The Ministry of Finance has published extensive draft amendments to the CIT, PIT and Tax Ordinance Act aimed at tightening up the tax system. They include also a number of regulations aimed at simplifying regulations and creating tax preferences.
Selected changes with a short commentary are set out below.
Solutions to seal the tax system
- Introduction of tax on income on unrealized profits (exit tax), concerning cross-border transfer of assets within the same taxpayer. The taxable basis will be the sum of income from unrealized gains established for individual assets. In turn, the income from unrealized gains will be the surplus of the market value of the transferred assets determined as at the date of transfer (e.g. as a result of a change of tax residency) over their tax value. Two tax rates will apply to PIT taxpayers - 3% if the tax value of the asset will not be determined and 19% in other situations. The tax rate should be 19% for CIT taxpayers,
- Introduction of the obligation for tax advisors, legal counsel, attorneys and other experts to to provide tax authorities with information on tax schemes implemented by their clients (MDR: Mandatory Disclosure Rules). If the advisor pleads professional secrecy, the client himself will have to notify the optimization to the tax authorities. In a new departure, information of this nature will have to be provided by the end of March 2019 and the schemes made available or implemented in the period 25 June 2018 through 31 December 2018 will be subject to disclosure.
- Changes in withholding tax (WHT). The current approach of
granting preferential treatment ‒ e.g. by applying a
preferential rate or exemption under a relevant double tax treaty
or provisions of the CIT Act implementing EU Directives without
prior verification ‒ will be changed to the mechanism of the
tax remitter (i.e. the Polish company) first collecting and paying
WHT calculated with the use of the nominal rates. Only afterward
the WHT will be refunded on request after the tax authority checks
on the possibility of applying preferential treatment. This change
will only apply to payments in excess of PLN 2 million per year per
At the same time, the draft provisions introduce two simplifications, thanks to which even if the proposed threshold is exceeded (i.e. PLN 2 million), Polish company will be entitled to apply preferential WHT (relief at source).
The first simplification will apply when the tax remitter (i.e. Polish company) submits a declaration to the tax authority (on pain of criminal liability and other sanctions) that it holds all documents required by tax law authorizing it to apply preferential taxation (e.g. reduced rates set out in the double tax treaty). This declaration will also include confirmation of no knowledge about any circumstances that might exclude the possibility of not charging WHT on the basis of tax law.
The second simplification will only apply to exemptions implementing the provisions of EU directives exempting certain payments from WHT. This simplification is based on the application of preferences on the basis of an opinion issued by the tax authority on the application of the exemption (it therefore provides that the authority will examine up front whether the exemption for dividends or interest paid to an EU shareholder can be used).
The definition of beneficial owner will also be clarified.
The main purpose of these changes is to check the conditions (criteria) of using non-residents from the angle of preferential taxation of interest, dividends, royalties or other income (revenues) subject to preferential withholding tax in Poland under double tax treaties or exemptions resulting from implementing solutions in EU directives, and prevention of irregularities in the settlement of WHT, for example paying interest to a taxpayer who does not meet the criterion of beneficial owner. This change could significantly impact the tax efficiency of paid dividends, interest payments and royalties.
- Changes regarding the general anti-avoidance regulations (GAAR), including the possibility of applying GAAR to tax remitters, clarifying the reasons for refusal to issue a tax interpretation and introducing a series of changes aimed at improving the economy of proceedings against tax avoidance. New sanctions are planned in the form of additional tax liability if the tax authorities deem GAAR regulations are applicable in a given case.
- Changes in regulations on taxation of foreign controlled companies (CFCs). The changes aim to increase the efficiency and precision of these provisions, including towards foreign entities unknown to the Polish legal system or operating under a completely different legal solution. This applies in particular to foreign foundations and trusts and similar entities / legal titles.
Solutions aimed at simplifying regulations and creating tax preferences.
- Introduction of the provisions of the Intellectual Property Box (IP BOX) / Innovation Box) in the PIT and CIT Act providing for taxation at a 5% income tax rate for entrepreneurs who receive income from commercialization of intellectual property rights created or developed by them (a separate alert will deal with this issue).
- Reduction of the CIT rate to 9% in relation to income (income) other than from capital gains achieved by taxpayers whose income in a given tax year did not exceed the PLN equivalent of EUR 1,200,000 and whose profitability does not exceed 33%.
- Introduction of the possibility of including hypothetical costs of acquiring external capital in tax deductible costs, if the company's financing source are additional payments paid by partners or retained earnings (notional interest deduction).
- Introduction of an alternative method of WHT taxing of interest on bonds with maturity of at least one year admitted to trading on a regulated market or introduced to the alternative trading system in the meaning of the Act of July 29, 2005 on Trading in Financial Instruments.
- Introduction of special solutions for purchasers of debt portfolios.
- Introduction of detailed regulations regarding taxation of income from virtual currencies.
- Raising up to PLN 150,000 the value limit of a car, to which it is possible to fully deduct depreciation charges for car use and consolidating tax rules for the business use of cars, irrespective of the contractual basis for use.
- Change in the rules for settling the costs of using cars for business and non-business use.
- Determination of the amount of tax deductible costs recognized in connection with debt-to-equity conversion.
Substantial modifications have also been made to the following provisions:
- heirs selling real estate or specific property rights acquired in inheritance,
- conditions for using housing relief,
- scope of exemption from PIT and CIT tax regarding sale of all or part of the real estate belonging to a farm,
- amounts of limits classified as tax deductible expenses for organizations of an optional nature associating employers and entrepreneurs,
- rules for settling loans concerning securities.
Please note that the above list does not present all the proposed changes, because their scope is very extensive. The draft amendment runs to more than 150 pages, while the justification for this amendment is over 200 pages.
The amended provisions will generally apply to settlements from January 1, 2019. Currently, the draft amending act has been submitted to public consultation, but the deadline for submitting comments is only 14 days. The draft regulations may be subject to changes during the legislative process. However, most of the proposed changes will be expected to come into force.
Taking into account the scope and significance of the proposed changes, we recommend carrying out a detailed analysis in terms of the possible impact on your business and making any necessary adjustments. Please contact us if you are interested in our support.
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