Tax Alert: Polish Deal 3.0 provisions passed by the Sejm

One of the key amendments approved by the Sejm provides entities belonging to tax groups with the first tax year starting after 31 December 2022 with a possibility to settle losses incurred before forming the group against income earned during group operation. Furthermore, the Senate and, subsequently, the Sejm changed the original wording of Article 14(3) of the Act, by adding the word “also”, making the final wording thereof as follows: “Article 69b. The provisions of Articles 7(6a) and 7a(4) of the Act amended in Article 2 also apply to losses arising before the tax year commencing after 31 December 2021."

Moreover, the Lower House of the Polish Parliament passed an amendment aimed at establishing definition of average monthly salary in the enterprise sector for the purposes of provisions on lump-sum tax on corporate income. Importantly, other changes proposed by the Upper House of the Polish Parliament, such as removing provisions further extending the operation of increased VAT rates, including linking increased VAT rates with defence expenditure as well as lowering the operating loss threshold or the profitability under which taxpayers are subject to the minimum income tax from 2% to 1%, were rejected by the Sejm.

The Act provides for a 2-year exemption from the minimum income tax referred to inprovisions are brought by Article 24ca of the CIT Act.   The levy itself was introduced by way of the Act of 29 October 2021 (commonly referred to as “Polish Deal 1.0”).

The act provides for a 2-year postponement of the entry into force of material provisions, i.e., until 31 December 2023.

At the same time, however, the bill introduces modifications to the very form of the new tax, mainly consisting in:

a) increasing the profit level indicator value , i.e., operating loss threshold or the probability ratio under which taxpayers are subject to the minimum income tax, up to 2%, 

b) making simultaneous amendments to the indicator calculation method through excluding: 

• fees under lease contracts, including depreciation write-downs of tangible assets used under contracts defined in Article 17a(1) of the CIT Act, where the write-downs are made by the asset users - from tax-deductible costs;
• factoring receivables - from revenues and tax-deductible costs;
• set amount (20%) of expenses related to remuneration and social security contributions, including Employee Capital Plans contributions - from tax-deductible costs;
• y/y increase in the value of electricity, heat and line gas or excise duty amounts (also in the case of trade in excise goods), retail sales tax, gambling tax, fuel surcharge, and emission fee - from tax-deductible costs;

c) introducing an alternative method for establishing the taxable base, which can be opted for by taxpayers at their own discretion, namely:

• fixing the taxable base at 3% of revenue or
• fixing the taxable base at 1.5% of revenue + the items presently considered when calculating the taxable base (including passive costs, such as debt financing or intangible services);

d) modifying the list of existing exemptions and extending it with:

• small taxpayers with annual revenue below EUR 2 million,
• municipal companies,
• taxpayers with most of their revenues generated in connection with the provision of healthcare services,
• taxpayers whose profitability in one of the last three tax years exceeded the 2% profit level indicator,
• taxpayers who went bankrupt, were liquidated or have been subject to restructuring proceedings

The amendments repeal hidden dividend provisions, set forth by the Act of 29 October 2021 (Polish Deal 1.0) under Article 16(1)(15b), (1d), and (1e) of the CIT Act, effective as of 1 January 2023.

Amendments to regulations on controlled foreign companies (CFCs) aim at clarifying the method of calculating CFC income (Article 24a(6c) of the CIT Act).

They also provide for:

• clarification of the prerequisite set forth by Article 24a(3)(5) of the CIT Act (concerning high profitability of a CFC in relation to the assets held) in the event of a potential sale of assets during the year (Article 24a(3f) of the CIT Act),
• modifying Article 24a(3a) of the CIT Act on calculating the difference between the income tax actually paid by a CFC and the corporate income tax that would be due from that entity if that entity was a Polish tax resident (supplementation of prerequisites of CFC introduced under the Act of 21 October 2021).
• clarification of the definition of controlled foreign company (Article 24a(2)(3) of the CIT Act) - editorial changes and supplementation.

Corresponding solutions are also to be implemented into the PIT Act (Article 30f thereof).

To dispel substantial interpretation doubts related to the tax on shifted profits, the following amendments were made:

• update of conceptual network provided for by Article 24aa of the CIT Act and introduction of provisions on taxable base,
• adding a clarification that a related entity for which the costs are incurred has no seat or management in the territory of the Republic of Poland,
• update of the condition relating to 50% of revenues obtained by a related entity and the condition pertaining to the shifting of revenues to another entity (at least 10%),
• changes to the method of establishing preferential taxation, primarily for income tax rate lower than 14.25%; the rate is determined in relation to the effective tax rate applicable to the related entity in the country of its seat, place of management, registration or location, including deductions, tax or tax refunds directly associated with the specified revenue, excluding tax-deductible costs incurred.

Other amendments cover, inter alia, correct application of provisions on profit shifting taxation to specified arrangements involving tax-transparent entities or foreign entities shifting revenue to other foreign entities benefiting from low taxation.

The main purpose behind amending withholding tax (WHT) provisions is to relax the rules for tax collection - commonly referred to as the pay & refund mechanism - or make it more feasible (Article 26(2e) et seq. of the CIT Act; Article 41(12) et seq. of the PIT Act). To do so, the following changes were made:

• making the time scope of the remitter’s statement more flexible under Article 26(7a) of the CIT Act and Article 41(15) of the PIT Act through extending the deadline for submitting the original statement and the follow-up statement and extending the validity of this first statement until the end of the tax year; in practice, this means that the remitter will have more time to prepare the statements and that the submission of the original statement will make it possible to abandon pay & refund mechanism application until the end of the remitter’s tax year,
• introducing special solutions for remitters submitting statements for 2022. (Article 23(1) of the Act) - the amendments to the scope of the statements brought by the Act are to apply retroactively, meaning that the extended deadlines are also to cover payments made in 2022.
• relaxing rules for non-collection of WHT on interest and certain types of bonds by the remitter (Article 26 (1ab-1ac) of the CIT Act and Article 41(25-26) of the PIT Act), which is to come in the form of repealing the issuer’s obligation to inform the taxpayers on conditions for the exemption and to submit the statement on exercising due diligence before tax authorities.

Amendments are made to the method of charging debt financing costs into tax-deductible costs under Article 15c(1) of the CIT Act in the context of amendments made to it by the Act of 29 October 2021 (Polish Deal 1.0) - it was clarified, among others, how to calculate the limit of debt financing costs by clearly specifying that the exclusion relates to an amount exceeding one of the two: PLN 3 million or 30% of EBITDA, yet not the sum thereof.

In turn, the goal of making amendments to Article16(1)(13f) of the CIT Act in terms of costs related to debt financing of capital transactions is to exclude the application of these provisions in situations where the financing entity is a bank, or a credit union seated in an EU or EEA state. Importantly, the provisions would not apply to debt financing granted for acquisition or take-up of shares or general rights and obligations in entities unrelated with the taxpayer. In addition, the restriction should only apply to debt financing obtained by companies or entities without legal personality, meaning that cooperatives and similar entities are excluded.

The amendment provides for repealing Article 18f(19) of the CIT Act and Article 26i(19) of the PIT Act. This means that taxpayers will be relieved from the obligation of enclosing the relevant appendix to the tax return, in which such data have been disclosed so far, which will simplify administrative obligations on their part. 

The catalogue of legal structures under which a holding company may operate is to get extended with simple joint-stock companies.

The requirement of not using the exemptions provided by Articles 20(3) and 22(4) of the CIT Act is to be removed from the definition of a holding company.

The conditions prohibiting an entity to:

• hold more than 5% of shares in another company,
• hold all rights and obligations in a company other than a legal person, and
• use the exemption under Article 17(1)(34) or (34a) of the CIT Act, i.e., an exemption provided for entities operating in a special economic zone or the Polish Investment Zone, are to be removed from the definition of a subsidiary.

Importantly, the 95% CIT exemption for dividends of holding companies is to be replaced by a full (100%) exemption.

In turn, provisions get extended with the remitter’s exemption from the obligation to collect tax as part of the exemption of the holding company as a taxpayer. The remitter’s exemption covers both situations where a domestic subsidiary distributes dividend to a holding company on its own and situations where it does so through an intermediary remitter, i.e., an entity maintaining securities or omnibus accounts.

The amendments:

• clarify the deadline for submitting notifications on the choice of lump-sum taxation of corporate income before the end of the tax year adopted by the taxpayer,
• make changes to the method of determining income from expenses outside business activity in the case of using assets (e.g., passenger cars) for business purposes and other purposes not related to business activities,
• modify the provision clarifying the condition for the expiry of the tax liability following the preliminary adjustment – clarification that a tax liability under preliminary adjustment fully expires with the elapse of at least one full period of applying the lump-sum scheme, i.e., after 4 tax years,
• change the provision determining the deadline for paying tax on income from transformation – clear indication that taxpayers willing to pay the tax on income from transformation in full are obliged to do so within the time limit provided for submitting the CIT-8 return for the tax year preceding the first year of lump-sum taxation,
• change the deadline for paying the lump-sum tax on income from distributed profit and income from profit intended to cover losses (this also applies to advances against the expected dividend) as well as the lump-sum on allocated income from net profit; extension of the payment deadline until the end of the 3rd month of the tax year after the tax year of distributing or covering the net financial result, payment of advances towards the expected dividend or distribution of income from net profit or the end of using the lump-sum scheme,
• update provisions on the conditions for applying the corporate income lump-sum tax scheme in terms of expenses related with engaging individuals on a basis other than employment contract.

The amendment relates to rewording and subsequent simplification of the procedure for refunding the tax on revenues from buildings upon the application referred to in Article 24b(15) and (16) of the CIT Act, through clarifying that tax refund will take place without the need to issue individual decisions, provided that the application raises no concern (corresponding changes are to be made to Article 30g(15 to 16) of the PIT Act).

New rules governing the procedure for refunding tax on revenue from buildings are to apply to applications submitted from 1 January 2023.

The key amendment repeals the requirement to follow the arm’s length principle and the documentation obligation for indirect tax haven transactions.

Importantly, according to the Act, materiality thresholds provided for by Article 11o(1) of the CIT Act and Article 23za(1) of the PIT Act are to be fixed at:

• PLN 500 thousand (base threshold),
• PLN 2.5 million (for financial transactions).

Amendments to Article 82(1c) of the Tax Code specify the rules for submitting information on contracts entered into with non-residents (ORD-U information) to the head of the tax office competent for the taxpayer, where the taxpayer is obliged to submit information on transfer prices (TPR report). The obligation to prepare and file the ORD-U information excludes entities required to establish transfer pricing reports under Article 23zf(1) of the PIT Act and Article 11t(1) of the CIT Act.

Moreover, it does not apply to taxpayers and entities without legal personality submitting such reports under Article 23zf(3) of the PIT Act or Article 11t(3) of the CIT Act. This means that such entities continue to be excluded from the scope of the exemption from submitting the ORD-U information. Amendments in this regard apply to related entities that carry out controlled transactions with entities from tax havens, as referred to in Article 23w(2a) of the PIT Act and Article 11k(2a) of the CIT Act. The new regulation simply extends the material scope of exclusion from the exemption, meaning that these entities will be now required to submit the ORD-U information.

Consequently, such entities, after meeting the statutory conditions provided for by the Tax Code and the above-mentioned tax acts, will be required to submit both the ORD-U information and the TPR report.

Article 69b supplemented to the Act of 29 October 2021 (Polish Deal 1.0) concerns the principles of loss settlement in companies forming tax groups brought by this Act, effective as of 1 January 2022. After amendments, these rules apply to the so-called new losses of companies that make up tax groups, i.e., losses incurred in tax years starting after 31 December 2021. Importantly, entities belonging to tax groups with tax year starting after 31 December 2022 will be granted a possibility to settle losses incurred before forming the group against income earned during group operation.

Under the amendment, the deadline for submitting JPK files (SAF-T) for 2024 (i.e., the first day for which the file will be due) becomes extended, in the event of ending the tax year earlier than expected. CIT payers who will be required to submit JPK/CIT files for the first time in 2024, with tax years ending in 2024, will have a longer deadline to fulfil this obligation and will have to submit the files by the end of March 2025.

The purpose of the amendment is to clarify the provisions pertaining to the obligation of making income tax return templates available to the public. The intention behind the provisions imposing on the minister competent for public finance the obligation to provide income tax return templates was, in fact, to enforce the obligation to provide a visualization of the model of an electronic document, and not the template itself, in the sense that it is provided for by the provisions of the Act of 17 February 2005 on computerization of the activities of entities performing public tasks. According to regulations in force, the template of electronic return must be made available by a minister competent for computerization in the Central Repository for Electronic Documents (CRWDE). Providing the same template of an electronic document by the minister competent for public finance is not justified under the applicable regulations.

Following the amendments, there will be no doubt that the obligation to share return templates is limited to providing their visualization and not their scheme, which is, in turn, made available by the Minister of Digitization in CRWDE. 

The bill is also expected to bring systemic changes in terms of clarifying the obligation of entities bound to submit transfer pricing reports to provide the head of the tax office competent for the taxpayer with information on contracts with non-residents. Obligation to prepare and file a report on contracts entered into with non-residents will exclude entities required to establish transfer pricing reports under Article 23zf(1) of the PIT Act and Article 11t(1) of the CIT Act. This means that exemption from the obligation to prepare and file a report on contracts entered into with non-residents does not cover entities which, when submitting transfer pricing reports under Article 23zf(1) of the PIT Act and Article 11t(1) of the CIT Act, disclose tax haven transactions. Consequently, such entities, after meeting the statutory conditions provided for by the Polish Tax Code and the above-mentioned tax acts, will be required to submit both the ORD-U file and transfer pricing report.

Moreover, pursuant to the bill, the currently existing provision of Article 11k(2a) of the CIT Act (Article 23w(2a) of the PIT Act) will be transferred to the amended Article 11o of the CIT Act (Article 23za of the PIT Act).

Because of the retroactive effect of amendments to Article 11k(2a) and 11o of the CIT Act (Article 23w(2a) of the PIT Act and Article 23za of the PIT Act), adding relevant interim provisions to the bill seems justified. To prevent acting to the detriment of entities so far exempt from the obligation to submit ORD-U forms in the scope of controlled transactions carried out pursuant to Article 11k(2a) of the CIT Act (Article 23w(2a) of the PIT Act) in the wording in force before the date of entry into force of the bill, the transitional provision provides for keeping the exemption from the obligation to submit ORD-U file for entities engaged in the above-mentioned controlled transactions in the tax year beginning after 31 December 2020, but not later than 31 December 2022.

The bill brings amendments to Article 81(2zc) of the Act on healthcare services to rectify the situation of insured entrepreneurs (using the lump-sum scheme) who fail to provide ZUS (Polish Social Security Administration) with information on monthly revenue from business activity. 

The provision added to Article 69b of the Act of 29 October 2021 amending the Personal Income Tax Act, the Corporate Income Tax Act, and certain other acts (Journal of Laws, item 2105, as amended) concerns the principles of loss settlement in companies forming tax groups brought by this Act (effective as of 1 January 2022). When amended, these rules will apply to the so-called new losses of companies that make up tax groups, i.e., incurred in tax years starting after 31 December 2021 and further on.

The purpose behind the amendment is to clarify the provisions of the PIT Act on statements and applications submitted by taxpayers to remitters for the purpose of collecting tax advances, to make it subject - wherever possible - to the general provision of Article 31a of the PIT Act.

It is proposed to extend the list of exceptions provided by Article 31a(7) of the PIT Act to Article 41(11) of the PIT Act on non-application of 50% of tax-deductible costs by taxpayers referred to in Article 41(1) thereof, and to make it possible for the taxpayers to submit the relevant application according to the formula established by the Minister of Finance (amendment to Article 45b(1)(3) of the PIT Act).

The proposed amendments are to become effective on 1 January 2023, except for provisions within the scope of establishing Local Files for tax haven transactions. These provisions are to enter into force on the day of their announcement. This is necessary due to the possibility of retroactive use of new, more advantageous solutions by entities subject to reporting obligation by the end of 2022. The entry into force of these regulations on 1 January 2023 would deprive these entities of the possibility of applying more favourable solutions.