On Friday, 24 August 2018, the Ministry of Finance (“MF”) published extensive draft amendments to the Corporate Income Tax Act, Personal Income Tax Act and Tax Ordinance Act. New regulations are expected to enter into force at the beginning of 2019.
The proposed provisions may have a significant impact on conducting business activity in Poland. Below please find the outline of the most important changes proposed by MF.
Sealing of the tax system
Income on unrealized profits (exit tax)
The proposed change means that unrealized capital gains related to the transfer of assets / tax residence / permanent establishment by the taxpayer outside the territory of Poland will be subject to a new tax.
The taxable amount is supposed to be the total income related to unrealized gains determined for particular assets. Income is going to be the surplus of the market value of the transferred assets, in particular arising from the change of the tax residence, over their tax value (determined as of the transfer date).
The tax rate applicable to CIT taxpayers is going to be 19% and the tax rates applicable to PIT taxpayers are going to be as follows: (i) 3% - if the tax value of the asset is not determined, and (ii) 19% - in other cases (also, PIT payers are exempt from tax in respect of assets valued at less than PLN 2 million).
Changes in withholding tax (“WHT”)
Currently, passive income (e.g. interest, royalties) may be subject to a preferential rate or WHT exemption already at the moment of payment made by the Polish tax remitter provided that certain conditions are met.
The planned amendment will replace to some extent the tax relief available already at the moment of payment made by the tax remitter with the obligation of the Polish tax remitter to withhold tax at the standard rate (which subsequently may be reimbursed to a foreign taxpayer by the tax authorities).
The above change (applicable to payments in excess of PLN 2 million made to a particular recipient per year) is going to obligate the tax remitter to collect and pay WHT in the domestic rate (i.e. there will be no possibility to apply the reduced rate or WHT exemption) – subsequently a foreign taxpayer will be entitled to apply for WHT refund which will be granted only after positive verification by the tax authorities that all requirements have been met.
Please note that in specific cases the tax remitter will be allowed to apply the preferential tax treatment already at the moment of payment: (i) by submitting a statement to the tax authority (under pain of criminal fiscal liability) that it holds all documentation required to apply the reduced tax rate or WHT exemption or (ii) by obtaining a special opinion from the tax authority authorizing the tax remitter to apply a WHT exemption.
In addition, the draft amendments will also clarify the definition of “beneficial owner”.
The planned changes may have a substantial impact on all passive income reconciliations.
Introduction of Mandatory Disclosure Rules (”MDR”)
According to the draft provisions, certain professional advisors indicated therein will be obliged for the first time to provide the tax authorities by the end of March 2019 with information on the tax schemes implemented by their clients (it also applies to schemes implemented in the period starting from 25 June to 31 December 2018). If an advisor pleads professional secrecy, the clients will be obliged to provide such information to the authorities by themselves. The draft bill provides for rigorous penal-fiscal sanctions for any non-compliance with the new requirements.
Sealing of the General Anti-Avoidance Regulations (“GAAR”)
Apart from numerous provisions of rather clarifying nature (grounds for rejecting tax ruling motions, procedural changes, extension of GAAR also onto tax remitters) the draft bill introduces also an additional tax liability equal to 40% of the amount of the tax benefit achieved in a particular case subject to GAAR.
Amendments to the regulations regarding tax treatment of a controlled foreign company ("CFC")
CFC is a term used in the context of regulations which provide for the obligation to include in the taxable amount at a resident taxpayer (a natural person and a corporate income tax payer) the income earned by a controlled foreign entity with a place of residence or management in a country with lower tax than the ones in force in the country of residence of such tax resident.
The draft bill provides for further changes aimed at increasing the effectiveness of CFC taxation, in particular by extending their application to foreign entities from outside of the Polish legal system – such as foreign foundations and trusts.
Simplifications of the tax system/ tax preferences
Introduction of the reduced 9% CIT rate
The proposed rate is going to apply to taxpayers whose revenue in a given tax year did not exceed an amount equivalent to EUR 1.2 million in relation to revenue (income) other than resulting from capital gains.
Introduction of an incentive for taxpayers to use own funds
Hypothetical costs of obtaining external funds are going to be included in the tax deductible costs of the company if the company's sources of financing are additional payments made by shareholders and/or the so-called retained earnings (notional interest deduction - up to PLN 250,000 in a tax year).
Tax treatment of purchase of debt portfolios
According to the draft bill, the new regulations are going to allow for recognition of the full cost base of the purchase of receivables.
Exemption of Eurobonds from WHT
The draft bill provides for the WHT exemption of interest and discount, obtained by non-residents (both PIT and CIT taxpayers) on bonds issued and admitted to trading on a regulated market or introduced into an alternative trading system within the meaning of the Act of 29 July 2005 on trading in financial instruments that meet, inter alia, the condition of maturity, which should not be shorter than one year.
Please note that the above summary does not cover all of the changes included in the draft bill and is only a brief commentary on its most important elements (the draft bill contains more than 150 pages).
As a matter of principle, the changes are to apply to tax settlements starting from January 2019. However, the draft provisions may be subject to further changes during the legislative process.