President has signed the so-called Polish Deal provisions. This means that the Polish Deal provisions will be in force as of January 1, 2022. Below, we present a list of most importat changes that may be of particular importance from the perspective of Poland-based entrepreneurs.
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Changes in PIT and ZUS
1) Entrepreneurs and employees
The Polish New Deal should bring significant changes for Individuals (both entrepreneurs and employees) subject to taxation with the progressive tax rates (17 / 32%). Among the proposed changes, attention should be paid to:
- increase of the tax-free amount up to PLN 30 000;
- increase of the amount dividing tax thresholds (from PLN 85 528 up to PLN 120 000) – which means that only income exceeding the amount of PLN 120 000 will be subject to taxation at the higher, 32% PIT rate;
- lack of deductibility of healthcare insurance contribution rate (currently – to some extent – deducted from PIT) – which should be still calculated as 9% of the healthcare insurance contribution basis (for both entrepreneurs and employees);
- introduction of the so-called “middle-class relief” – which will be available to employees hired on the basis of standard employment contracts as well as entrepreneurs taxing their income from business activity in accordance with the progressive tax scale. This relief should be applicable in respect of Individuals whose annual taxable revenues (resulting from standard employment contracts) / taxable income (from their business activity) will range from PLN 68 412 up to PLN 133 692.
It should be noted that the “middle-class relief” shall not be granted to entrepreneurs or employees other than those specified above (in particular, this relief should not be applicable towards Individuals employed on the basis of mandate contracts, contracts for specific work or entrepreneurs benefitting from PIT flat rate).
2) Entrepreneurs being subject to taxation with the use of PIT flat rate (19%)
Entrepreneurs being subject to taxation with the use of PIT flat rate (19%) shall be obliged to pay a healthcare insurance contribution amounting to 4.9% of the healthcare insurance contribution basis (generally speaking, this basis should correspond to the income from business activity) – but not less than the amount corresponding to 9% of:
1) the minimum wage applicable at the beginning of the year (in case of contributions calculated on a monthly basis);
2) the number of months in a calendar year during which the taxpayer is subject to health insurance multiplied by the minimum wage applicable at the beginning of the year (in case of contributions calculated on an annual basis).
Lack of deductibility of the health contributions (currently – to some extent – deducted from PIT) may result in the increase of effective level of PIT (even up to ca. 24%).
3) Entrepreneurs being subject to the taxation with lump-sum income tax on registered income
As an alternative to the 19% flat-rate taxation of income earned on business activity, it may turn out, especially for IT specialists (i.a. software developers), that it is more effective solution to tax their revenues with a lump-sum tax on registered revenues (hereinafter: “lump-sum tax”) – owing to the fact that newly added 12% lump-sum tax rate may be applicable to entrepreneurs providing certain IT services (especially in the field of software development).
The lump-sum tax basis is calculated as the amount of taxable revenues decreased by social insurance contributions (using the lump-sum tax a taxpayer is not allowed to deduct any tax deductible costs). It is of crucial importance to notice that taxpayers (using the lump-sum tax) should be in the position to pay lump-sum healthcare insurance contributions (not being deductible from PIT – as in the case of other forms of PIT taxation). The healthcare contribution should amount to 9% of its calculation basis – whereas the basis (relating to 60, 100 and 180% of the average monthly remuneration in the enterprise sector in the fourth quarter of the preceding year, including payments from profit, announced by the President of the Central Statistical Office in the Official Journal of the Republic of Poland “Monitor Polski”) should depend on the amount of generated revenues – i.e., it shall be calculated with the use of the following revenue thresholds: (i) up to PLN 60 000, (ii) above PLN 60 000 but less than PLN 300 000 and (iii) above PLN 300 000.
At this point it should be pointed out that each entrepreneur should individually assess his/her tax situation and choose the most efficient way of taxation of business-related income. For this purpose it may be recommendable to benefit from tax advisor’s support.
In 2019, the Polish tax law governing withholding tax (WHT) was significantly amended, and a number of new far-reaching and imprecise requirements were imposed on the business entities. Due to Poland’s socio-economic improvement plans – which are to be introduced as the “Polish Deal” – some significant changes in the field of WHT may to come into force in 2022.
We would like to briefly present the most important changes in this regard.
1) Pay-and-refund mechanism
Currently, in case the cross-border payments made by the Polish entities exceed PLN 2 mln annually, there is a general obligation to collect WHT (at the standard rate of 19%/20%) from the excess above PLN 2 mln – regardless of any relief available under a double tax treaty or domestic tax regulations. The collection of WHT should be performed by the Polish entity who makes the payments (the remitter). WHT applies to the following types of payments:
- royalties (e.g. fees for use of copyrights, trademarks, fees for sale of such rights, fees for use of know-how);
- fees for intangible services (this applies to services such as consultancy, accounting, market research, legal services, advertising, management and control, data processing, employee recruitment and personnel acquisition services, guarantees and sureties and benefits of a similar nature);
- dividends (and other revenue from participation in the profits of legal entities).
After such obligatory WHT collection is done, it is than possible to apply for a tax refund. Therefore, the above-mentioned procedure is called pay-and-refund mechanism. Nevertheless, for now this mechanism is temporarily suspended due to a special regulations regularly issued by the Ministry of Finance.
Polish Deal introduces favorable changes to the pay-and-refund mechanism. According to the Polish Deal the mechanism will apply only to payments made to foreign related parties and will concern only interest, royalties and dividends.
Therefore, the pay-and-refund mechanism will not apply to payments for intangible services (even if made to foreign related parties) as well as to all other types of payments made to unrelated parties.
2) Clearance opinion
Currently the Polish remitters may be released from the pay-and-refund mechanism in case they are granted with a special decision issued by the tax office (i.e. clearance opinion). However, such clearance opinion may be issued only with respect to application of WHT exemptions stipulated under relevant EU Directives (which concern interests, royalties and dividends).
The Polish Deal extends the scope of a clearance opinion also to any WHT exemptions/reduced tax rates which are stipulated in double taxation treaties. Therefore, settlement of the WHT will be more convenient.
3) Confirmation statement
Another way for the Polish remitters not to collect WHT under the pay-and-refund mechanism is to submit to the tax office an appropriate statement confirming that all conditions for application of WHT exemption or reduced tax rate are met. However, currently such statement requires signature of all of the remitter’s Directors (Members of the Board). Such joint signature of all Directors may be observed as inconvenient.
Provisions of Polish Deal will allow to sign the above-mentioned statement by a designated Director. However, it will still not be possible to submit such statement by a proxy.
4) Certificate of residence
In case of application of WHT exemption or reduced tax rate the Polish WHT regulations in each case require the remitter to possess an original certificate of tax residence (i. e. document issued by relevant authority which confirms tax residence of the payment recipient). However, in some cases Polish regulations allow to use also a copy of such a certificate (for example in case the payments made to the same entity do not exceed PLN 10,000 in a calendar year and concern fees for intangible services).
The provisions of Polish Deal introduce the ability to use a copy of a tax certificate in any case (to all kinds of payments and regardless their amounts).
5) Extended definition of due diligence of WHT tax payer
When verifying the conditions for applying a reduced WHT rate or exemption, Polish regulations require the remitter to conduct due diligence in such verification through the nature and scale of the payer’s business.
Polish Deal regulations relating to the due diligence itself have been described more specifically. The conditions shall be verified also through the relationship of the related parties. This means that in case of payments to related parties the standard of due diligence will be higher.
1) Estonian Corporate Income Tax (so-called Estonian CIT)
Lump sum on income of capital companies commonly referred to as Estonian CIT appeared in the Polish tax law with 2021. The main feature of Estonian CIT regime is postponement of income taxation until the moment of its actual payment to shareholders. In short, in the situation when the company does not pay income, it does not pay income tax.
The regulations governing the so-called Estonian tax currently provide for a number of conditions that must be met in order to take advantage of the new regime. First and foremost, this way of taxation is available only to capital companies, incurring investment outlays (mainly for purchase of new fixed assets) with a simple capital structure (with shareholders being natural persons, no shares in other entities), with revenues not exceeding PLN 100 million inclusive of VAT.
In order to increase the attractiveness (and at the same time popularity) of the new taxation regime from next year the following changes will be introduced:
- allowing limited partnerships and limited joint-stock partnerships to benefit from Estonian CIT;
- reducing and under certain conditions eliminating the additional tax burden imposed by entering the new tax settlement regime;
- reduction of the effective tax burden to 20% for small taxpayers and about 25% for others (these values already take into account the PIT burden on distributions from companies to partners);
- abolition of the obligation to incur capital expenditures;
- elimination of the income limit, exceeding of which resulted in ineligibility for the Estonian regime.
Undoubtedly, the above changes will make the Estonian CIT a very interesting option for many companies, especially those looking for ways to reduce their current tax burden.
1) Changes in settlement of R&D tax relief and IP BOX
As a matter of the R&D tax relief a taxpayer may deduct 100% (150% in case of CBR) of the so-called qualified costs from the tax base. On the other hand, IP BOX allows for taxation of income from IPR generation at a preferential rate of 5%. Currently, a taxpayer cannot take advantage of both reliefs with respect to the same group of income.
Proposed regulations introduce the possibility of simultaneous application of R&D tax relief and IP Box to the same income (the same projects). This is a very good change, especially for entities that used to calculate every year which relief will bring them greater tax benefits.
2) Prototype tax relief
Taxpayers who introduce a new product to the market will be eligible for the credit. The tax relief will be based on the same principles as the existing R&D tax relief, with the difference in the type of eligible costs. The expenses considered within the scope of trial production and market launch include purchase of machinery necessary to launch the production together with the costs of their improvement and adaptation, costs of materials and raw materials purchase as well as costs of research, expert opinions, preparation of documentation necessary to obtain a certificate. The tax relief allows the taxpayer to deduct 30% of the costs from the tax base (no more than 10% of the income earned in a tax year).
3) Relief for robotization
The deduction will be available to a taxpayer who invests in the purchase of an industrial robot. The following may be considered eligible costs in connection with the investment: purchase of new machinery, intangible assets necessary for its start-up and use, and purchase of training services. The relief will allow to deduct from the tax base no more than 50% of the costs.
4) Allowance for innovative employees
The tax relief will be available to entrepreneurs conducting research and development activity who employ workers to produce intellectual property (the employee’s involvement in the project must amount to at least 50% of the total working time). The taxpayer has the right to reduce the advance income tax payments paid on the salaries of the employees involved in the R&D projects by the value of the amount resulting from the product of the unused assets under the R&D relief and the tax rate applicable to the taxpayer in the given tax year.
5) Relief for expansion
The relief is aimed at entities that are interested in expanding their business into new markets. The taxpayer will be able to deduct expenses incurred in order to increase revenue from product sales from the tax base. The following are considered as costs incurred for this purpose: participation in fairs, promotional activities, adaptation of product packaging to customer requirements, preparation of necessary documentation e.g. for tenders or product certification. The amount of deduction cannot exceed the amount of income earned by the taxpayer from income other than capital gains income (cannot be higher than PLN 1 million).
6) Consolidation relief
The relief may be used by a taxpayer who derives income other than from capital gains and acquires shares in a company having a legal personality. In addition to recognize the expenditure as a tax-deductible cost, the taxpayer may also deduct the expenditure from the tax base (the maximum amount may not exceed PLN 250,000). Eligible acquisition expenses may include, but are not limited to, the following: legal services, valuation, preparation of merger plans, audit, taxes.
Minimum income tax
The Polish Deal introduces to the Polish CIT Act the new institution – so-called ‘minimum income tax’. The new tax will impact the CIT payers and also Tax Capital Groups, that either (i) reported tax loss for a fiscal year or (ii) had very low proportion of taxable income to taxable revenues (equal or less than 1%). In both conditions, only the revenues other than capital gains will be taken into consideration (i.e. core business income). The new tax will affect all CIT payers meeting one of the two conditions mentioned, as the bill does not provide any revenue, balance sheet sum or employment threshold. As a result, even small entrepreneurs will be affected by the new law.
The minimum income tax will be 10% of the tax base calculated as follows:
- 4% of taxable revenue (other than from capital gains) plus
- costs of financing paid to related entities (exceeding 30% of the so-called tax EBITDA), plus
- costs of intangible services or royalties paid to related entities (e.g. marketing, legal, consulting, data processing services), exceeding 5% of the so-called tax EBITDA plus PLN 3 million.
- the value of deferred income tax resulting from the disclosure intangible assets for the tax purposes.
When calculating the tax base for minimum income tax, taxpayers will be entitled to apply exemptions (R&D relief and new reliefs announced in the Polish Deal, e.g. for prototyping and robotisation) as well as decrease the tax base by the income from the activity in the Special Economic Zone or the Polish Investment Zone.
The provisions described above will not apply to.:
- financial enterprises,
- start-ups, in the first three subsequent fiscal years of operation
- taxpayers who recorded over 30% decline in revenues (in relation to preceding fiscal year).
- taxpayers whose shareholders are natural persons only and provided that the taxpayer does not hold shares in other company or investment fund.
Taxpayers will pay the minimum tax minus the amount of the CIT due for the same fiscal year. The minimum tax paid will be deductible from the CIT paid in Poland in the following three fiscal years.
In our view, BFF may benefit from the minimum income tax exemption assuming that all requirements regarding the financial institution status is confirmed. This should be however the subject of further verification once the final shape of “New Deal” provisions is revealed.
Tax and social security burdens on the remuneration of the employees and board members
The Polish Deal includes also significant changes related to the PIT – taxation of employment contracts, B2B contracts and board members, in particular:
- The tax exempt revenue will be increased to PLN 30.000 PLN annually for the taxpayers subject to general rules (progressive taxation 17%/32%). The threshold for 32% PIT rate will rise from PLN 85.528 to PLN 120.000 annually.
- In case of employment contracts, healthcare contributions covered by employee will rise from 7,75% to 9% of taxable income and will be no longer deductible from the PIT.
- In case of B2B contracts (taxed with 19% linear taxation), healthcare contributions will rise from 381,81 PLN (lump sum) to 4,9% of taxable income (with additional conditions).
- Board members will be subject to healthcare contributions – 9% of taxable income. The contributions will be non-deductible from the tax due.
New deadlines for fulfillment of individual obligations in field of transfer pricing are as follows:
- Local file – deadline by the end of the 10th month after the end of the tax year.
- Information on transfer pricing (TPR) – deadline by the end of the 11th month after the end of the tax year.
- Master file – deadline by the end of 12 months after the end of the tax year.
- Submission of local and group documentation at the request of the tax authorities – 14 days from the delivery of summons.
2) Value of the transaction
Act specifies the method of determining the value of a controlled transaction. Value of the controlled transaction in the case of:
- Deposit agreement has to match the capital value;
- Articles of association of a company without legal personality are to correspond to the total value of contributions made to the company which is not a legal person.
Additionally, the value of the controlled transaction was linked to the neutrality of VAT. In case of:
- Active VAT payer (tax neutral VAT) = the amount of VAT is not included in the transaction value, instead
- Non-neutrality of VAT (VAT cannot be deducted) = VAT amount is included in the transaction value.
3) Local file
Act provides a list of additional exemptions (extension of Article 11n of the CIT Act). The obligation to prepare local transfer pricing documentation will not include:
- Transactions concluded only between foreign establishments of related entities located in the territory of the Republic of Poland, having their place of residence, seat or management in the territory of an EU or EEA Member State other than the Republic of Poland.
- Transactions subject to an APA, tax agreement and investment agreement.
- Transactions of the so-called re-invoicing.
- Safe harbor transactions for low value-added services and financial transactions (loans, credits, bonds.
In addition, the act specifies obligation to prepare local transfer pricing documentation in electronic form.
4) Transfer pricing analysis
Local file does not need to be analyzed for:
- Controlled transactions concluded by related entities that are micro or small entrepreneurs within the meaning of the Entrepreneurs’ Law,
- Transactions other than controlled transactions concluded from the so-called tax havens (direct transactions) or in which the real owner of the contractor is a resident of the so-called tax havens (indirect transactions), subject to the documentation obligation.
The change in the field of micro and small entrepreneurs and transactions with tax havens provides for new regulations to apply to transactions starting on January 1, 2021.
In case of above-mentioned exemptions, there is an obligation to prepare local transfer pricing documentation and submit information on transfer pricing (TPR).
5) Information on transfer pricing (TPR form)
Information on transfer prices prepared in accordance with the template of an electronic document which is submitted to the head of the tax office competent for the taxpayer.
The act also shows that the TPR information cannot be signed by a proxy. The exception is: an attorney, legal advisor, tax advisor or auditor.
In addition, in the case of a multi-person authority, where the information is signed by a designated person who is part of this authority, the appointment of such a person does not release the other persons included in this authority from responsibility for not submitting TPR information.
6) Statement on the preparation of transfer pricing documentation
Cancellation of the statement as a separate document and transfer of the modified content of the statement to the transfer pricing information (TPR).
New content of the statement in the TPR Information:
“I certify that the local transfer pricing documentation has been prepared in accordance to the actual state of affairs, and the transfer prices covered by this documentation are set on terms that would be agreed between unrelated entities.”
7) Sanctions – Fiscal Penal Code
Act also introduces changes to criminal sanctions. The new sanctions, in accordance with the Fiscal Penal Code, will be as follows:
- Fine of up to 720 daily rates for a person who:
- does not prepare local transfer pricing documentation or
- does not attach group transfer pricing documentation to the local transfer pricing documentation or
- prepares local file inconsistently with the actual state,
- does not submit information on transfer pricing (TPR) to the relevant tax authority or
- submits it, providing data inconsistent with the local transfer pricing documentation or with the actual state;
- Fine of up to 240 daily rates for a person who:
- against the obligation, prepares local transfer pricing documentation after the deadline or
- submits information to TPR after the deadline.
- Fine for a tax offense, in case of a minor offense.
8) Master file
The additional value requirement, obliging taxpayers to prepare group documentation, i.e. the threshold of PLN 200 million consolidated revenues, has been abolished.
Changes in VAT
1) VAT groups and changes in non-cash payments
The amendments to the VAT Act contain, among others, provisions introducing the so-called VAT groups. The new rules assume that entities which are financially, economically and organizationally linked will be able to settle jointly for VAT purposes.
Entities which decide to form a VAT group will not have to tax supplies of goods and services between themselves. However, for this purpose, it will be necessary to conclude an appropriate agreement, which is concluded by the designated entities for a minimum period of 3 years and cannot be extended to include new members. The agreement names a representative of the entire group who submits consolidated VAT returns on its behalf and represents the VAT group in its relations with the tax authorities.
2) VAT taxation of financial services
The amendments to the VAT Act also introduce the possibility to tax financial transactions, except for insurance services.
Taxpayers will be able to opt for taxation of financial services for a minimum period of 2 years provided that they remain registered as active VAT taxpayers and submit a written notice to the head of the tax office on the choice of taxation of financial services.
Resignation from the exemption will apply only to transactions made for other taxpayers. In case of transactions with consumers, the use of the exemption will remain obligatory.
3) Other changes
The new provisions also aim to popularize non-cash transactions among taxpayers by introducing a 15-day VAT refund for non-cash taxpayers and remove the possibility to issue a binding rate notice in a situation where a taxpayer enters into a tax agreement covering the VAT classification of goods or services.