The President signed on 22 November 2017 the Act of 27 October of the current year, introducing changes to the acts on corporate income tax and personal income tax (further, the "Act"). The aim of the amendment is to make the tax system more efficient and counteract the application by taxpayers of aggressive forms of tax optimization.
Due to a broad range of proposed changes, we present below a summary of some selected regulations that may considerably affect your business decisions related to the business activity carried on by you.
I. Income tax on commercial properties
The Act introduces an income tax that is to be payable on certain commercial properties (fixed assets). The tax is to apply in respect of office buildings, shopping centres, department stores, and other retail and service buildings with an initial value of more than PLN 10 million. The tax will be payable on a monthly basis; the rate will be 0.035 percent of property value - of the excess over the sum of PLN 10 million, determined as at the first day of each month. The tax so calculated will reduce the "standard" corporate income tax.
II. Division of income into operating and capital income
The Act introduces a definition of capital earnings comprising, among others, income from the share in the profits of legal persons, from the sale of shares/stocks, from in-kind contributions, or from the sale of receivables and securities. Also, operating income will be separated from capital income, which will carry such effect that losses on one source of income will not reduce income from another source.
III. Costs of financing - revolution regarding thin capitalization rules
The Act envisages the deviation from the "thin capitalization" principle in its current form and introduces one restriction as to the possibility of recognizing the so-called costs of debt financing (such as interest, fees, commissions, bonuses, the interest part of a lease instalment) as tax deductible costs. According to the new regulations, a taxpayer will be able to record as taxable costs only the costs of an excess in debt financing (the difference between the interest paid by the tax payer and the income earned on interest) in the amount of 30 percent of EBITDA. The restriction will be applicable to the financing from both related companies and from banks.
At the same time, there will be an option of recognizing in five subsequent years the interest subject to exclusion on the basis of the laws under consideration as tax deductible costs, if such interest falls within the permissible limits in subsequent years. The restrictions will not apply to the taxpayers who have an excess of financing costs in a given year of not more than 3 million zlotys and to financial institutions (e.g. banks).
The existing principles can be applied in respect of interest on loans (credits) actually delivered before the date of entry of the amendment into force, however not longer than until 31 December 2018.
Please note that the foregoing changes may have a significant impact on entities that use substantial external financing (e.g. bank credits). In many instances, the costs of such financing will be excluded from taxable costs.
IV. Taxation of cash contributions
The Act introduces a significant - although seemingly unintended by the legislator - change in the taxation of contributions. At present, making a cash contribution is recognised as a tax neutral transaction. According to the literal reading of the amended provision, taxable income will be the value of each contribution made to the company, therefore, of a cash contribution as well. At the same time, however, in the justification of the introduced changes it is stated that the change is of a legislative nature only, connected with the moving of a part of the provisions to other text units. The standpoint that cash contributions are not intended to be taxed has been also informally confirmed by the Ministry of Finance. An official standpoint on this issue may be expected.
V. Costs of interest on credits and loans granted for the purchase of shares
The Act excludes the expenses on interest on credits and loans granted for the purchase of shares in companies, from tax deductible costs. The proposed change is aimed against the structures based on the 'debt push down' concept, that allows setting-off interest on loans/credits granted for the purchase of shares against the income from the business activity of the company being purchased and decreasing the effective taxation of that company.
VI. Change in the principles of functioning of Tax Capital Groups (TCG)
The changes include:
- A decrease from PLN 1,000,000 to PLN 500,000 in the average value of the share capital that the companies of a TCG must hold
- A decrease from 95 percent to 75 percent in the value of the direct share that the dominant company must hold in the capital of its subsidiary companies
- A decrease from 3 percent to 2 percent in the TCG's profitability level
The Act restricts the possibility of tax optimizing using a TCG, by introducing the provisions pursuant to which a TCG may lose its status of a CIT taxpayer, with retroactive effect (even from the inception), if it breaches the conditions of its functioning.
VII. Limit on recognizing expenses for intangible services and intangible assets as tax deductible costs
The Act introduces a limit on recognising as costs expenses on intangible services (management, accounting, legal services, etc.) and licence fees for using e.g. trademarks or copyrights, where such services are purchased from related entities or entities based in so-called tax havens. The limit is to be 5% of the value of operating income (EBIDTA) and applied to the excess value of the expenses over 3 million zlotys (pursuant to the initial bill the limit was to be 1.2 million zlotys). The foregoing limitation will not apply to the costs subject to re-invoicing and to the costs classified as directly related to the manufacture of goods or the provision of a service.
VIII. Transfer pricing
The Act provides for an exemption from the obligation to prepare transfer pricing documentation for entities who may be recognised as "related parties" on the basis of a single qualifying factor, which is the holding of its shares by the State Treasury or local government units. Also, companies that make up tax capital groups will be exempted from the obligation to prepare the documentation.
IX. Controlled Foreign Companies (CFC)
A number of changes with regard to CFCs have been introduced. In particular, it has been specified that in order to evaluate whether the actual business activity of a CFC is of a substantial nature, the proportion of income generated by the CFC from the actual carried-on business activity to the CFC's total income should be taken into consideration.
X. Changes in the taxation of incentive schemes
As regards the taxation of so-called incentive schemes, the Act stipulates that in respect of the schemes based on securities or derivatives, the generation of income as a result of the exercise of rights under the securities or derivatives subscribed for or acquired as a performance in kind or gratuitous performance will be recognised to belong to this source of income within which the performance in kind or gratuitous performance has been obtained. The Act also provides that in respect of stock option plans established by a resolution of the general shareholders' meeting and fulfilling certain criteria, the income will arise for the participant only upon the non-gratuitous sale of the acquired or subscribed for shares and not upon their acquisition or subscription. Please note, however, that the Legislator has envisaged, unintentionally it seems, that the preferential method of taxation applies only to the shares of the companies whose registered office or management is based in the country with which Poland has entered into an agreement for the avoidance of double taxation and, thereby, excluded the shares of Polish companies from the application of the preferential rules. In our opinion, it is an apparent legislative error, which would need to be corrected by the Ministry of Finance.
XI. Raising the limit of tax deductible costs for authors
The Act also provides for the raise by 100 per cent of the annual 50 percent limit of tax deductible costs for creators, which after the change will be 85 528 zlotys. In addition, the types of creative work to which the increased costs may be applied have been specified in it.
The majority of the provisions are to come into force starting from 2018.
The link to the Act can be found here.