), licensing fees or debt financing costs, and :
  • such expenses constituted (i) at least 50% of the value of gross income obtained by the foreign related entity, and (ii) at least 3% of the total sum of expenses of the taxpayer paying the receivable, which were classified as tax costs, regardless of the form.
  • the income tax actually paid by the foreign related entity for the year in which it received the receivable for expenses is lower by at least 25% than the amount of income tax that would be paid in connection with the Expenses under Polish law.

•  Excluding so-called hidden dividends as costs

• The Polish Deal prevents benefits received by a beneficiary who is a partner or an entity related to a company or one of its partners (so-called hidden dividends) from qualifying as tax-deductible costs.
• Such exclusion applies if:

– the service was not provided on an arm’s-length basis;

– the amount of costs or the date on which they were incurred are in any way dependent upon the company achieving a profit or a certain amount of profit;

– these costs include remuneration for the right to use the assets owned / jointly owned by the partner or an entity related to the partner before the taxpayer was established.

• The exemption does not apply if the total costs incurred as hidden dividends in a tax year is lower than the amount of gross profit obtained in the financial year in which those costs were included in the company’s financial report.
• According to the current version of the draft reform package, the provisions on hidden dividends will enter into force on 1 January 2023.

• Restructuring activities

• The Polish Deal significantly limits the availability of tax neutrality during restructuring processes.
• The new rules limit the tax neutrality of any exchange of shares / mergers / divisions to one single reorganization. Any subsequent restructuring activities involving the same shares / stocks will be taxable.
• Additionally, the new provisions enable the tax neutrality of divisions / mergers only if all of the following conditions are fulfilled:

• the value of the shares / stocks allocated by the acquiring company or by the newly formed company does not exceed the value of the shares / stocks in the acquired or divided company that would have been acquired by the relevant partner for tax purposes if no merger or division had occurred;
• the value of the assets taken-over for tax purposes by the acquiring company does not differ from the value resulting from the tax books of the acquired or divided entity.

• The new provisions will also result in the taxation of mergers between limited liability companies and partnerships.

• Minimum tax (the so-called tax on gross income)

• The New Deal introduces a 10% tax which is payable by taxpayers that (i) incurred losses in their operating activities or (ii) earned a net income from operational activities which did not exceed 1% of gross income from operational activities
• The tax on gross income will not apply inter alia to:
  • so-called flat structures – i.e. companies having no shares or other rights to participate in the profits of other entities and whose partners are all natural persons;
  • taxpayers starting a business – in the tax year of commencing the business and for the following two tax years (except for taxpayers which come into existence as a result of a restructuring process);
  • finance companies;
  • taxpayers who earned gross income of at least 30% lower than that obtained in the previous tax year,
  • entities belonging to a group comprising at least two companies, in which one company has a direct 75% share in the share capital, stock capital or equity capital of other companies within the same group if the share of the total income of these companies in their total this gross income exceeds 1%.