On 5 September 2016, the lower chamber of the Polish parliament (Sejm) accepted changes made by the Senate to the Act amending PIT and CIT. The Amendment Act has been sent to the President for signing.
The new law and most of the attendant amendments will come into force on 1 January 2017, although the Act also mentions a range of transitional provisions.
The key changes include the following:
1. A reduction of the CIT rate from 19 to 15 percent for small taxpayers earning sales revenues (inclusive of VAT) of the equivalent of EUR 1.2m or less and for taxpayers launching new businesses for their first tax year. This change does not apply to payers of personal income tax, including sole proprietors.
2. A non-exhaustive list is to be added to the CIT Act of cases when a non-resident’s income (revenue) shall be deemed earned “in the territory of the Republic of Poland”. The Act lists the following as income/revenue achieved by non-residents in Poland:
- Income/revenue in the form of receivables coming from (made available, paid or set off) by Polish entities, regardless of where the underlying agreement was made or the relevant performance rendered.
- Income/revenue from transfers of ownership of shares in companies, the totality of rights and obligations of partnerships lacking the status of legal persons or units in investment funds or in collective investment undertakings with at least 50 percent of their assets, direct or indirect, comprised of real estate located in the territory of the Republic of Poland or title to such real estate.
- Income/revenue from securities and derivative instruments other than securities, all admitted to public trading in the territory of the Republic of Poland on the regulated exchange market, including income/revenue from the sale of these securities and derivatives and from the exercise of the rights thereunder.
This particular change will matter when (income) revenue achieved by non-residents in the above instances is not subject to protection under the relevant double tax treaty. If that is the case, this income (revenue) will be taxed in Poland.
3. New rules for determining revenue from the acquisition of shares in a company being a CIT payer in exchange for a contribution in kind of assets other than an enterprise or an organized part thereof. In this case the revenue shall be equal to the value of this contribution as set out in the deed of a company or other document of a similar nature which shall not, however, be less than the market value of the contribution. In effect, the revenue achieved by the entity making the in-kind contribution will be the market value of the contributed assets.
With the current laws in place it may be argued that the revenue from a contribution of assets is limited to the nominal value of shares in a company received in exchange for a contribution in kind other than an enterprise or an organized part thereof. The currently prevailing interpretation of regulations governing taxation of in-kind contributions allowed for various tax optimization solutions, such as those involving contributions of assets to companies, with a portion of the contribution allocated to the share premium.
4. A more precise description of legitimate economic reasons warranting preferential taxation of mergers and de-mergers of companies and the extension of the rules in this regard to exchanges of shares, with these exchanges to be now no longer tax neutral if there are no legitimate economic reasons for them. Due to tax neutrality, share exchanges (i.e. contributions in kind of shares in a company to another company) are often used in market practice. Once the proposed bill becomes law, the tax authorities will be in a position to challenge the tax neutrality of share exchanges when these are done with the sole purpose of achieving tax gains and not for legitimate economic reasons.
5. More precise regulations governing the determination of tax deductible costs incurred when selling shares in the acquiring company, or newly established company, or a company being divided relying on the concept of “extinguishment” of rights incorporated in the shares.This amendment may have significance for entities which have carried out or are planning de-mergers.
This amendment is particularly important when shares are being sold in a company being divided by spin-off. The regulations currently in place lend themselves to the interpretation whereby if a shareholder does not end up holding fewer shares in the divided company following the spin-off but the nominal value of these shares is reduced, when the shareholder then sells his shares in the divided company, the entire amount paid to acquire these shares may be recognized as tax deductible. This interpretation allowed for the recognition of tax losses on sales of shares in a divided company.
6. Making the right of exemption from withholding tax, among others, of interest and licensing fees paid by a Polish company to a company taxed on its worldwide income in European Union (the latter being the Polish company’s shareholder, subsidiary or sister company ― subject to the fulfillment of certain additional conditions) conditional on whether the company receiving the interest is simultaneously their beneficial owner.
The CIT Act in its current wording does not unequivocally require that this condition be necessarily fulfilled. The proposed amendment meanwhile makes it very clear that in order to be eligible for the said exemption, the company receiving interest or licensing fees must be their beneficial owner, which is to say that it receives them for its own benefit and does not act in doing so as an intermediary for the benefit of other entities.