We would like to inform you that as of January 1, 2023, within the framework of yet another amendment to the so-called “Polish Order”, amendments to the tax law on corporate income tax (CIT) came into force in accordance with the Law of October 7, 2022 on Amendments to the Law on Corporate Income Tax and Certain Other Laws (Journal of Laws of 2022, item 2180). It is worth mentioning that the regulations in some cases differ significantly from those in effect as of January 1, 2022, which we informed you about when they were coming into force.
We encourage you to contact us to discuss the detailed impact of these changes on the tax settlements of your companies.
We hereby present you with a summary of the changes to the CIT Law:
- Income shifted
- Transfer pricing
- Debt financing costs
- Holding companies
- Withholding tax
- Controlled Foreing Companies (CFC)
- Estonian CIT
- Bad debt relief
- Minimum income tax on buildings
1. Income shifted
- Only costs incurred directly or indirectly for the benefit of a related entity of the company, representing a receivable of this entity, which have been included in deductible expenses in the tax year, will be considered as income passed through.
- Clarification – the related entity to which the costs are incurred may only be a taxpayer who does not have a registered office or management in Poland.
- Clarification – the premise of “preferential taxation” of a related party, i.e. indicating that, in compliance with the tax laws in force in the country of the related party’s registered office, management, registration or location, such income (revenue) of the taxpayer’s related party derived from passive costs is to:
- be subject to taxation at an income tax rate of less than 14.25%, or
- be subject to exemption or exclusion from such tax.
- Specifying that the related party must derive at least 50% of its total passive income from the taxpayer or other companies related to the taxpayer that are Polish tax residents.
- New tax conditions – it will be required that the related entity to which expenses are incurred, transferred at least 10% of passive income to another entity in cases specified in the law.
- The tax rate (19%) and the type of costs [expenses for intangible services (consulting, market research, advertising, management and control, data processing, insurance, guarantees and warranties, and services of a similar nature); all kinds of fees and charges for licenses, copyrights and industrial property rights; costs of transferring the debtor’s risk of insolvency for loans other than those granted by and benefits of a similar nature; costs of debt financing, fees and remuneration for the transfer of functions, assets and risks] will not be changed.
2. Transfer pricing
- Elimination of regulations regarding the obligation to document so-called indirect paradise transactions (regulations repealed retroactively – starting in 2021).
- Raising the thresholds for direct paradise transactions:
- PLN 2,500,000 – in the case of a financial transaction;
- PLN 500,000 – in the case of a transaction other than a financial transaction
- Controlled transactions and transactions other than controlled transactions, with an entity domiciled, established or managed in a territory or country practicing harmful tax competition – applying to transactions commenced and not completed before January 1, 2021, to the extent of that portion of such transactions that are carried out in a tax year beginning after December 31, 2020, or commenced after December 31, 2020.
- Controlled transactions and transactions, other than controlled transactions, with a foreign permanent establishment domiciled, established or managed in a territory or country that applies harmful tax competition – applicable to transactions commenced and not completed before January 1, 2023, with respect to that part of such transactions that are executed in a tax year beginning after December 31, 2022, or commenced after December 31, 2022.
3. Debt financing costs
- Obligation to exclude from tax deductible costs of debt financing in the part in which the excess of debt financing costs exceeds the higher amount – the amount of PLN 3,000,000 or the amount calculated according to the EBIDTA calculated according to the formula [(P – Po) – (K – Am – Kfd)] × 30%.
- Exceptions to the exclusion from tax expenses introduced by “Polish Order 1.0” in its entirety of the costs of debt financing from a related party – in the part allocated to equity transactions, namely:
- acquisition or subscription of shares (stocks),
- acquisition of all rights and obligations in a company that is not a legal person,
- payment of additional contributions,
- increase of share capital, or
- redemption of own shares for cancellation
Exceptions apply to the execution of such transactions in entities unrelated to the taxpayer and by a bank/ SKOK established in an EU/EEA country. In addition, the rule has been clarified, that the exclusion from tax costs does not apply to financing costs on debt that was obtained and spent before the end of 2021.
- Both regulations are retroactive – starting January 1, 2022.
4. Holding companies
- Increase withholding tax exemption on dividend payments from 95% to 100%.
- Change in the definition of a holding company:
- in addition, a simple joint stock company will qualify as a holding company
- direct uninterrupted ownership by title of at least 10% of the shares (stock) in the capital of the subsidiary should be met for a period of not at least 1 year, but at least 2 years, as of the date prior to the date of receipt of the relevant income
- the company will be able to benefit from (meet the conditions for) the dividend exemption under Article 22 section 4 of the CIT Law and dividend income earned abroad (Article 20 section 3 of the CIT Law) – it still cannot benefit from the exemption for Special Economic Zones or the Polish Investment Zone.
- Change in the definition of a subsidiary:
- the possibility of owning more than 5% of shares (stocks) in the capital of another company
- the possibility of owning all rights and obligations in a company that is not a legal entity
- the possibility of benefiting from exemptions relating to Special Economic Zones or the Polish Investment Zone
- as of the date prior to the receipt of dividend income or disposal of shares, all conditions should be met continuously for at least 2 years
- Change in the definition of a foreign subsidiary:
- as of the date prior to the receipt of dividend income or the disposal of shares (stocks), the conditions have been fulfilled continuously for at least 2 years.
- Provided the company meets the conditions referred to in Article 24a section 3-point 3 letter b and c, in the tax year in which the dividend is paid, or in any of the 3 tax years (not 5 years as in the case of the original regulation) prior to that year.
- Change in definition of domestic subsidiary:
- a limited liability company or a joint stock company that has been a Polish CIT taxpayer for two years.
5. Withholding tax
- Removal of the requirement for payers to file follow-up WH-OSC statements, with the effect of applying extended statement terms to receivables paid in 2022. The first WH-OSC statement filed by a payer will allow them not to apply the provision of Article 26 section 2e of the CIT Law until the last day of the tax year in which they filed the statement.
- The WH-OSC follow-up statement will not have to be filed until the last day of the month following the end of the tax year.
6. Controlled Foreign Company (CFC)
- When calculating the income of a CFC, the income and expenses attributed to it in accordance with Article 5 of the CIT Law (common sources of income, e.g., from participation in non-corporate companies) and that the reliefs and exemptions under the CIT Law do not apply, with the exception of those set in Article 24a of the CIT Law, are also taken into account.
- Determination of the premise of high profitability – if, before the end of the tax year, an entity has disposed of assets corresponding to at least 25% of the carrying amount of all assets determined as of the last day of the previous tax year, the carrying amount of the disposed assets shall be determined as of the day preceding the date of their disposal and shall be included in the value referred to in Article 24a section 3 point 5 letter 5 of the CIT Law in the proportion in which the number of days that these disposed assets were owned by the entity in the tax year remains to the total number of days in that year (Article 24a section 3f).
7. Estonian CIT
- The deadline for filing the CIT-8E return and paying the lump sum due on the value of the disposed net profit income will be the end of the third month of the tax year following the year in which the disposition was made.
- Introducing, among other things, a change in the determination of income from non-business expenses in the case of using assets (e.g., personal cars) for business and other non-business purposes.
8. Bad debt relief
- Introduction of no requirement to show the bad debt relief in the tax return (CIT-WZ or CIT/WZG attachments).
9. Minimum income tax on buildings
- Simplification of the procedure for reimbursement of tax on income from buildings – no obligation to issue a decision on reimbursement in the absence of doubts about the application submitted.
In addition, the minimum income tax regulations have been suspended and are due to apply as of 1 January 2024. Meanwhile, the so-called ‘hidden dividend’ regulations (which were originally due to apply as of 1 January 2023) have been repealed.