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When a new income tax regime, dubbed "Estonian CIT", was announced in September 2020, it looked as if, although overshadowed by COVID-19, the past year was to bring a raft of unprecedented business-facing tax amendments. The hope for a change seemed to find its confirmation in the provisions introduced by way of subsequent COVID-19 Acts, including postponing tax deadlines, deferring entry into force of some new public levies, as well as relaxing certain documentation obligations.

Authors:
Anna Sińczuk, Partner, Corporate Tax Advisory
Przemysław Szywacz, Partner, Corporate Tax Advisory

When a new income tax regime, dubbed "Estonian CIT", was announced in September 2020, it looked as if, although overshadowed by COVID-19, the past year was to bring a raft of unprecedented business-facing tax amendments. The hope for a change seemed to find its confirmation in the provisions introduced by way of subsequent COVID-19 Acts, including postponing tax deadlines, deferring entry into force of some new public levies, as well as relaxing certain documentation obligations.

Announced by Polish PM, and supported by industry organizations, the Estonian CIT project seemed to perfectly fit in this new trend. An extensive information campaign, including the presentation of the main project assumptions, carried out in June 2020, along with far-reaching public consultations, only strengthened the belief that we were witnessing the emergence of a new legislative standard, with particular focus on preparing taxpayers to face changes that would have a significant impact on their activities and required planning beforehand, thus ensuring stability of the tax system.

Unfortunately, realty proved to be different and brought yet another disappointment. First of all, the project of the Estonian CIT solution turned out to be far from what was expected. A number of restrictions on the permissible form of activity (companies only) and ownership structure (only companies with shareholders being natural persons, plus the company itself cannot hold any shares in other companies), justified by the pilot nature of the solution, have significantly narrowed the scope of its application. Even the fact of increasing the revenue threshold from the original PLN 50m to PLN 100m (including VAT) did not change the outcome. Additionally, the complexity of the new regulation (draft explanatory notes thereto have over 120 pages) situated it far from the previously announced solution, which was supposed to simplify tax settlements and thus bring beneficial changes to taxpayers.

Secondly, before taxpayers even realized that the proposed simplification of tax settlements would in practice be accessible solely to a narrow group of entities meeting a long list of restrictions and requirements, they were yet again surprised by a new draft of amendments, this time aimed at sealing the Polish tax system. Unlike the Estonian CIT solution, the amendments had not been announced during numerous conferences held by representatives of the government. As a result, companies were forced to engage in urgent and strenuous analyses on how the new regulations would impact their existing and planned operations. This relates in particular to extending CIT obligations to limited and general partnerships, settling tax losses on reorganizing activities, introducing the obligation to prepare and publish a report on the executed tax strategy or imposing amendments related to real estate companies. Despite the requests for postponement of the new provisions made during the consultation phase, the vast majority of the new regulations entered into force on 1 January 2021.

Importantly, some of them may impact the actions already performed by the taxpayers, e.g. restricted right of settling tax losses by entities taking part in reorganizing activities. Restrictive approach adopted by tax authorities is likely to translate into numerous disputes between taxpayers and authorities to be settled by administrative courts. In this context it must be noted that such a stance is in clear opposition to the principle of protection of the taxpayer's acquired rights exhibited in the jurisprudence of the Polish Constitutional Tribunal.  The new regulations can also have a retroactive effect on the obligations related to preparation and publication of a report on the executed tax strategy. Pursuant to the new provisions, taxpayers will be required to prepare and publish a report on the implemented tax strategy by the end of the 12th month following the end of the tax year to which the report relates. According to the announcement published on the Ministry of Finance's website, this means that the initial report on the tax strategy executed in 2020 must be published by 31 December 2021. The requirement to provide a report for 2020 may give rise to justified doubt, especially given the fact that the related provisions entered into force on 1 January 2021. Regardless of the controversy it may spark, it is worth considering preparation and execution of a tax strategy as part of CIT calculations for 2020, to meet the requirements of the legislator. Thus, it will become possible to determine the scope and level of detail of the required disclosures, in a manner consistent with the annual settlements. Considering that the report on the executed tax strategy will become publicly available (pursuant to the Act, it must be published on the taxpayer's website), the new obligation must be approached in a well-considered manner, to find a balance between fulfilling the requirement and ensuring that the information disclosed is positively received by the public.

Finally, despite many announcements, 2020 did not bring any amendments related to the collection of WHT. Once again, it was decided to only postpone the entry into force of the solutions that were originally supposed to be introduced two years ago. Nevertheless, in 2021, the final form of the mechanism is likely to be presented, along with changes in the jurisdiction of tax authorities responsible for WHT-related issues. Given the above, it is worth planning in advance for the submission of a declaration allowing for the continued application of exemptions or obtaining a binding opinion on the application of the exemption, especially that the applicant may face even a twofold delay in the statutory deadline (i.e. 12 instead of 6 months).