Since Poland joined the European Union on 1 May 2004, Polish domestic law has been harmonised with EU legislation and the case law of the Court of Justice of the European Union, and all EU tax directives have been implemented.2
In addition, foreign and local income is protected in Poland against double taxation through an extensive network of 92 double taxation treaties (DTTs) that are based on the OECD Model Convention. Whenever such a treaty does not exempt income from taxation, or in the absence of a treaty, the tax credit system applies, including the full tax credit for underlying tax applicable to Polish companies receiving foreign (inbound) dividends from countries outside the EU. As a result, in many such cases, no corporate tax would apply in Poland, since the Polish Corporate Income Tax Law (CITL) sets tax rates of 19 or 15 per cent, which are lower than tax rates in many countries.
Income derived from economic activities conducted in the Polish territory within special economic zones (SEZs) (i.e., areas designated for the purposes of running businesses on preferential terms) is tax-exempt. Furthermore, large and small investments that are crucial to the Polish economy may also find support through a number of government and other state aid programmes aimed at fostering investment or the creation of new workplaces. Flexible thin capitalisation rules also encourage investors to finance local businesses with the use of debt, including intra-group loans.
II COMMON FORMS OF BUSINESS ORGANISATION AND THEIR TAX TREATMENT
In Poland, business activity may be pursued by any person acting either as a sole entrepreneur or a capital (corporate) company or partnership, as envisaged in the Polish Commercial Companies Code. Foreign entrepreneurs with their registered office in the EU, EFTA or EEA may perform their business activity in Poland in compliance with the rules and principles set forth for Polish entrepreneurs. In turn, foreign entrepreneurs with their registered office in other countries may perform their business activity in Poland through a limited partnership, a partnership issuing shares, a limited liability company or a joint-stock company only. Foreign entrepreneurs may also perform their business activity in Poland through a local branch.
Corporate companies (i.e., limited liability companies and joint-stock companies) obtain legal personality upon court registration. The limited liability company is most frequently used for doing business in Poland. In turn, a joint-stock company features more advanced corporate instruments, such as convertible bonds, authorised but not issued capital, founders' certificates and non-voting shares. Its operations and management are subject to more stringent requirements than the operations of a limited liability company. In addition, the value of all in-kind contributions to the share capital of a joint-stock company is subject to a mandatory verification by court experts. The registered share certificates may be issued prior to the full coverage of shares by shareholders. Bearer shares may be listed on stock exchanges and traded on a public market. The form of a joint-stock company is mandatory for the conduct of certain types of activities (e.g., banking or insurance). Joint-stock companies floated on the Warsaw Stock Exchange must comply with additional informational obligations envisaged by pertinent laws and stock regulations.
Corporate companies (even prior to their court registration) and other organisational units, with or without legal personality, including limited partnerships issuing shares (with the exception of other partnerships), are taxpayers liable to corporate income tax (CIT). Corporate taxpayers that have their registered office or place of management in Poland are liable to CIT on their worldwide income. If a corporate taxpayer does not have its registered office or place of management in Poland, the tax is levied only on the income derived in Poland, unless an applicable DTT provides otherwise.
Capital companies may also establish a 'tax group' (tax unit) – a group of two or more capital companies treated as a single CIT payer – which must first satisfy numerous conditions.
Owing to attractive tax treatment, foreign and local investors also used Poland-based regulated close-ended investment funds and qualified foreign-regulated mutual investment funds from the EU and the EEA (they must be managed by a company operating under a permit granted by the competent financial sector supervision authority of the country of the fund's seat), and regulated investment companies from the EU and the EEA operating upon a simple notice of initiation of investment activities. Although Polish investment funds may not conduct operational business activities, they may invest in real property, in shares issued by companies and limited partnerships issuing shares, and in other securities. Such local and foreign regulated funds and regulated investment companies were entirely exempt from Polish CIT on any local and foreign income. However, since 2017 the local general tax exemption of Poland and foreign regulated investment funds is narrowed to income derived by Poland-based open-ended investment funds and qualified foreign-regulated collective investment funds from the EU and the EEA only. In principle, they must have a permit granted by the competent financial sector supervision authority of the country of the fund's seat, be managed by a company operating under a permit of such authority and have custody. In turn, Poland-based close-ended investment funds and qualified foreign-regulated collective investment funds from the EU and the EEA operating upon a simple notice of initiation of investment activities, rather than upon a permit of the competent financial sector supervision authority, are also able to apply the local tax exemption, with, however, the exclusion of certain items of their income (in particular, interest, donations and profits paid by local and foreign tax-transparent partnerships, and capital gains from transfers of securities issued by such partnerships). In addition, the new tax exemption for qualified foreign-regulated collective investment funds from the EU and the EEA is limited to situations where Poland may claim an exchange of information from the tax authorities of the country of such fund pursuant to a pertinent DTT or other treaty.
The administrative court also ruled that a Luxembourg investment company operating under Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers is not exempted from CIT in Poland as it is not a collective investment fund such as UCITS, which should operate upon a permit of the competent financial supervisory authority in the meaning of the EU and Polish regulations.
On the other hand, the Court of Justice of the European Union and Polish administrative courts have issued encouraging judgments stating that narrowing the tax exemption to income of regulated investment funds only from Poland and other EU or EEA Member States violates Article 56 of the Treaty on the Functioning of the European Union (TFEU). According to Article 56, taxpayers from third countries should be treated equally to taxpayers from the EU, and therefore income of investment funds from countries outside the EU or EEA should also be exempted from CIT pursuant to Article 56 of the TFEU, which may be applied by foreign funds directly. In particular, tax authorities denying that the Polish tax exemption on cross-border income of a US investment fund violates the freedom of movement of capital provisions under the TFEU.
Since 2014, CIT has been imposed at a rate of 19 per cent on profits of limited partnerships issuing shares (general and limited partnerships remain tax-transparent for income taxation). Such partnerships fall under the standard corporate tax rules, including thin capitalisation rules, and should depreciate fixed and intangible assets by continuing to apply the rates and methods they adopted prior to 2014.
Local and foreign investors may conduct business activities through a partnership, which in general may have one of the following forms: civil law partnership, general partnership, professional partnership, limited partnership or limited partnership issuing shares (limited-stock partnership). General and limited partnerships are most commonly used. Limited partnerships issuing shares have also been popular, as they are used by close-ended investment funds for carrying out income tax-exempt business activities. In turn, civil law partnerships are established for small businesses only. All types of partnerships other than limited partnerships issuing shares are income tax-transparent. Therefore, partners are liable to income tax on profits derived through their partnership proportionally to their interests in the partnership's profits. Creation and liquidation of partnerships are subject to special tax rules, and income from withdrawal of a partner from a partnership or from liquidation of a partnership is tax-exempt under those rules. However, according to a recent court ruling, payments received by a partner in a partnership will not be tax-exempt if such payment represents the income that was not taxed when derived by the partnership.
In general, partnerships may be taxpayers for purposes of other Polish taxes, including value added tax (VAT), excise tax, customs duty, tax on civil law transactions or real estate tax (local taxes).
III DIRECT TAXATION OF BUSINESSES
i Tax on profits
Determination of taxable profit
CIT is payable at a rate of 19 (or 9) per cent on all income derived from whichever source of income and on all capital gains derived from certain sources of capital gains, subject to certain exemptions. The 9 per cent rate applies for small taxpayers, with the exception of new taxpayers created via the restructuring of existing businesses; this rate does not apply to capital gains. Taxable income is defined by tax rules as an excess of all items of the taxable income (excluding capital gains from certain sources of such gains) over costs of such income in a given tax year. The taxable income is not equal to an accounting profit. In addition, it may include income from gratuitous services and imputed income. For example, according to interpretative guidelines issued by the Minister of Finance, a surety or guarantee issued by a shareholder without remuneration to secure a payment of debts of its corporate company constitutes taxable income of such company. In principle, income from business activities is taxable on an accrual basis. Expenses incurred to derive taxable income are deductible unless they are listed in Article 16 of the CITL, which enumerates non-deductible costs. Non-deductible costs include expenses for the acquisition of land or perpetual usufruct of land, which may not be depreciated but may be deducted upon the sale of such assets, purchase costs of shares and securities until the day of their sale or redemption, certain expenses for promotion, compensation and contractual damages, any donations, expenses (above certain limits) for the use of cars, costs incurred for tax-exempt income or depreciation write-offs pertaining to know-how contributed in-kind to the stated capital of the company, and other costs. According to the general tax interpretative guidelines of the Minister of Finance, however, deductions of payments for the rental of passenger cars used in business activities are not subject to statutory limitations in terms of expenses incurred during the use of such cars (e.g., the cost of fuel); such rental payments are, therefore, fully deductible. Another general tax interpretative guideline of the Minister of Finance states that the cost of food, beverages, lunches and other meals offered to customers and potential customers are not subject to the statutory limitations regarding expenses for the promotion and representation of a taxpayer; therefore, such costs are fully deductible.
As from 2018, new tax rules exclude from tax-deductible costs expenses incurred directly or indirectly for the benefit of affiliated entities or entities that have their seat in countries deemed to have engaged in harmful tax competition, related to the following (intangible) services, to the extent to which the aggregated expenses of such services exceed 5 per cent of taxpayer's EBIDTA:
- advisory services, market research services, advertising services, management and control services, data processing services, insurance, guarantee, surety and similar services;
- licence fees for use of copyrights and IP rights, and know-how; and
- shifting a risk of a debtor's insolvency as regards loans, other than extended by banks and credit and savings unions, including liabilities arising out of derivatives and similar services.
The amount of costs not deducted in a given fiscal year is deductible in the consecutive five fiscal years, within the cap applicable in particular years.
According to case law, company share capital increase is tax-exempt; therefore, costs associated with such increase are non-deductible. However, the costs should be solely narrowed to expenses that are directly connected with such an increase (e.g., notarial or court fees), and not to costs connected with the general functioning of a company or its business activity generating taxable income (e.g., advisory fees), which should be deductible.
Generally, fixed assets (buildings, constructions, machinery and equipment, and vehicles) owned by a taxpayer, acquired or constructed may be depreciated if their projected service life exceeds one year, they are completed and fit for use when they are placed in service, and if they are used for business activities by the taxpayer or a third party on the basis of a rental, lease or similar agreement with the taxpayer.
The following may also be depreciated, regardless of their projected useful life: leasehold improvements placed in service; buildings and constructions developed on land owned by a third party; and buildings, constructions and other assets constituting a separate freehold used by a taxpayer for business activities on the basis of a financial lease agreement.
Taxpayers may also depreciate certain intangible assets such as computer software, copyrights, licences and goodwill.
Interest on loans received to finance acquisitions or to develop depreciable fixed or intangible assets accrued by a borrower before the assets are placed in service is subject to depreciation rather than full deduction. Generally, rates of deductible depreciation write-offs are prescribed by local tax regulations. However, taxpayers may set depreciation rates within certain limits for fixed assets used or improved, and for intangible assets. The minimum depreciation periods for intangible assets are 24 months for licences for computer software, copyrights, films, radio and television programmes, 12 months for R&D costs, and 60 months for goodwill and other intangible assets.
Once established, the depreciation rates for intangible assets may not be changed. Goodwill may be depreciated only in cases of acquisition of an enterprise or its organised part, namely where it is purchased on the basis of a sale agreement; or where the enterprise or its organised part is subject to a financial lease arrangement and is depreciated by the lessee pursuant to applicable rules, or where the enterprise or its organised part is contributed in-kind to a local company under the Privatisation Law.
After a statutory merger or demerger, acquiring companies should continue the depreciation of fixed and intangible assets of the target company on the basis of the same depreciation value, rates and methods. This also applies in cases of the contribution in-kind of an enterprise or its organised part to a company. Depreciation of fixed and intangible assets contributed to partnerships is subject to special tax rules.
From 2018, the minimum CIT will apply on income from commercial properties leased or otherwise made available to third parties: commercial and service buildings (inter alia, commercial centres, department stores) and office buildings classified as an office building in the classification of buildings, where their initial value exceeds 10 million zlotys. The taxable basis is the initial tax value of a building for its tax depreciation decreased by 10 million zlotys. The tax rate is 0.035 per cent of the table basis per month. The amount of the tax may be deducted from CIT. The tax does not apply to office buildings used exclusively or mainly for the taxpayer's own purposes.
Capital and income
There is no capital gains tax in Poland. However, certain capital gains from a disposal or redemption of shares in corporation and partnerships, titles in investment funds, derivative instruments and other securities, and from interest on shareholders' participating loans as well as costs related to such gains should not be aggregated with ordinary income subject to CIT. In principle, capital expenses may be offset only against capital gains, while expenses related to ordinary income may be offset only against ordinary income.
Where costs of ordinary income exceed total taxable ordinary income, in a given tax year, the difference will represent a tax loss. Such loss may be carried forward against ordinary income derived in the next five consecutive tax years. However, in any of those five years, the loss from the given year may be deducted in part not exceeding 50 per cent of that loss. It is not possible to carry losses back, offsetting them against prior year income. Tax losses are linked with the legal entity that incurred them. Therefore, in cases of mergers, acquisitions (including purchases of an enterprise) and divisions, an acquiring entity may not carry forward tax losses incurred by a target business prior to such a transaction. Conversely, the acquiring entity may carry forward its tax losses incurred prior to the transaction.
Capital losses may be carried forward under the same rules applicable to ordinary losses. However, ordinary losses may not be carried forward against capital gains, and capital losses may not be carried forward against ordinary income.
As previously mentioned, CIT is chargeable at a rate of 19 per cent or, with respect to small taxpayers, at a rate of 9 per cent. In addition, outbound dividends are subject to local withholding tax at a rate of 19 per cent, and outbound royalty and interest payments are subject to local withholding tax at a rate of 20 per cent, unless a pertinent DTT sets out a lower rate. There is no proposed legislation aimed at a change in the CIT rates after 2017.
The fiscal year is the same as the calendar year, unless a taxpayer selects another period of 12 consecutive months and notifies the tax office by 30 January of a given year.
Polish taxpayers are obligated to pay corporate tax advances on a monthly basis, without, however, an obligation to file monthly CIT returns with the tax office. They may also decide to pay monthly tax advances in a simplified form, in an amount of 1/12th of the tax due as disclosed in the annual CIT return filed during the preceding tax year. All taxpayers are only obliged to file one annual CIT return within three months from the end of each tax year, and to pay the difference between the tax due and the sum of tax advances paid from the beginning of the tax year.
The taxation system is uniform across Poland (outside small differences in local taxes only). Foreign and local companies and individuals pay the same taxes. The Polish tax system is administered by:
- heads of tax offices, who supervise the collection of taxes in their territories, audit taxpayers and issue individual administrative decisions;
- heads of customs and tax offices, who perform taxation and procedural checks on fiscal settlements and conduct fiscal penalty proceedings; they also issue individual administrative decisions to taxpayers as a result of checks of fiscal settlements that were not corrected by taxpayers;
- heads of tax administration chambers, who supervise the heads of tax offices and heads of customs and tax offices: they are empowered to review administrative decisions of tax offices and customs and tax offices;
- the chief of Country Tax Administration, who generally supervises the entire taxation system on the territory of Poland; examines tax cases that require that final tax decisions be declared null and void, or that tax proceedings already closed be exceptionally resumed; and issues tax decisions in tax cases falling under the local general anti-avoidance rule;
- the head of Country Tax Information, who issues private tax rulings in taxation cases upon the request of taxpayers and withholding tax agents; and secures, processes and publishes uniform information that is relevant for taxation and customs; and
- the Minister of Finance, who is responsible for budgetary policy. He or she, ex officio or upon the request of taxpayers and other entities, issues general guidelines applicable to tax rules that in his or her opinion require uniform interpretation; and
- local self-government authorities, which are responsible for the collection of local taxes.
Taxpayers may, within 14 days, appeal against a tax decision or a private tax ruling of the local tax authority. Afterwards, a complaint against the tax decision or a private tax ruling may be submitted, within 30 days, to the district administrative court, and subsequently to the Supreme Administrative Court of Poland (NSA).
Tax advantages of a few single companies may become apparent in the case of the creation of a 'tax group', which may compensate losses of some of its members with profits of the remaining members. The tax group may be formed by corporations that meet the following conditions:
- they are limited liability or joint-stock companies incorporated in Poland;
- the average share capital of the member companies is not less than 500,000 zlotys, excluding the value of the share capitals covered by shareholders' loans, interest thereon or non-depreciable intangibles;
- in principle, a parent company directly holds 75 per cent of the shares of the subsidiary companies;
- the subsidiary companies do not hold shares in other subsidiary companies being members of the tax group; and
- before joining the tax group, the companies do not have any tax arrears towards the State Treasury budget.
Once the tax group is formed, the following additional requirements must be met: members of the tax group may not be exempted from CIT; the ratio of taxable income of the tax group to its total revenue in each tax year must be at least 2 per cent; and members of the tax group need to price transactions with related entities from outside the group at arm's length according to Polish transfer pricing rules.
Violation of any of these conditions results in the dissolution of the tax group and its members have to settle CIT on their own for a current tax year and previous two tax years. The group is also dissolved at the end of a period for which it was established.
The parent company and the subsidiaries that establish the tax group need to do so for at least three years under an agreement in the form of a notarial deed to be registered with the tax office.
Each member of the tax group should calculate its profits (capital gains) or losses separately in accordance with the ordinary rules. The taxable income of the tax group is defined as an excess of total taxable profits and capital gains of members of the group over ordinary losses and capital losses of the other members during the tax year. However, tax losses or profits from years before or after the life of the tax group may not be offset against the income or losses of the tax group. The tax group is a taxpayer liable to CIT at the regular rate of 19 per cent, which should be withheld by the parent company, but for which tax all the members of the tax group may be held liable jointly and severally. If the total losses of the members exceed their total profits, such difference represents a tax loss of the tax group. However, in practice, such a situation violates the 2 per cent profitability requirement for the tax group, and triggers the end of the tax group as of the date the group files its annual tax return for its given tax year.
Owing to the required 2 per cent profit-to-revenue ratio, the benefits of creating the tax group are generally seen as rather strict when compared with the potential 'fruits' of the creation of such a group.
ii Other relevant taxes
Other taxes in Poland are:
- excise tax;
- stamp duty;
- tax on civil law transactions;
- real estate tax and other local taxes;
- tonnage tax;
- gambling tax;
- donation and inheritance tax (which, however, does not apply to legal persons);
- tax on mines;
- special hydrocarbon tax;
- tax on certain financial institutions; and
- tax on retail sales.
The Polish VAT is in general harmonised with the EU VAT legislation, including Council Directive 2006/112/EC of 28 November 2006 on the common system of VAT. Pursuant to Article 5, Section 1 of the Polish VAT Law, in principle, supply of goods (inter alia, intra-Community acquisitions and supplies of goods) and provision of services against consideration in the territory of Poland are subject to Polish VAT at a rate of 23 per cent. Gratuitous services and supplies of goods without remuneration may be also taxable. For some goods and services, VAT rates have been reduced to zero,3 8,4 7,5 56 and 4 per cent.7 Certain services, including education, medical services, insurance, granting and management of loans, dealing in securities and certain other services, are subject to a VAT exemption, and the service provider may not deduct input VAT in such cases.
Pursuant to the above-mentioned EU Directive, Poland has exercised the option that any transfer of an enterprise or organised part of an enterprise is outside the scope of Polish VAT. In addition, input VAT on purchases, importation, manufacturing and use (rent, lease) of passenger cars, and VAT on the purchase of engine fuel, maintenance and other services related to such cars, may be deducted provided such passenger car is used solely for business activities. If a passenger car is used for both business and private purposes, 50 per cent of the input VAT may be deducted. Taxpayers using passenger cars for business activities only should maintain VAT records that include details about the driver, his or her itinerary and mileage.
In principle, only suppliers (importers) of goods and services are taxpayers obliged to pay VAT on their supplies; however, a VAT payer who purchases certain goods8 may be jointly and severally liable with a supplier of such goods for the payment of VAT chargeable on that supply if the value of goods supplied between those parties exceeds 50,000 zlotys in a given month, and the purchaser knows or should reasonably know that the supplier is not going to pay VAT on that supply. The purchaser will not be held liable if the supplier provided the tax authorities with the required security for the payment of VAT (e.g., cash deposit, bank guarantee or insurance policy).
Over the past few years the scope of the local reverse charge has been widely extended, mostly in order to tackle the VAT carousel frauds. For example, during the past year the local reverse charge has been applied to building services rendered by subcontractors. For the same reasons, in 2018 the 'split payment' was introduced to the VAT Law. Under this mechanism, the purchaser is eligible to: (1) divide the amount following from the invoice received into VAT part and a net price; (2) pay the VAT part to a special 'VAT bank account' of the supplier; and (3) pay the net price to the current bank account or settle it in some other way (e.g., in cash or set off). Currently, the application of the split payment mechanism is optional.
The VAT Law states that services provided by Polish suppliers to foreign service recipients are not subject to Polish VAT, and are subject to VAT in the country where the recipient of services has its seat or fixed establishment, provided that the recipient is registered for VAT in that country.
Similarly as with VAT, the Excise Tax Act is harmonised with the respective EU regulations. The tax is charged on certain supplies of goods, including intra-Community acquisitions and supplies of goods in Poland.
Excise tax is imposed on certain transactions performed by the taxable entity, such as transactions involving:
- import, intra-Community acquisition and first domestic sale of passenger cars that are not registered in Poland; and
- import, intra-Community acquisition, production or transfer to a tax warehouse, domestic supplies and use of certain engine fuels and gas, heating fats, oils and gas, coal products, other energy products, electric energy, and alcohol and tobacco products listed in Attachment 1 to the Excise Tax Law, including the use of dried tobacco plant or goods exempted from excise tax because of their intended use if they are used contrary to their intended use.
Excise tax is calculated either as a percentage of the value of taxable goods (or their customs duty value) or as a flat fee per the quantity basis (fee per unit).
The refund rules in VAT and excise tax may change in 2019. It is expected that the tax authorities may deny the refund if the taxpayer has transferred the burden of tax on to clients. Otherwise, the tax refunds in VAT and excise tax may would then lead to unjust enrichment of the taxpayer.
Stamp duty is payable in nominal amounts on certain acts and documents, including:
- official applications;
- official acts;
- permits; and
- certain documents (e.g., powers of attorney presented in administrative and court proceedings).
Stamp duty rates are determined in relevant schedules to the Stamp Duty Act, and paid in cash or by a bank transfer.
Tax on civil law transactions is a capital (transfer) tax levied on certain civil law transactions and certain legal acts and their amendments, in particular, on the sale and exchange of goods and property rights agreements, loan agreements, on setting up a mortgage, establishing a corporate company or partnership, and increasing the company's share capital, additional shareholder payments or loans. The tax is due if related goods are situated or property rights are exercised in Poland, or their purchaser has its residence in Poland, and the transaction itself takes place in Poland. With few exceptions, this tax is not payable if the transaction is subject to VAT, even though VAT-exempt.
Civil law transactions tax rates are either fixed or ad valorem. The rates include:
- 2 per cent of the market value of the subject of the transaction on the sale or exchange of real estate, perpetual usufruct right or movable goods;
- 1 per cent of the market value of the subject of the transaction on the sale or exchange of other property rights, including shares in companies;
- 0.5 per cent of the par value of the share capital on the establishment of a corporation or partnership or an increase in a share capital; and
- 2 per cent (0.5 per cent from 2019) of the principal amount of loans.
A number of tax exemptions apply, including a tax exemption on loans extended by a direct shareholder to its company and by non-residents of Poland conducting business activities that encompass the extending of loans. In addition, an exchange of majority shares in one company for new shares issued by another company is tax-exempt. The tax exemption also applies to an in-kind contribution of an enterprise or its organised part to the stated capital of a local capital company as well as to mergers or transformations of such local capital companies. According to a tax ruling issued by the tax authorities, a limited partnership issuing shares should be treated as a corporation, and that transfer tax exemptions pertaining to corporate mergers and restructurings should therefore also apply if they refer to a limited partnership issuing shares.
Local taxes include:
- real estate tax;
- transportation tax (imposed only on lorries and trucks);
- marketplace tax;
- agricultural tax;
- forestry tax;
- dog owner tax; and
- sanatorium tax.
Local self-governments are entitled to establish rates for certain taxes within the limits set by law. The most important local tax is real estate tax, which is paid annually (in monthly instalments) by an owner or possessor of real property and constructions, and their parts, including devices and equipment facilities, connected with business activities. For real estate used for business, the maximum tax rates in 2019 are 23.47 zlotys per square metre for buildings connected with business and 0.93 zlotys per square metre of land. In addition to statutorily defined exemptions, local self-government bodies, at their discretion, may establish further tax exemptions and their conditions with a view to attracting investors and businesses to invest in certain regions of Poland. As from 2018, the local self-governments report to the Minister of Finance on the tax rates, tax base and exemptions applied in their regions.
Tonnage tax is imposed on navigation enterprises rendering international sea ship services in transportation of goods and passengers, sea tugboat and sea tow services, sea lifeboat and rescue services, deepening of the sea bottom, as well as certain other services connected with the foregoing, such as the sale of goods and services on ships, currencies exchange, management of passenger and cargo terminals, loading, unloading and reloading of cargo, and ship chartering. Tonnage tax is chargeable to the extent that the navigation enterprise uses ships with a tonnage gross (GT) capacity exceeding 100GT, and provided that it has selected to be the taxpayer of this tax instead of CIT for 10 years. The tax is chargeable at a rate of 19 per cent on total lump-sum income calculated as an aggregated product of the total net capacity (as determined in the international measurement certificate) of each ship used for the taxable services, and rates decreasing from €0.50 to €0.10 for each 100 tonnes of net capacity of each ship per day. In addition, such ship owners pay tax at a rate of 15 per cent of the gross proceeds from the sale of ships if such proceeds are not reinvested into the purchase, reconstruction or modernisation of ships within three years. They are exempted from CIT.
Gambling tax is imposed on businesses organising gambling activities (casino roulette, card games and gambling, bingo games, various lotteries, mutual bids, slot machines, etc.) under permit, except for promotion lotteries and poker tournaments; it is also imposed on individual participants in poker tournaments. Tax rates differ with respect to each gambling activity and game, and vary from 2.5 to 50 per cent of proceeds from given activities.
The inheritance and donation tax is levied on natural persons only, and depends on the tax bracket, which in turn depends on the degree of relationship between a donor and a donated party. The first two brackets pertain to relatives, and the third to other persons. The tax rates for the first bracket are 3 to 7 per cent; for the second, 7 to 12 per cent; and for the third, 12 to 20 per cent. There also apply tax exemptions regarding certain assets and regarding inheritance or donations of all assets between certain family members.
The tax on mines is imposed on copper, silver, crude oil and natural gas mining. For copper, the tax rate amounts to 0.033 x average copper price + (0.001 x average copper price) 2.5, and applies to each tonne of copper mined by a taxpayer or included in copper concentrate produced by the taxpayer. For silver, the tax rate amounts to 0.125 x average silver price + (0.001 x average silver price) 4, and applies to each kilogramme of silver mined by a taxpayer or included in silver concentrate produced by the taxpayer. If the average prices of copper or silver drop below the statutory determined thresholds, higher tax rates will apply, with a minimum tax rate of 0.5 per cent of the average price of copper or silver. From 2016, the tax is also levied on production of natural gas and production of crude oil. The tax is levied at ad valorem rates of 1.5 to 3 per cent for natural gas and 3 to 6 per cent for crude oil. In addition, a tax incentive rule entered into force according to which the tax may be reduced by 19 per cent of tax losses that could not be deducted for income tax purposes. The tax should be declared and paid to the proper tax office for each month within 25 days of the following month.
On 1 January 2016, a special hydrocarbon tax was introduced in Poland. This tax is levied on profits of natural and legal persons, and organisational units without legal personality, including civil law partnerships, derived from hydrocarbon extraction businesses such as shale gas and oil exploration. The tax rates range from zero to 25 per cent depending on the ratio of gross income derived from hydrocarbon extraction business to qualified expenses of such business. Taxpayers have to pay monthly tax advances for each calendar month by the 25th day of the next month.
In 2016, a new tax on certain financial institutions was introduced. The tax applies mainly to Polish banks, insurance institutions and branches of foreign banks and insurance institutions. The tax is levied on the accounting value of assets exceeding a statutory threshold of 4 billion zlotys for banks and 2 billion zlotys for insurers. The value of assets constituting a tax base is calculated jointly for all affiliated insurance institutions liable to the tax. The tax is charged at a rate of 0.0366 per cent monthly.
In 2016, the new Act on Tax on Retail Sales was adopted by Parliament. The tax applies to the revenues of retailers. A monthly surplus of such revenues over 17 million zlotys is subject to tax at a rate of 0.8 per cent, and a monthly surplus of revenues over 170 million zlotys is subject to tax at a rate of 1.4 per cent. However, owing to the European Commission's objection to the tax, its collection has been suspended until 31 December 2019.
IV TAX RESIDENCE AND FISCAL DOMICILE
i Corporate residence
Companies, other legal persons, limited partnerships issuing shares and organisational units without legal personality (e.g., tax units), except for other partnerships, are taxpayers liable to CIT. Taxpayers having their seat or place of management in Poland are tax residents liable to CIT on their worldwide income. Other taxpayers are non-residents liable only to tax on income derived in Poland unless an applicable DTT states differently. An entity incorporated outside Poland may become a Polish tax resident if its place of management is relocated to the territory of Poland. Conversely, a locally incorporated entity may cease to be a Polish tax resident if its place of management is relocated from Poland to another jurisdiction. To determine under Polish rules where an entity has its place of management, one must look at where the entity is actually managed (namely, where decisions regarding the entity's matters are actually taken). It is a question of facts rather than law. Any legal deeds or other formal indicators of a place where the entity is managed and where decisions are made (e.g., relevant rules in articles of association or management agreements executed with the entity) may be considered by the tax authorities, but they are neither final nor prevailing in determining the place of management. In practice, however, there exists no tax or court ruling in which local tax authorities would claim that a given entity became or ceased to be a Polish tax resident owing to the relocation of the place of its actual management. Nevertheless, the place of actual management may be effectively moved for tax purposes. In many cases, such movement could not be challenged by the tax authorities of the exit jurisdiction, since many DTTs executed by Poland state that in cases of disputes regarding where a corporate taxpayer is tax resident, it must be considered a tax resident of the contracting state in which it has a place of management.
A company incorporated in any EU Member State, including SEs, may also become Polish tax residents, and a company incorporated in Poland may relocate to another EU Member State by way of a statutory merger between such companies. SEs and SCEs may also move their corporate seat between EU Member States. Another Polish company would have to open a liquidation procedure if it decides to move its seat to another country.
In Poland, no corporate immigration or emigration taxes were levied on entities that became or ceased to be Polish tax residents. However, as of 2019 Poland introduced exit tax, as part of Polish corporate tax. Exit tax is imposed on unrealised gains in cases where, in connection with the following events, Poland would not be able to impose CIT on income that would be realised from sale of assets in the future:
- relocation of the corporate taxpayer's seat (place of management) from Poland to another jurisdiction;
- relocation of corporate assets from Poland to another jurisdiction;
- gratuitous transfer of assets located in Poland to any Polish or foreign entity; or
- in-kind contribution of assets to an entity other than a corporation or a cooperative.
The exit tax should apply at a rate of 19 per cent to a surplus of the fair market value of assets of the CIT payer being relocated from Poland over costs that would be deductible, were such assets sold before their relocation from Poland.
ii Branch or permanent establishment
A foreign entrepreneur has its fiscal presence in Poland and is liable to Polish income tax if it derives income locally through its PE in Poland within the meaning of local definitions or a pertinent DTT. A PE is defined as a fixed place where the business activity of the foreign entrepreneur is conducted, in part or in whole, in Poland. A PE is created, in particular, if the foreign entrepreneur has a place of management, a branch office or a workshop in Poland.
PEs frequently take the form of a local branch office. A locally registered partnership of one or more of its non-resident partners may also constitute their PE. A PE may also be created without such formal presence in Poland, in particular where a foreign entrepreneur seconds to Poland an employee authorised to conclude agreements in Poland on behalf of the foreign entrepreneur, and such individual customarily exercises such authorisation.
In practice, activities of a foreign entrepreneur will create a PE if they are conducted in Poland permanently. Therefore, such establishment does not exist if activities generating local income are performed outside Poland on a permanent basis rather than in Poland. However, neither Polish domestic regulations nor DTTs define the permanency of such local activities; thus, activities conducted for a few months (e.g., six months) may create a PE. For example, pursuant to a court judgment, cross-border advisory and other services of a Japanese company aimed at the implementation in Poland of a licence granted to a Polish company constitute a local PE within the meaning of the Poland–Japan DTT.
Owing to the protection of DTTs executed by Poland, the PE condition may not be enough to tax local income of the foreign entrepreneur. With few exceptions, most DTTs require that tax authorities prove a nexus between the local business activities of the PE and any items of income derived by the entrepreneur in Poland. In the absence of such nexus, no item of local income may be taxed. However, a few treaties, such as the DTT between Poland and Italy, set forth the presumption that one must assume that such nexus exists between the PE and all items of income (if any) derived by that taxpayer in Poland, unless the taxpayer proves the absence of such nexus with a given item of local income.
In addition, DTTs executed by Poland provide which local permanent activities and places may not be considered to be a PE. Although such activities and places differ to some extent, Polish tax treaties are based on the OECD Model Convention; therefore, such definitions are similar in all treaties. In general, a fixed place of business in Poland does not constitute a PE if it constitutes a construction site or installation for a certain period (usually lasting not more than 12 to 18 months), or if the fixed place is designated solely for the storage or delivery of products, or the purchase of goods or gathering of information (or for the combination of some or all of these). In the absence of a DTT, most such activities would constitute a PE, and any income generated by the taxpayer from such activities would have to be taxed in Poland.
V TAX INCENTIVES, SPECIAL REGIMES AND RELIEF THAT MAY ENCOURAGE INWARD INVESTMENT
2018 brought a big change to the Polish system of tax incentives, which until 5 September 2018 were available only with respect to investments located within the territories of SEZs. Now, under the new Act on supporting of new investments and secondary legislation issued on its basis, the entire territory of Poland has become the SEZ eligible for basically the same kind of support (i.e., income tax exemption). This means that the main barrier – the need to locate a new investment in the SEZ – is no longer present. Also, under the new regulations, the investors that have already obtained state aid within the 'old' SEZ scheme may still enjoy such aid and utilise the tax exemption granted to them (however, only until the end of 2026, when the SEZs will finally cease to exist).
According to Article 17, Section 1, Item 34 of the CITL, income derived from economic activities conducted in the Polish territory under a 'decision on support' (i.e., a decision issued under the new Act on supporting of new investments) is tax-exempt. The main purpose of this new scheme is to encourage investors to invest in new ventures, irrespective of the investment's location. In return, an investor is permitted to deduct a specific percentage (depending on pertinent regulations, up to 50 per cent) of its qualified investment outlays and costs incurred in the SEZ (eligible expenditures) from the amount of income tax. The investor must obtain a prior decision on support from the Minister of Entrepreneurship and Technology, under which the state aid with respect to the new investment is granted. The investor may benefit from the CIT exemption on the ground of costs borne for a new (initial) investment, or on the ground of costs borne for the creation of workplaces for new employees. The CIT exemption may be cancelled as a result of cancellation of the decision on support if the investor ceases to perform the business activity defined in the decision, or flagrantly violates conditions specified in the decision or fails to redress infringements thereof within the deadline set by the Minister. The new regulation provides a list of activities that may not be covered by the decision on support and, consequently, by the tax exemption, including:
- administration and supporting services (such as those related to office administration services – e.g., preparation and copying of documents, post services such as emails and answering telephones), except for call centre services, which are explicitly authorised to be performed in SEZs;
- professional, science and technical services (e.g., legal and tax advisory, management advisory, head office, advertising and translation services);
- financial, insurance and real estate transactions;
- certain licence services related to books, brochures, maps, magazines, computer games, software, etc.;
- military services;
- film, video and television production;
- waste management services;
- construction services; and
- certain other services that are also excluded from state support.
In addition, costs of investments not successfully closed can be fully deducted by a taxpayer on the date of the sale or liquidation of investments. The disposal of investments should be documented with an invoice or a bill, and the liquidation of investments should be documented with a memorandum (protocol) of liquidation.
In Poland, any foreign income items may also be income tax-exempt under a pertinent DTT. If a tax treaty is silent as to the exemption, or in absence of a treaty, foreign income tax may be credited against Polish tax on the same item of income (see Section VI.iv).
It must be also noted that unlike the SEZ rules, the new legislation introduces additional conditions of applying for state aid: quantity and quality criteria.
Quantity criteria are the minimum amount of investment expenditures that must be reached in order for an investment to qualify for support. This minimum amount of investment varies depending of the unemployment rate in the area where a project is to be located and the type of the investor (lower thresholds are available to small and medium-sized enterprises).
The quality criteria include such aspects of the investment as creation of specialised jobs, employment predominantly on the basis of employment agreements, the research and development component, cooperation with academic and research centres and with industry schools, contributing to the development of industry clusters, and location of investments in the territories that are most in need of support, have the highest unemployment rate, etc.
Only an investment that meets both the applicable quantity criterion and the quality criteria (in a sufficient number, also varying depending on location) can obtain support.
i Holding company regimes
Inbound and outbound dividends, capital gains, and other local or foreign income derived by local holding corporations or their non-resident shareholders, are subject to income taxation at a rate of 19 per cent and, in certain cases, tax exemptions or tax credits. The basic characteristics of a local special holding company tax regime are as follows:
In votes or in capital
|10 per cent (25 per cent for Switzerland)
|Minimum holding period for dividends||Two years†|
|Capital gains tax exemption||No|
|Capital loss deduction||Yes|
|Deduction of expenses (e.g., interest)||Yes|
|Capital infusion tax||0.5 per cent‡|
|Withholding tax to parent under domestic law
To EU, EEA and Switzerland parent
To US parent
|19 per cent/0 per cent§
0 per cent
15 per cent/5 per cent
|Foreign income tax credit||Yes, if foreign income is not tax-exempt locally under a tax treaty|
|Foreign income tax credit for underlying tax||Yes, for CIT of foreign subsidiaries from outside the EU, EEA and Switzerland|
|Cross-border consolidation||Yes, under certain circumstances|
|Controlled foreign companies legislation||Yes|
|* This exemption applies to dividend payments between domestic companies, EU, EEA or Switzerland-based companies. The direct shareholder's interest in the share capital should amount to 10 per cent. In respect of dividends paid by Swiss companies, interest in the share capital must amount to at least 25 per cent.
† The tax exemption applies even if the two-year minimum holding period is met after the payment of dividends.
‡ Exemptions available for an in-kind contribution of an enterprise or its organised part or shares in an EU capital company to the share capital of a local capital company in exchange for its new shares, and for mergers and transformations of capital companies.
§ No dividend withholding tax if the requirements for the tax exemption referred to in the first footnote to this table are satisfied.
ii IP regimes
According to the new rules, a taxpayer is entitled to deduct part of the costs incurred in R&D activities from its taxable income. The expenditures eligible for deduction include 30 per cent of the salaries of employees engaged in R&D activities, and 20 per cent (for small and medium-sized enterprises) or 10 per cent (for other enterprises) of other R&D-related costs (e.g., materials, research data, use of scientific apparatus), including depreciation write-offs. The relief does not apply to taxpayers operating within SEZs. The tax incentive for R&D activities replaces the previous incentive system involving the deduction of costs for the purchase of new technologies available under the legislation that was in force before 2016. The previous incentive entitled taxpayers to deduct 50 per cent of costs incurred in the acquisition of new technologies (e.g., software licence, research data). Taxpayers who obtained a right to the tax deduction under the previous legislation may continue to make deductions until the existing deduction is utilised in full.
From 2019 the Innovation Box tax relief applies, in addition to the existing R&D relief referred to above. Namely, eligible incomes of CIT payers carrying out R&D activities directly connected with creation, development or improvement of the 'qualifying IP right' is subject to CIT at a rate of 5 per cent, instead of the standard rate.
The following income is the eligible income under the Innovation Box:
- licence fees for the qualifying IP right;
- income from sale of the qualifying IP right;
- a value of the qualifying IP right included in the sale price of a product or a service (transfer pricing regulations apply accordingly); and
- compensation for infringement of the qualifying IP right if obtained in the course of litigation, including court or arbitration proceedings.
The taxable base at the rate of 5 per cent is the sum of the eligible incomes from the qualifying IP rights, less direct costs incurred by the CIT payer for purchases of the qualifying IP rights or for R&D activities related to creation, development or improvement of the qualifying IP rights during a tax year.
Costs of the same R&D works may be deducted simultaneously within the confines of both the Innovation Box and the existing R&D relief referred to above (where the total R&D costs are also deductible from ordinary income taxed at 19 per cent) and, therefore, the tax savings may be even bigger.
The qualifying IP rights comprise the following rights: patents, utility model protection, an industrial design, rights to topography of an integrated circuit, additional rights to a patent for a medical product or a plant health product, rights to new varieties of plants and breeds of animals, and copyrights to software provided that they are subject to legal protection under laws or ratified international agreements in Poland.
A loss on the activities subject to the Innovation Box relief may be carried forward for five consecutive tax years. A loss from a qualifying IP right may reduce incomes derived only from the eligible income derived from the same qualifying IP right, the same type of product or service, or the same group of products or services in which the qualifying IP right was used.
The condition for application of the relief is also to keep accounting records that should allow a CIT payer to determine the eligible income, tax-deductible costs, income (loss), attributable to each qualifying IP right, under pain of payment of 19 per cent tax in the event the records are kept improperly.
iii State aid
On 5 July 2011, the Council of Ministers adopted the Scheme Concerning Support for Investments of Material Significance to the Polish Economy for the period from 2011 to 2020 (Scheme), which was subsequently amended on 22 July 2014, on 27 October 2014 and on 8 June 2016 (when the Scheme was extended from 2020 to 2023). The purpose of the Scheme is to increase innovation and competitiveness in the economy through cash grants awarded to Polish and foreign companies. The cash grants under the Scheme are to be awarded until 2019 for a maximum period of five years, and the Scheme will end in 2023. The Scheme's overall budget is approximately 1.5 billion zlotys.
Under the Scheme, funds may be granted to support high-value investments or the creation of new workplaces to entrepreneurs planning investment in priority sectors such as aviation, the car industry, electronic equipment manufacturing (e.g., computers, home appliances, television, radio and telecommunication devices), biotechnology, agrifood, R&D or 'modern' business services, including IT processing and advanced IT processing management, knowledge management, IT consulting, engineering centres and also certain business processes, and in the 'significant investment' in any sector (see below).9
To qualify for support for the creation of new jobs, the investor should make at least one of the following investments:
- a new manufacturing investment in priority sectors offering at least 250 new jobs with a minimum investment of 40 million zlotys;
- a significant new manufacturing investment offering at least 500 new jobs with a minimum investment of 500 million zlotys, or offering at least 200 new jobs with a minimum investment of 750 million zlotys (significant investments);
- a new investment in the 'modern' services sector offering at least 250 new jobs with a minimum investment of 1.5 million zlotys; or
- a new R&D investment creating at least 35 jobs for employees with higher education degrees with a minimum investment of 1 million zlotys.
To qualify for support for new investment, the investor should carry out at least one of the following investments:
- a new investment in priority sectors offering at least 50 new jobs for employees with a minimum investment of 160 million zlotys;
- significant investments; or
- a new R&D investment creating at least 35 jobs for employees with higher education degrees with a minimum investment of 10 million zlotys.
Cash grants for significant investments may be awarded for periods exceeding five years, but only until 2023. No cash grants may be awarded for any investments in areas where the unemployment rate is below 75 per cent of Poland's average unemployment rate, except for investments in R&D, 'modern' services, significant investments or, in certain eastern parts of Poland, investments in 'priority sectors'. In principle, it is not possible to combine cash grants awarded under the Scheme in an amount higher than 3 million zlotys with other regional cash grants originating from the state budget, CIT exemptions available in SEZs or EU grants, except for cases of cash grants for significant investments or in the R&D sector, or where the value of an investment in other priority sectors equals or exceeds 350 million zlotys or if an investor creates 500 new jobs in the 'modern' business services sector. Any deviation from this rule requires the consent of the Polish Council of Ministers.
Investors whose investments meet the above criteria may apply on a standard form to the Polish Agency of Investments and Trade (PAIH). The application is assessed by PAIH, the Inter-ministerial Committee for Investments of Material Significance to the Polish Economy and the Ministry of Economic Development. The decision of whether to award cash grants under the Scheme is discretional; however, the Scheme defines the criteria for assessing the investment parameters for the purposes of calculating available support.
Poland-based companies, either within or outside SEZs, may under certain conditions benefit from horizontal state aid instruments for legitimate purposes (mainly employment and training). State aid for employment is, as a rule, designed to reimburse companies for part of the costs of employment or training of selected categories of persons (namely, employees, unemployed persons delegated by local labour offices, and disabled and disadvantaged persons).
Incentives are granted in Poland in compliance with the EU state aid rules. The maximum regional aid intensity available for investors varies from 15 per cent (in Warsaw) to 50 per cent (mostly in the eastern part of Poland).
The following all make Poland a very attractive jurisdiction for business development, acquisition and operation:
- domestic tax legislation harmonised with EU tax law;
- the low 19 per cent CIT rate;
- the income tax exemption offered for activities conducted in SEZs;
- the real estate tax exemption offered by local self-government bodies in many areas of Poland;
- broad state aid programmes for new investments;
- the advantageous tax treatment of IP technologies, R&D and unsuccessful investments;
- Poland's attractive geographical location in central and eastern Europe; and
- the government's attempts to soften the adverse impact of the economic depression of other countries on Poland's economy to maintain economic growth.
In addition, the extensive network of DTTs and the attractive foreign tax credit system, including the foreign full tax credit for dividend withholding tax and underlying tax, allow for the effective elimination or sufficient reduction of the total international and local tax burdens on income derived from Poland-based holding companies and on foreign income derived from Polish companies.
VI WITHHOLDING AND TAXATION OF NON-LOCAL SOURCE INCOME STREAMS
i Withholding on outward-bound payments (domestic law)
Withholding tax at a rate of 19 per cent applies to outbound dividends and other income from participation in corporate profits, and withholding tax at a rate of 20 per cent applies to outbound interest and royalties. Other income from participation in corporate profits includes income from share capital reductions, company liquidations, redemptions of corporate shares (except for their voluntary redemption via a transfer of shares to a company, qualified as taxable capital gains), and other income from shares (e.g., bonus shares or shareholders' income from companies mergers and divisions) or other equity titles in legal persons. Payments of profits by limited partnerships issuing shares (which have been taxpayers since 2014) to general partners and shareholders of such partnerships are also subject to dividend withholding tax at a rate of 19 per cent.
Domestic compliance rules for the settlement of local withholding tax on cross-border interest and dividend outbound payments from securities registered on an omnibus account maintained for foreign investors also apply.
ii Domestic law exclusions or exemptions from withholding on outward-bound payments
Poland has implemented into domestic tax law Council Directive 90/435/EEC on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, which sets forth, inter alia, the 'participation exemption'. Accordingly, payments of outbound dividends and certain other income from participation in corporate profits of a Polish corporation are exempt from local dividend withholding taxation provided that:
- the recipient of the payment is a company that is a tax resident of any EU Member State, Switzerland or EEA Member State, provided the recipient is not entirely tax-exempt as regards its worldwide income, and has a legal form indicated in an attachment to the above Directive or is such company's PE also located in one of the above-mentioned states;
- the recipient of dividends holds at least 10 (in the case of Switzerland, 25) per cent of shares in the Polish corporate subsidiary for an uninterrupted period of two years, even if this minimum holding period expires after the dividends were paid; and
- prior to the payment of dividends or other corporate profits, a tax certificate is delivered by the recipient of the income to the Polish subsidiary; such certificate must be issued by the former's pertinent foreign tax authority to confirm that the recipient is a tax resident of an EU Member State or another state referred to above.
Pursuant to a judgment of the local court, the dividend withholding tax exemption may still apply, although the minimum two-year holding period elapses after a merger of a parent company from an EU Member State with its general tax successor (being another EU company referred to in the above Directive). In another judgment, the local court stated that although a local general partnership is tax transparent and is a permanent establishment of its corporate partners from other EU States, dividends paid by a Polish company to such permanent establishment may not be subject to the Polish dividend withholding tax exemption; such exemption requires that dividends be paid to a company holding shares in the Polish company directly, while the corporate partners in the partnership do not hold directly the shares in the Polish company paying dividends.
In limited partnerships issuing shares, the above dividend withholding tax exemption applies only to profits paid to shareholders. In turn, general partners (and not shareholders) may credit the CIT of the partnership (according to their participation in the partnership's profits) against withholding tax on profits distributed to them within the next five consecutive years.
From 2016, the dividend withholding tax exemption may not apply to dividends and other income from participation in corporate profits if they result from a transaction or series of transactions lacking business reasons and aimed solely or mainly at obtaining the tax exemption rather than at avoidance of double taxation of corporate profits.
Poland has also implemented Council Directive 2003/49/EC on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States. In particular, payments of outbound interest and royalties are exempt from withholding taxation. The withholding tax exemption as from July 2013 applies to outbound interest and royalties as long as:
- the recipient and payer of interest or royalties are associated companies where one company holds directly at least 25 per cent of shares of the other company, or another company holds directly at least 25 per cent of shares of both the payer and the recipient of interest or royalties, or the payer or recipient (or both) is a PE of any of such associated companies;
- the above minimum 25 per cent holding of shares lasts for an uninterrupted period of two years, even if this minimum holding period ends after the payment of interest or royalties;
- the recipient of interest or royalties is a tax resident of any EU or EEA Member State or Switzerland, provided the recipient is not entirely tax-exempt as regards its worldwide income, or it is such tax resident's PE located in another EU or EEA Member State or Switzerland; and
- prior to the payment, the recipient of income delivers its tax residence certificate issued by its pertinent foreign tax authority to confirm that the recipient is a tax resident in the EU Member State or Switzerland, or is such tax resident's PE that is also located in another EU Member State or Switzerland.
The existing withholding tax exemptions of outbound dividends, interest and royalties, paid mainly to recipients from the EU, the EEA and Switzerland referred to in Section VI.ii are limited to situations where Poland may claim the exchange of information from tax authorities of the country of the foreign recipient of income pursuant to a pertinent DTT.
As of 2019, Poland introduced new compliance rules for collection of withholding taxes on cross-border payments of dividends, interest, royalties and intangible services. The new rules provide for some restrictions that impede application of exemptions and reduced rates to payments of WHT, including:
- keeping the existing principles of collection of the tax in case of cross-border payments not exceeding 2 million zlotys for amounts due to one taxpayer in a given fiscal year;
- an obligation to collect the tax in the full amount on the aforementioned payments over 2 million zlotys, without applying any exemptions or reduced rates as provided for in DTTs and the CIT Law;
- the taxpayer or withholding tax agent will be able to apply with the tax authority, through a different procedure, for a refund of the tax withheld; such a procedure will include but not be limited to examining whether:
- the actual recipient of the payments is a CIT payer in his or her country and carries out a real business activity; and
- any prerequisites exist to apply GAAR;
- the tax refund deadline is to be six months and it can be extended; and
- exceptions to the above full withholding tax at the domestic rate will apply only if:
- upon the taxpayer's request, the tax authority issues, within six months, an opinion on application of the WHT exemption by the taxpayer; or
- under pain of criminal responsibility, the tax withholding agent declares that they have verified the beneficial owner of the payments and have been in possession of proper documents to prove non-collection of the tax or collection of the tax in the reduced amount.
In the case of payments of dividends and other proceeds from participation in corporate profits between domestic entities, analogous rules of collection and refund of the WHT will apply.
iii Double tax treaties
Local interest and royalty withholding taxation at a rate of 20 per cent, and dividend withholding taxation at a rate of 19 per cent, may be reduced to 10 or 5 per cent, or even eliminated, in compliance with a relevant DTT. Pursuant to a judgment of the local court, after assignment of a loan by a bank to a third-party acquirer of the loan a typical DDT interest withholding tax exemption for loans extended by banks may still apply to interest paid by the acquirer of the loan provided that the acquirer of the loan is also a bank. A foreign recipient of such payments should deliver a tax certificate from its respective tax authorities to confirm that it is a tax resident of the other contracting state under the meaning of the tax treaty. According to new legislation, such certificate is valid for one year only unless it indicates another period, and the same recipient of income should deliver a new tax certificate for each tax year in which it receives a payment falling under local withholding taxation. According to administrative courts, cross-border interest may be subject to a treaty withholding tax rate provided that a beneficial owner of the interest is a tax resident in a treaty state.
In turn, most of the 92 DTTs executed by Poland provide that Polish income taxation of inbound dividends, interest and royalties may be reduced through foreign tax credits on such income (not higher, however, than the Polish tax due on the same item of income). In addition, the Poland–Luxembourg DTT, which exceptionally provided for the tax exemption of foreign inbound dividends, whereby a Luxembourg company's dividends that are subject to Luxembourg dividend withholding taxation are Polish tax-exempt, changed as from 2013. Now, the Luxembourg dividend withholding tax may only be credited against the Polish dividend withholding tax.
iv Taxation on receipt
Dividends, interest and royalties are taxed on a cash basis. Dividends paid between local corporate companies, or by a foreign corporate company tax resident in any EU or EEA Member State or Switzerland, are exempted from Polish income taxation if the Polish recipient of dividends holds at least 10 (25, in the case of a Swiss subsidiary company) per cent of shares in a subsidiary distributing dividends for an uninterrupted period of two years, even if this minimum holding period expires after the payment of dividends. However, foreign income derived from hybrid instruments is excluded from the Polish inbound dividend tax exemption.
The dividend tax exemption may not apply to dividends and other income from participation in corporate profits if they result from a transaction or series of transactions lacking business reasons and aimed solely or mainly at obtaining the tax exemption rather than at avoidance of double taxation of corporate profits.
Any inbound dividends, interest, royalties and other items of foreign income may also be exempt from Polish income taxation if a pertinent DTT provides for such an exemption. Whenever a tax treaty provides otherwise, or in the absence of a treaty, foreign income tax may be credited against Polish tax. Such credit, however, may not exceed the Polish income tax on the same income.
Polish companies receiving foreign (inbound) dividends in Poland may credit against Polish CIT foreign dividend withholding tax, as well as foreign corporate tax paid by a foreign corporation on its profits out of which such dividends were paid out (full tax credit for underlying tax). The foreign underlying tax may also be credited against Polish tax on other foreign income, not only dividends. As a result, in many cases there would be no corporate tax in Poland, since the 19 per cent Polish tax rate is lower than tax rates in many countries. The Polish tax credit for the underlying tax, however, applies only with respect to foreign tax of a foreign subsidiary being a tax resident in countries other than the EU, EEA Member States and Switzerland, having a DTT with Poland, and provided that the Polish corporation holds at least 75 per cent of shares in the foreign company distributing dividends for an uninterrupted period of two years, even if this minimum holding period expires after the payment of dividends. The scope of the foreign tax credit referred to above, including the tax credit for foreign dividend withholding tax and underlying tax, is also granted in the case of Polish taxation of foreign income derived through a Poland-based PE of a company from the EU or EEA Member State, pursuant to a pertinent DTT.
The existing tax credit on foreign inbound income referred to here is limited to situations where Poland may claim the exchange of information from tax authorities of the country of the source of foreign income pursuant to a pertinent DTT.
VII TAXATION OF FUNDING STRUCTURES
In practice, local companies are usually financed with a mix of equity contributions (both in cash and in kind) and typical loans from shareholders or third parties, or through bonds issued to shareholders or third parties. Sometimes, companies also obtain 'additional shareholder cash contributions', which in principle are required to be paid to cover accounting losses of the company, but may also be used to finance operations of the company in other situations, and may be returned to shareholders to the extent that they are not required to cover company losses.
i Thin capitalisation
The CITL provides for restrictions with respect to interest paid by the Polish subsidiary on borrowings (loans) extended by qualified related lenders. Such interest is not tax deductible to the extent that the loans from qualified lenders exceed the borrower's (Polish subsidiary) equity. Qualified lenders are a shareholder or shareholders directly or indirectly holding at least 25 per cent of the voting stock in the share capital of the borrower; or sister companies, where the same shareholder directly or indirectly holds at least 25 per cent of the voting stock in the share capital in each of those companies.
Interest on part of such a loan or loans exceeding the 1:1 debt-to-equity ratio is not deductible, but for local withholding taxation it should still be qualified as interest rather than dividends. The debt-to-equity ratio should be calculated on the last day of the month preceding the month of interest payment. A definition of the loan covers not only typical loan agreements regulated in the Polish Civil Code, but also any agreement for payment of the amount that will subsequently have to be returned, including debt securities, irregular deposits and deposits (except for derivatives). However, according to administrative courts, commercial credits resulting from deferred payment terms of purchases of goods and services from a shareholder do not qualify as shareholder loans, and interest thereon should not be subject to thin capitalisation rules.
Recent case law confirms that interest is not deductible under thin capitalisation rules if paid to a qualified lender under a loan extended by the same or other qualified lender; however, transfer of such a loan by the qualified lender to a third party (or vice versa) before payment of interest does not restrict interest deductions. Accordingly, owing to the narrow scope of qualified lenders, the impact of the thin capitalisation rules on the financing of local companies with intercompany loans is very limited.
Taxpayers may select not to apply the above thin capitalisation rules on condition of notifying the tax office. Subsequently, for at least a three-year period, they will have to apply an alternative interest deduction regime, according to which interest paid on any loan (whether from a related or non-related party) may not be deducted to the extent a sum of interest payments exceeds the statutorily determined percentage of the value of the borrower's assets (reduced, however, by depreciable intangible assets). The new rules set the percentage of the assets limiting interest deductions as the reference interest rate announced by the National Bank of Poland (which is currently 1.5 per cent) increased by 1.25 per cent. A surplus of interest over such limitation may be deducted over the next five consecutive tax years with other deductible interest to the extent of the aforesaid limitation.
ii Deduction of finance costs
Interest, discounts and other financial costs are deductible when they are actually paid or capitalised – that is, added to a principal amount of debt without payment. Interest that is not at arm's length may be challenged by the local tax authorities. Interest and other costs of financing acquisitions of shares and other securities may also be deducted, including situations of pushing debt down, where interest on the parent company's debts used to finance a purchase of shares in a subsidiary where companies subsequently are merged is deducted, after the merger, from taxable profits generated by the merged subsidiary's business.
Interest and other costs of financing acquisitions of depreciable fixed and intangible assets accrued until the day of placing a fixed asset into service are subject to depreciation write-offs. Such costs of financing acquisitions of depreciable fixed assets accrued after that day may be deducted according to general rules.
From 2018, CIT taxpayers, including local branches of foreign enterprises, are obligated to exclude from tax-deductible costs, a surplus of their all debt financing costs over their interest income (if any), to the extent to which such surplus exceeds 30 per cent of their EBITDA in a given fiscal year.10 The new tax rules widely define costs of debt financing as any and all explicit or hidden costs of financial transactions, including interest, capitalised interest, fees, commissions, bonuses, interest-bearing part of a leasing instalment, penalties and fees for delay in payment of liabilities, and costs of securing receivables and payables (including costs of financial derivatives), securities lending and REPO transactions, regardless of who is a beneficiary of financing costs. In turn, they narrowly define revenues as the interest income (only), which will contribute to the increase in the amount of tax non-deductible costs. The limitation of tax-deductible costs also refers to costs of financing payable to either related entities or entities not related to the taxpayer or, to both. The limitation does not apply to: banks, brokerage houses, investment funds and other regulated entities in the financial services market. The amount of costs not deducted in a given fiscal year is deductible in the consecutive five fiscal years, within the cap applicable in particular years.
iii Restrictions on payments
Tax rules do not prevent dividend payments, which are not restricted by corporate law provided that they are not paid from the company's net assets required to fully cover the par value of the share capital. Dividends may amount to the aggregated company's profits from the last accounting year and retained earnings from previous years. Dividend payments must, however, be decreased by losses, the equivalent of treasury shares and write-offs from the company's profits to reserve and supplemental capitals, as required by the articles of association or law.
If dividends are formally declared by a company, but not actually paid to shareholders, such dividends, as shareholders' funds deposited gratuitously with the company, may be a source of imputed income equal to interest on a hypothetical banking loan that otherwise would be taken by the company from a bank.
iv Return of capital
The equity capital may be repaid to the company's shareholders as a result of capital reduction or redemption of (almost) all or some of the shares in the company. In both cases it is tax-neutral for shareholders up to the amount of the share purchase costs; only a surplus is taxable. Whenever new shares were issued in exchange for an in-kind contribution, their purchase costs may not exceed the fair market value of the in-kind contribution. In any case, losses from the capital reduction or redemption of shares are not deductible.
VIII ACQUISITION STRUCTURES, RESTRUCTURING AND EXIT CHARGES
Most frequently, non-local companies acquire local businesses by virtue of acquisition of existing or new shares in a local corporation operating a business. In the former case, a purchase of shares is subject to capital tax (tax on civil law transactions) at a rate of 1 per cent. In the latter case, such tax is payable at a rate of 0.5 per cent by the local corporation. In addition, acquisition of new shares issued by the company in exchange for a cash contribution to the local corporation is frequently used to eliminate tax on capital gains that arises for sellers in cases of purchases of existing shares. In particular, sellers may reduce the share capital or redeem their existing shares in the corporation for a consideration to be paid by the corporation out of cash contributed for the new shares by the investor, instead of selling the existing shares to the non-local purchaser directly. In this case, the consideration for the sellers qualifies as dividend-like income that may be tax-exempt if the seller holds 10 per cent of shares in the corporation for an uninterrupted period of two years ending even after the redemption of old shares. Since 2011, the tax legislation has limited this solution to a reduction of the share capital and certain types of redemption of corporate shares; the transfer of shares to the company for the purposes of their redemption is excluded from this solution.
Acquisitions of shares in local corporations are frequently financed with intercompany or third-party loans, and often such acquisitions are followed by a merger (also cross-border) between the acquiring and target companies. According to existing tax rulings, interest paid on a banking loan extended for financing share purchase costs should not be capitalised and may be deducted on a current basis. Consequently, after the merger, interest on such loans may be deducted from the taxable profits of the target company's business.
Owing to attractive tax treatment, foreign and local investors also used Poland-based close-ended investment funds, qualified foreign-regulated mutual investment funds, and regulated investment companies from the EU and the EEA to acquire shares in local businesses. Although such funds or regulated companies may not conduct operational business activities directly, they may invest in real property, in shares issued by local and foreign companies and limited partnerships issuing shares, and in other securities. They were entirely exempt from Polish CIT on any local and foreign income. Therefore, if they invested in shares issued by a local or foreign partnership that is tax-transparent in Poland, no CIT was levied on profits derived through the partnership in proportion to interest held by such a fund in the partnership.
In 2014, Polish limited partnerships issuing shares ceased to be tax-transparent (with certain exceptions applicable until the end of October 2015) and become CIT taxpayers pursuant to new tax rules. Therefore, investment funds transfer investments from Polish limited partnerships issuing shares to other Polish partnerships in which they hold interest through other tax-transparent entities, including foreign partnerships (e.g., Luxembourg tax-transparent special limited partnerships or Dutch limited partnerships). However, from 2017, this general tax exemption of qualified foreign-regulated mutual investment funds was narrowed significantly, and their profits paid by local and foreign tax-transparent partnerships are excluded from this tax exemption (see Section II.i). In particular, interest, donations and profits paid to such investment funds by local and foreign tax-transparent partnerships and capital gains from transfers of securities issued by such partnerships are excluded from the tax exemption. In addition, the new tax exemption for qualified foreign-regulated collective investment funds from the EU and the EEA is limited to situations where Poland may claim an exchange of information from the tax authorities of the country of such fund pursuant to a pertinent DTT or other treaty.
Poland has implemented Council Directive 133/2009/EC of 19 October 2009 on the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States, and to the transfer of the registered office of an SE or SCE between Member States as regards both cross-border and domestic mergers, demergers and other corporate reorganisations determined in the Directive. Accordingly, pursuant to the CITL, a merger of companies from Poland or other EU Member States is tax-exempt for both the merging companies and their shareholders, except for upstream mergers when the acquiring company holds less than 10 per cent of voting rights in the target company. According to a tax ruling issued by the tax authorities, a cross-border downstream merger between a Polish acquiring subsidiary and its German target parent is tax-exempt under local tax rules even if the Polish acquiring subsidiary grants its treasury shares acquired upon merging to shareholders of the target company, instead of issuing and granting its new shares. The same exemptions apply to a company demerger, provided, however, that all assets and liabilities of the demerged company are divided into two or more parts, each representing a separate organised part of the enterprise. Otherwise, a demerger will be taxed as a sale of assets by the demerged company and a sale of shares by its shareholders.
The above tax exemptions apply assuming that the merger or demerger is pursued for justified business (non-tax) reasons, and where tax avoidance is not the main or one of the main merger drivers. Pursuant to the tax authorities, only statutory mergers of capital companies are tax-exempt; therefore, in the event of the merging of a local tax-transparent partnership into a capital company, shares acquired in exchange for the business of the merging partnership by a partner in such a partnership constitute taxable income of such partner.
If a company contributes in-kind a majority of shares in a company to another company in exchange for shares of the latter company, whether as a domestic or cross-border exchange, such an exchange of shares will be exempt from CIT (19 per cent) and capital tax (0.5 per cent) if all such companies are tax resident in Poland or other EU Member States. In addition, in-kind contributions of an organised part of an enterprise are exempt from corporate and capital taxes.
From 2011, an enterprise conducted by a natural person may also be transformed into a corporation in a tax-exempt manner. According to the tax authorities, the transformation of a corporate (capital) company into a local partnership is subject to CIT at a rate of 19 per cent on the retained profits of such company. On the other hand, the transformation of a local partnership into a corporate (capital) company is not subject to CIT.
However, the general tax succession applicable to the tax rights and obligations of the acquired company in cases of statutory company mergers and demergers does not cover protection arising from a tax ruling. According to a recent court judgment, nonetheless, a general tax successor may benefit from a tax ruling issued to an acquired company if the acquired company complied with such ruling before the merger.
A non-local investor may exit from a Polish corporate company by selling shares in such a company. Most DTTs executed by Poland exempt capital gains from such sale from Polish income tax, except for some treaties allowing for taxation if the company holds mainly real properties. Alternatively, the investor may redeem the shares for consideration that in certain cases may be considered dividend income that is tax-exempt or taxed at a lower treaty rate according to rules referred to in Section VI.i–iii. Pursuant to a judgment of the local court, in a case of a transfer of shares to a company against remuneration in order to redeem the shares, a shareholder who transfers the shares may deduct losses resulting from share purchase costs exceeding such remuneration.
Such an investor may also exit from Poland by relocating a Polish company, including an SE, to another EU Member State by way of a statutory merger with a company in such other EU Member State. The SE may also move its corporate seat between the EU Member States. Another Polish company would have to open a liquidation procedure if it decided to move its seat to another country.
In Poland, as of 2019, exit tax is levied at a rate of 19 per cent on unrealised income of entities that cease to be Polish tax resident or that relocate their assets from Poland to another jurisdiction, transfer them gratuitously to any entity or contribute their assets in-kind to an entity other than a corporation or a cooperative (about exit tax see also Section IV.i). Income from liquidation of a partnership is tax-exempt under local rules. Therefore, investors holding interests in a local partnership may liquidate it to exit from the partnership's business in a tax-neutral way.
IX ANTI-AVOIDANCE AND OTHER RELEVANT LEGISLATION
i General anti-avoidance
Anti-avoidance rules are very limited in Poland. Article 199a of the Polish Tax Ordinance sets forth the 'substance-over-form' principle. Under this regulation, the tax authorities may ignore tax effects of a given transaction if it is a cover for another transaction (legal act). In such case, the tax effects should be drawn from the hidden transaction. Whenever the intentions of transacting parties cast doubt, the tax authorities should refer to a civil court to judge the existence or non-existence of such a transaction. In principle, Article 199a may apply when a given transaction is executed or performed in an extraordinary manner to achieve tax benefits that would not normally be available if such a transaction were performed in a typical manner.11
From July 2016, Poland introduced a general anti-avoidance rule, according to which tax authorities may disregard tax benefits (e.g., reduction or postponement of tax obligations or an increase of tax losses) resulting from a transaction or series of transactions of a taxpayer if such transaction or transactions are completed in an 'artificial' manner mainly or solely for purposes of achieving those tax benefits. A transaction is completed in an 'artificial' manner if, for example, without reasonable business or economic reasons, it is divided into separate transactions, involves intermediaries or creates risks higher than non-tax business or economic benefits that could be expected from such transaction. This general anti-avoidance rule does not apply to VAT settlements or to transactions that are subject to other specific anti-avoidance rules (e.g., exchange of shares or cross-border payments of dividends). A taxpayer may apply for a tax clearance opinion confirming that a given transaction is not completed in the 'artificial' manner mainly or solely for purposes of achieving the tax benefits, and that the general anti-avoidance rule shall not apply to that transaction.
Simultaneously, Poland introduced a specific rule outside the above general anti-avoidance rule. According to this rule, the inbound and outbound dividend tax exemptions will not apply to dividends and other income from participation in corporate profits if they result from a transaction or series of transactions lacking business reasons and aimed solely or mainly at obtaining the tax exemption rather than at avoidance of double taxation of corporate profits. A similar specific rule applies to the tax exemption of exchanges of shares, where a majority of shares is contributed in-kind into the share capital of another company and all the companies are residents in the EU Member States or the EEA.
In addition, since 2018 the new legislation implemented Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market.
ii Controlled foreign corporations (CFCs)
Polish CFC rules apply both to corporate and personal income taxpayers shifting profits (i.e., in the form of royalties, dividends and other passive income) to a foreign company, other entity or PE located in jurisdictions with a lower income tax rate. In particular, a Polish CIT payer must incorporate income generated by its CFC (or its foreign PE) into its corporate tax base for a given year and tax it according to the Polish corporate income (personal income) tax law. A foreign entity is deemed a CFC when it is located in a tax jurisdiction applying harmful tax practices as listed by the Polish Ministry of Finance; it is located in a tax jurisdiction with which Poland has not concluded a DTT; or if the conditions referred to below are met jointly:
- a Polish entity, alone or with a related party, holds, directly or indirectly, at least 50 per cent of shares (voting rights) or other rights to participate in profits in the foreign entity or exercises actual control;
- at least 33 per cent of the foreign entity's income constitutes dividends, capital gains, royalties, income from derivatives, or from receivables, guarantees, surety, interest and income from banking, insurance or other financial services, or other income from related-parties transactions having no value added; and
- a foreign tax actually paid by the foreign entity (less any refundable foreign tax) is below 50 per cent of the Polish CIT that would be paid in Poland if the foreign entity were a tax resident of Poland.
Since 2019 the notion of a CFC has been broadened to also include any entity with or without the legal capacity, a foreign foundation, trust, any nominee relationship or direct or indirect representative. A foreign entity is not a CFC if it is a tax resident of a Member State in the EU or the EEA, and actually performing a substantial business activity in that state. In one of its judgments, the administrative court ruled out that taxable income of a Polish shareholder derived through a CFC entity may be reduced by dividends paid by such entity to the shareholder, regardless of when the company derived profits, out of which those dividends are paid out.
iii Transfer pricing
Transactions between related parties must be priced at arm's length. Parties are related, inter alia, where one party holds, directly or indirectly, at least 25 per cent of shares in the share capital of the other party, or the same persons are in the governing bodies of those entities. If, as a result of such relations between parties they agree conditions differing from those that would have been agreed by independent entities, and as a result a taxpayer does not show any income or shows income lower than would have been expected should those linkages not exist, taxable income or related costs may be reassessed, and the tax settlement of that entity may be challenged by the tax authorities. In such a situation, the tax authorities determine income on the basis of market prices of similar goods or services, or according to one of the following methods:
- the comparable uncontrolled price method;
- the resale price method;
- the reasonable margin (cost-plus) method; and
- the transaction profit method.
Note that taxpayers conducting transactions (including the execution of partnership deeds, joint-venture or similar agreements) with related entities, or if such transactions trigger payments to entities located in jurisdictions applying harmful tax practices (directly or indirectly), are required to maintain relevant tax documentation describing, inter alia, the functions of the parties, anticipated costs of the transaction, the method and manner of calculating profits and pricing, a business strategy and factors defining the value of the transaction. Taxpayers must present the documentation within seven days of any request of the tax authorities. Should the company fail to provide such documentation, the tax authorities may apply a 50 per cent tax rate to income reassessed by them.
According to the administrative court, the statutorily defined value of transactions that triggers local transfer pricing documentation obligations (€50,000) refers to the aggregated value of all transactions executed by a taxpayer in any given tax year, rather than separately to the value of each transaction.
From 18 July 2013, the scope of a transfer pricing tax audit has been broadened to include restructurings by related parties of their activities, where such restructuring is defined as a transfer between such parties of substantial economic functions, assets or risks.
From January 2017, CIT taxpayers' transfer pricing reporting obligations increase significantly, and the transfer pricing documentation must be more complex. In particular, for the biggest entities, benchmarking analysis for documented transactions and a 'masterfile' documenting a whole group of related taxpayers are required.
In general, the obligation to prepare transfer documentation follows the OECD's BEPS recommendations and arises for a Polish taxpayer having a transaction or other event with a related entity, when the accounting revenues of the taxpayer for the previous tax year according to its financial balance sheet exceeded €2 million and the value of the transaction or other event in one tax year exceeds €50,000.
In such a case, the taxpayer should prepare the local file including, in particular:
- a description of the transaction or other event, including financial data, related parties to the transaction and their functions, engaged assets and incurred risks, and methodology and manner of profit calculation with detailed pertinent justification;
- a detailed benchmarking analysis – only if the accounting revenues of the taxpayer for the previous tax year according to its financial balance exceeded €10 million;
- a description of the financial data of the taxpayer;
- information about the taxpayer, including organisation and management structure, subject and scope of business activities, a business strategy, and competitive environment; and
- documents, namely corporate agreements concluded between related entities and APAs.
Furthermore, if the accounting revenues of the taxpayer for the previous tax year according to its financial balance exceeded €20 million, the transfer pricing documentation must also include the master file.
The transfer pricing documentation should be prepared on an annual basis, and the taxpayer is required to confirm in its annual tax return (to be filed by the end of the third month following the given tax year) that all TP documentation is properly prepared.
iv Tax clearances and rulings
The Minister of Finance, ex officio or upon the request of taxpayers and other entities, issues general guidelines applicable to tax rules governing selected tax issues that in the opinion of the Minister require uniform interpretation. If particular cases require interpretation of the tax rules, an entity (taxpayer, withholding tax agent and certain other entities) interested in securing the certainty of such interpretation may also apply to selected heads of tax chambers, who (representing the Minister of Finance) issue individual tax rulings within three months (tax rulings regarding local taxes are issued by local government tax authorities). If a ruling is not issued within this period, the tax interpretation presented by the entity in its application will become valid for the tax authorities (a silent ruling), which allows taxpayers to avoid unjustified delays in settlements of tax issues in business activities.
An existing tax ruling may be changed by a new one; however, a taxpayer complying with an original tax ruling that is subsequently changed may not be liable to taxation contrary to the contents of the original tax ruling, and if tax referred to in the original ruling is settled periodically (monthly, quarterly or yearly), the taxpayer is exempt from such tax by the end of the tax settlement period during which the new tax ruling was served to the taxpayer, except for cases arising prior to serving the original tax ruling to this taxpayer.
Taxpayers dissatisfied with any private tax ruling may file a complaint with a district administrative court within 30 days, and subsequently with the NSA.
It is not allowed to apply for (or to issue) individual tax rulings pertaining to powers and duties of tax authorities, CFC rules, the general anti-avoidance rule or specific anti-avoidance rules. A taxpayer may apply for a tax clearance opinion confirming that a given transaction is not completed in an 'artificial' manner mainly or solely for purposes of achieving tax benefits, and that the general anti-avoidance rule shall not apply to that transaction (see Section IX.i).
X YEAR IN REVIEW
During 2018, investors continued to use regulated mutual investment funds from other EU or EEA Member States to acquire shares issued by partnerships and other companies, or to invest in other Polish securities directly. However, since 2017 the local general tax exemption of Poland and foreign-regulated investment funds was narrowed to income derived by Poland-based open-ended investment funds and qualified foreign-regulated collective investment funds from the EU and the EEA only. In turn, the CIT exemption of Poland-based close-ended investment funds and qualified foreign-regulated collective investment funds from the EU and the EEA operating upon a simple notice of initiation of investment activities, rather than upon a permit of the competent financial sector supervision authority, was narrowed with the exclusion of certain items of their income (in particular, interest, donations and profits paid by local and foreign tax-transparent partnerships, and capital gains from transfers of securities issued by such partnerships). Therefore, during 2018 investors conducted various restructuring of business assets, including shares in companies, securities and interest in partnerships held by such foreign investment funds in order to qualify for the new tax exemption.
CIT taxpayers' transfer pricing reporting obligations increased significantly, and transfer pricing documentation became more complex from 2018. In particular, for the largest entities, benchmarking analysis for documented transactions and a master file documenting a whole group of related taxpayers shall be required. Therefore, taxpayers concentrated on preparing pertinent documentation and other practices envisaged by those obligations during the year.
In turn, the administrative courts issued the following positive judgments:
- assembling cranes from parts manufactured by subcontractors in Poland and downloading software into cranes' digital devices by a Finland-based company on the territory of Poland on a permanent basis does not constitute a permanent establishment as such activity constitutes an auxiliary activity in the meaning of the Poland–Finland DTT;
- an upstream merger of a company that paid tax-exempt dividends to the surviving company before the merger does not deprive the target company of the dividend withholding tax exemption applicable under local rules implementing the EU Parent–Subsidiary Directive even if the merger occurs before the end of the two-year holding period set forth in these rules;
- profits of a CFC company from re-evaluation of its assets should not be taxable under CFC rules in Poland;
- services of agents intermediating sales of goods are not the intangible services that are subject to the cap of cost deductions at 5 per cent of EBIDTA and, therefore, costs of such intermediary services may be deducted without such limitation; and
- simultaneous contributions in-kind by several shareholders of (aggregated) majority of shares in a limited liability company in exchange for shares in the stated capital of another corporation constitute the tax-exempt exchange of shares under local rules and the EU Merger Directive even if each particular shareholder contribution does not encompass the majority of such shares.
In 2018, the tax authorities continued their policy regarding local taxation in several important matters. In particular, the Minister of Finance aimed to increase tax collections and declared the intention to fight against avoidance of taxation according to its general warning letters regarding certain transactions that may be considered as aggressive tax optimisation falling under the general anti-avoidance rule, for example, acquisition of shares in Polish companies by an investor from non-Treaty country outside the EU and the EEA via a subsidiary company from the EU or the EEA in order to exempt dividends paid by Polish companies from Polish withholding taxation pursuant to the EU Parent–Subsidiary Directive; shifting taxable income to non-Polish companies that are actually managed in Poland and should tax their total income in Poland; transferring IP assets to an SPV, which increases assets' depreciation basis and licenses them to related companies; shifting taxable profits by local companies via payments of interest on bonds issued to tax-exempt Polish regulated investment funds; and other warning letters. In turn, local tax authorities issued general and individual tax rulings confirming the following:
- local mortgage banks are not obliged to withhold tax on cross-border interest payments to non-resident corporate holders of mortgage bonds;
- compensations paid by an insurance company to a bank on the basis of an insurance policy assigned by a CIT payer to that bank, as collateral security for a loan extended by the bank to the CIT payer, constitute taxable income of that CIT payer as such payments reduce loan liabilities of the CIT payer; and
- in a case of sale by a company of shares contributed in-kind to its stated capital, the company may deduct costs equal to par value of shares issued by it in exchange for shares contributed.
XI OUTLOOK AND CONCLUSIONS
From 2019, a number of amendments to the CITL will enter into force, including the following.
The new legislation implements Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market. According to the new rules, taxpayers, including local branches of foreign enterprises, will be obliged to pay exit tax levied at a rate of 19 per cent on unrealised income if they relocate their assets from Poland to another jurisdiction, transfer them gratuitously to any entity or contribute their assets in-kind to an entity other than a corporation or a cooperative or if Polish CIT payers cease to be Polish tax residents (on exit tax see Section IV.i).
The new legislation also governs other tax issues, including:
- broadening the scope of CFC rules in relation to foreign private foundations, trusts and similar entities;
- implementing the Innovation Box, which sets forth the 5 per cent CIT rate on certain items of income (e.g., licence fees and sale proceeds) from the qualifying IP rights comprising: patents, utility model protection, an industrial design, rights to topography of an integrated circuit, additional rights to patent for a medical product or a plant health product, rights to new varieties of plants and breeds of animals, and copyrights to software;
- narrowing DTTs' rates and local withholding tax exemptions to cross-border royalties, interest, dividends and payments for intangible services not exceeding 2 million zlotys and introducing a refund by the tax authorities of withholding tax collected from payments exceeding 2 million zlotys;
- specific CIT rules on gains from sales of cryptocurrencies;
- narrowing deductions of purchase costs of receivables to proceeds from the receivables' principal amounts;
- exempting from withholding tax interest from bonds admitted to transactions on regulated markets in Poland or other DTT's countries; and
- mandatory disclosure of certain domestic and cross-border transactions that may qualify as aiming at avoidance of taxation.
1 Jarosław Bieroński is a partner at Sołtysiński Kawecki & Szlęzak.
2 Including Council Directive 2009/133/EC of 19 October 2009 on the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States, and to the transfer of the registered office of a European company (SE) or European cooperative society (SCE) between Member States; Council Directive 90/435/EEC on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States; and Council Directive 2003/49/EC on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States.
3 For example, export and intra-Community supplies of goods, sea and air transportation, international transportation and related services.
4 For example, some groceries, fertilisers and healthcare products; sport, recreation and culture events; some services in agriculture and forestry; and construction services related to the development of public residential buildings and apartments.
5 For example, farming activities.
6 For example, printed books and specialist journals, some groceries and ready-made meals.
7 For example, taxi or cab transportation.
8 In principle, steel pipes for fuel and gas pipelines, fuels (except for fuels purchased at petrol stations) and gold (including gold sand and gold self-products).
9 For example, HR management, accounting and tax services, risk management, hedging, netting and certain other services.
10 From 2018, the new legislation implemented Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market to the extent of the Directive's restrictions pertaining of deductions of financial expenses and CFC rules.
11 As confirmed by the verdict of the NSA of 18 November 2009 No. I FSK 1133/08.