The Polish Ministry of Finance has published a draft bill that proposes significant changes to, among other things, the Act on Corporate Income Tax (Bill). Its aim is to close loopholes in the corporate tax system. The Bill introduces many measures to combat so-called aggressive tax planning, but in practice it will make it harder for the average taxpayer to make its settlements. Furthermore, the Bill has "smuggled" in a new tax for so-called real estate companies. Below we present a summary of the changes that may have a significant impact on your business decisions.
Corporate tax on commercial real estate
The Bill introduces a corporate tax that will be paid on some commercial real estate. The tax will cover office buildings, shopping centres, department stores, and other commercial buildings that have an initial book value exceeding PLN 10 million.
The tax will be paid monthly at the rate of 0.042 percent of the value of the real estate - understood as the initial book value of the real estate (not only the excess above PLN 10 million) fixed for the first day of each month. Therefore, the annual tax liability will amount to 0.504 percent of the value of the building. This tax will be settled against the "standard" CIT to be paid.
Controlled foreign companies (CFC)
The Bill changes the criterion for applying the CFC rule - the effective not the nominal tax rate will now be taken into account. Currently, the definition of a CFC is a company whose revenue in the state of its residency is subject to a CIT rate that is at least 25 percent lower than the 19 percent CIT rate applicable in Poland (i.e. lower than 14.25 percent) or a company that is exempted or excluded from taxation. After the introduction of the planned changes, a company that pays tax at a rate 50 percent lower than the rate it would pay in Poland will be considered as a CFC.
The Bill also introduces a new catalogue of types of income that are subject to CFC regulations (i.e. income from insurance and banking activities).
Introducing categories of income - capital gains and operating income
The Bill introduces a definition of capital gains that includes, among other things, income from participation in a company's profits, profits from the sale of shares, in-kind contributions, and sales of receivables or securities. Consequently, as a result of dividing the business income into income from capital gains and operating income, the loss from one source of income cannot be set off against the income from another source.
Financing costs – a revolution in thin capitalizations rules
Currently, a taxpayer can determine interest which cannot be considered as tax deductible costs using two possible thin capitalization methods: (i) basic or (ii) alternative. The basic method involves comparing the value of the taxpayer’s equity to its obligations regarding related subjects (possessing at least 25 percent of the taxpayer’s shares) and recognizing the interest as a revenue-earning cost up to the value of the equity. The alternative method involves calculating the maximum value of interest that may be recognised as a revenue-earing cost by reference to the determined percentage of the tax value of the assets (a reference to the taxpayer's total debt).
The Bill introduces a new limitation on recognizing the costs of so-called debt financing as tax deductible costs. At the same time, debt financing is given a much wider definition. Not only is interest considered as a cost of debt financing, but also commission, initial payments, bonuses, interest on lease instalments, and buyer's credits.
According to the new rules, the taxpayer will be able to deduct the 'debt financing costs' that do not exceed in total the amount of 30 percent of the operating profit increased by depreciation write-offs (EBITDA). The limitation applies to all paid costs - regardless of whether the financing is granted by a related or non-related party.
It is planned that the new rules will apply to the interest on loans actually paid to the borrowers before the new regulation enters into force (however, the current rules may only be applied until the end of 2018; in other words, as of 1 January 2018, all loans will be subject to the new rules).
It should be pointed out that the abovementioned changes may have a significant impact on the choice of the type of transaction financing.
Change of rules governing tax capital groups
The Bill significantly limits the possibility of tax planning involving tax capital groups. According to the new rules, if a tax capital group violates any condition under which it was set up, it may lose its income status as a joint taxpayer from the date of its registration. In practice, in such a case, a tax capital group will be treated as if it never existed and each entity that is a part of the group will be obliged to settle its own corporate income tax for the time it participated in the group.
Limiting the deductibility of fees for advisory services and intangible assets
The Bill limits the deductibility of fees for advisory services such as management, accounting, legal and tax, as well as any royalties paid for the use of intangible assets such as trademarks and copyrights. The total amount of advisory services to be treated as tax deductible costs cannot be higher than 5 percent of the operating profit plus depreciation write-offs. At the same time, the limit will be applied only to costs exceeding PLN 1.2 million. Expenses below this threshold may be deducted without limitation. The planned change is highly significant for entities that incur substantial advisory and management costs, as well as for those that pay substantial royalty fees.
Transfer pricing regime
The Bill includes an exemption from the obligation to prepare transfer pricing documentation (TPD) for entities in which shares or stocks are held by a local government unit or by the State Treasury and where there is no other link between those entities and the State Treasury/local government unit. This exemption will also apply to tax capital groups.