In general, businesses in Poland tend to adopt a corporate form. This tendency is mostly driven by such factors as the size of the business activity and the desire to limit liability. The Polish legal system features two types of corporate forms, namely limited liability companies and joint-stock companies; as of 1 March 2020 another corporate form will come into play, a simplified joint-stock company as a hybrid between the two currently existing forms. Both forms offer limited liability for their shareholders.
The limited liability company is most frequently used for doing business in Poland due to its relative simplicity in terms of corporate governance and compliance obligations. Shares issued by a limited liability company are not deemed securities; as a result, such a company cannot be listed on a stock exchange. Conversely, the dematerialised shares of a joint-stock company can be floated on a stock exchange.
Joint-stock companies also feature 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.
Both forms are taxed as separate legal entities. This will also be the case for a simplified joint-stock company once it becomes available.
Local and foreign investors may conduct business activities through a partnership. In general, this may take one of the following forms: a 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 used to be popular when they were transparent entities and were used mostly by real estate investors. However, this is no longer the case, since they are now taxed as separate legal entities and are rarely used. 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. Private equity and hedge funds rarely adopt any of the transparent forms and gravitate towards corporate forms or different forms of investment funds.
Incorporated businesses, which have their corporate seat or their place of effective management in Poland, are deemed Polish tax residents. To determine the place of effective management, it is necessary to establish where important management decisions of the company are taken and prepared. Most double tax treaties concluded by Poland determine residence using the effective place of management as a tie-breaker rule.
Transparent entities are disregarded for income tax purposes; as a consequence, there is no need to determine their tax residence and no such rules exist.
Corporate income tax (CIT) is chargeable at the rate of 19% or, with respect to small taxpayers, at the rate of 9%. In addition, outbound dividends are subject to local withholding tax at the rate of 19%, and outbound royalty and interest payments paid to non-residents are subject to local withholding tax at the rate of 20%, unless a pertinent double taxation treaty (DTT) sets out a lower rate. There is no proposed legislation aimed at changing CIT rates after 2019.
As a general rule, individuals conducting business directly or through transparent entities are subject to progressive taxation, with rates of 17% and 32%. However, it is also possible to choose taxation at the 19% flat rate.
Income generated through the exploitation of intellectual property (IP) rights may be taxed at 5% subject to certain additional conditions and formal requirements (the so-called "Innovation Box" or "IP Box" tax regime).
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 (with the significant exception of interest). Expenses incurred to derive taxable income are deductible unless they are expressly listed in the Polish CIT Act as non-deductible costs.
The Innovation (IP) Box
On 1 January 2019, the Innovation (IP) Box, a new tax incentive scheme, came into force in Poland. The Innovation Box incentive includes a preferential tax rate of 5% (applicable to both corporate and personal income tax) on qualified intellectual property (IP) income, where the taxpayer is deemed to be an owner, co-owner, or user of IP rights under a licence agreement. The 5% rate is applied only to qualified intellectual property rights that have been created, developed, or improved by the taxpayer. The intellectual property rights which qualify for the Innovation Box tax incentive cover, for example, patent rights, protection rights for utility models and rights to computer software.
R&D Tax Relief
As from 2016, both corporate income tax (CIT) and personal income tax (PIT) taxpayers may make additional deduction of eligible costs incurred for research and development activities (R&D) from the tax base. Starting from 2018, the attractiveness of the R&D tax relief increased since the deduction level has been raised to 100% of eligible costs incurred – and even 150% of costs incurred by certain types of taxpayers that possess the status of research and development centres.
State aid is provided to investors in the form of the exemption from the personal and corporate income taxes for the implementation of a new eligible investment.
Since 30 June 2018, income tax exemptions are available for eligible investments located anywhere in Poland and the investment does not have to be located in the area covered by the special economic zone status. Tax exemptions are granted upon the administrative decision of the respective Minister for the period of ten to 15 years.
To be eligible for this state aid, each new investment has to satisfy quantitative and qualitative criteria.
Where costs of ordinary income exceed total taxable ordinary income, in a given tax year, the difference represents a tax loss.
The taxpayer has the opportunity to deduct such a loss. The provisions provide that the loss may be carried forward against ordinary income derived in the following five consecutive tax years. However, in any of those five years, the loss from a given year may be deducted in part not exceeding 50% of that loss. Alternatively, a tax loss not exceeding PLN5 million may be set off against the profits of one year; no deducted amount may be carried forward to the remaining five years, but it may not exceed 50% of the loss per year.
It is not possible to carry losses back, offsetting them against prior year income. Tax losses are linked to the legal entity that incurred them.
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 vice versa.
Interest is deductible when it is 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 tax authorities. The deductibility of interest is expressly excluded in debt push-down structures, where a special purpose vehicle (SPV) that incurred debt to acquire an operating company is subsequently merged with the latter to reduce operating income by interest on the incurred debt.
From 2018, CIT taxpayers, including local branches of foreign enterprises, are obliged 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% of their earnings before interest, tax, depreciation and amortisation (EBITDA) in a given fiscal year. The limitation of tax-deductible costs also refers to costs of financing payable to both related and unrelated entities. 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. This interest-limitation rule features a safe harbour of PLN3 million.
Poland provides for a tax consolidation regime, known as a "tax capital group".
Taxable income for the group is calculated by combining the incomes and losses of all the companies forming the group.
A tax capital group under the Polish CIT Act may be formed only by limited liability companies and joint-stock companies based in Poland and under certain conditions. Some of the requirements for establishing a capital group are as follows:
There is no separate capital gains tax in Poland as it forms part of the general CIT regime. However, certain capital gains from the 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.
Capital gains are generally treated as regular income and are subject to the standard 19% CIT. Exemptions may apply under double tax treaties.
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 the 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 it is VAT-exempt.
Civil law transaction tax rates are either fixed or ad valorem. The ad valorem rates vary from 0.5% to 2% depending on the type of civil law transaction.
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 declared capital of a local capital company, as well as to mergers or transformations of such local capital companies.
Apart from general corporate income tax, incorporated businesses may be subject to the following notable taxes.
Polish regulations on value added tax (VAT) are based on EU legislation. It means that the principles of VAT taxation in Poland are in many cases the same as in other EU member states.
The basic VAT rate applicable to most goods and services is 23%.
The rate of 8% applies to pharmaceuticals and medical products, most foodstuffs, restaurants and hotel services, magazines and newspapers as well as transportation services and residential housing.
The rate of 5% applies to supplies of certain foodstuffs (eg, bread, dairy products, meats) and certain kinds of printed books.
A zero VAT rate applies to the intra-Community supply of goods, exports of goods, some international transportation services and related services.
Similarly, as with VAT, excise tax 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:
Excise tax is calculated either as a percentage of the value of the taxable goods (or their customs duty value) or as a flat fee per quantity basis (fee per unit).
Tax on Civil Law Transactions
For more information, please refer to 2.8 Other Taxes Payable by an Incorporated Business.
Real Estate Tax and Other Local Taxes
Local taxes include:
Autonomous local 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: PLN23.47 per square metre for buildings connected with business; and PLN0.93 per square metre of land. In addition to statutorily defined exemptions, local 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.
Tax on Certain Financial Institutions
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 PLN4 billion for banks and PLN2 billion for insurance companies. 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% monthly.
Other, less notable, taxes include:
Most closely held local businesses operate in Poland either as limited liability companies (spółka z ograniczoną odpowiedzialnością) or sole proprietorships (jednoosobowa działalność gospodarcza). Partnerships are popular forms among professionals such as lawyers, auditors and business consultants.
In Poland, individual professionals (eg, architects, engineers, consultants, accountants) working under employment contracts or civil law contracts are subject to personal income tax, calculated, as a rule, according to a progressive tax scale which is 17% and 32%.
Individual professionals conducting business activity are also taxed according to the tax scale. However, such individuals may elect the 19% flat-rate personal income tax, taking into account restrictions on services for former/current employers and an exclusion of management services from that rate. Engineers and other professionals whose work involves the creation of IP rights can also benefit from the IP Box regime, thus being subject to 5% tax on the income derived from certain IP rights.
Except for attorneys-at-law, advocates and certain other legal professionals, other professionals may conduct their activity through a limited liability company, thereby being subject to the general rules of Polish corporate income taxation.
There are no rules which could prevent closely held corporations from accumulating earnings for investment purposes, especially since there is no wealth tax in Poland.
Dividends payable to individuals are subject to withholding tax at the rate of 19%. Double tax treaties may stipulate a lower rate or a tax exemption.
Income on the sale of shares is subject to 19% personal income taxation.
No participation exemptions apply.
As with the case of closely held corporations, dividends payable to individuals are subject to withholding tax at the rate of 19%. Double tax treaties may stipulate a lower rate.
Income on the sale of shares by an individual is subject to 19% personal income taxation.
No participation exemptions apply.
In the absence of income tax treaties, withholding tax applies at the rate of 19% to dividends and at the rate of 20% to interest and royalties.
Payments of dividends are exempt from corporate withholding taxation provided that:
Payments of interest and royalties are exempt from withholding taxation as long as:
Both the above-mentioned exemptions may not apply if they stem from a transaction lacking business reasons and aimed solely or mainly at obtaining a tax benefit.
As of 2019, Poland has introduced new compliance rules for the collection of withholding taxes on payments of dividends, interest, royalties and intangible services. The new rules provide for some restrictions that impact the application of exemptions and reduced rates to payments of withholding tax (WHT), including:
In general, Poland has an extensive double tax treaty network with, in total, more than 90 countries reducing or eliminating withholding taxes.
The primary tax treaty countries used to make investments in local corporate stock or debt are, inter alia, Luxembourg, the Netherlands, Sweden, Switzerland, Ireland, Cyprus or Malta. This is mostly due to relatively low domestic corporate taxation in these countries, participation exemptions provided in the domestic tax systems of these countries or in the double tax treaties between Poland and the countries in question.
The Ministry of Finance has identified cases of abuse of tax exemption for dividends by distributing dividends through intermediary companies. In this regard, the Minister of Finance has issued a general warning letter concerning the acquisition of shares in Polish companies by an investor from a 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. Such exempt dividends are further being exempt under double tax treaties concluded by intermediary countries and benefit from preferential tax treatment in the non-treaty countries. The purpose of the letter is to draw the attention of subordinate tax offices to the risk of tax avoidance and to challenge these harmful practices.
The biggest transfer pricing (TP) issues presented for inbound investors operating through a local corporation are:
The Polish tax authorities are increasingly interested in scrutinising local and cross-border transfer pricing issues, with more emphasis being placed on the verification of the arm’s-length pricing in transactions between related parties. Tax officers may audit limited risk distribution (LRD) arrangements for the sale of goods or provision of services locally, especially when such arrangements do not correspond to the functional profile of the local distributor.
LRDs should reflect the economic reality, so if the local company is a fully-fledged distributor, tax authorities may challenge such arrangements. Therefore, it is essential to gather evidence confirming the real functions performed by the distributor. Nonetheless, there exists no general fiscal approach or fiscal policy of local tax authorities aimed at challenging the use of related party limited risk distribution arrangements for the sale of goods or provision of services locally.
Since 2016, the Polish government’s tax policy, including transfer pricing rules, conforms with current global trends and it is focused on closing any remaining loopholes in the Polish tax system by changing the existing provisions and introducing various regulations, such as exit tax, or other measures – for example, more stringent controlled foreign corporation (CFC) rules, new transfer pricing documentation requirements or reporting tax schemes (under the Mandatory Disclosure Regime, MDR). These measures are taken to prevent base erosion and profit shifting, aggressive tax optimisation, indirect tax fraud and tax leakage caused by all the above.
The effect of non-recognition of a transfer price between related parties is the primary adjustment, which leads to an increase in the tax income of the entity whose transfer pricing has been adjusted. In such cases, a compensating adjustment would be allowed, at the level of the counterparty of the adjusted transaction, reducing its tax income. Such adjustments are not made automatically, which leads to at least temporary double taxation of profits. However, it is general practice that a compensating adjustment will be made to eliminate double taxation, when a mutual agreement is reached with the counterparty country following an application for a mutual agreement procedure. Moreover, Poland has recently implemented EU Directive 2017/1852, which provides for the shortening of the Mutual Agreement Procedure (MAP).
The non-local corporation is a taxpayer on income received by its branch in Poland. Tax is levied on the income attributable to the activities of the local branch; proper formulas should be applied to make the cost/revenue allocation. Such income may be also taxed in the country of which the non-local corporation is a tax resident; however, taxation on that level is usually eliminated on the basis of applicable double tax treaties.
In turn, subsidiaries of non-local corporations established in Poland are subject to taxation in Poland on their worldwide income. This income is not taxable at the level of the non-local corporation.
Under Polish income tax regulations, capital gains on the sale of stock in a corporation are taxable in Poland provided that at least 50% of the assets of the local corporation consist of real estate located in the territory of Poland or of the right to such real estate. The said provisions apply irrespective of whether the real estate or the right to such real estate is held directly or indirectly by the entity whose shares are being sold. Thus, if an investor sells shares in a non-local holding, which in turn owns stock in a local corporation whose assets consist mostly of real estate, such a transaction is deemed taxable in Poland. Also, the sale of shares in a local corporation allowed to be publicly treated on a regulated stock exchange by a non-resident is a taxable event. Conversely, if a non-resident sells the shares of a non-local holding company owning shares of a listed company, such a transaction should generally not be taxable in Poland.
The above-mentioned provision may be modified by applicable double tax treaties concluded by Poland, which, in general, provide for capital gains taxation only in the residence country, unless there is a real estate clause in a given double tax treaty.
The change of control, including the disposal of an indirect holding much higher up in the overseas group, may result in tax duties in Poland if the assets of the holding consist mainly of real property in Poland; for more information please refer to 5.3 Capital Gains of Non-residents.
A change of control encompassing the sale of stock in a local corporation results in taxation of 1% transfer tax levied on the market value of disposed shares, with the exception of sales of shares on the regulated stock market via local licensed intermediary companies. There is no transfer tax if the change of control encompasses the sale of shares in a non-local corporation, unless a buyer is a local entity and a share sale agreement is signed in Poland.
There are no specific formulas used to determine the income of foreign-owned local affiliates selling goods or providing services.
In principle, any cost of the local affiliate is tax deductible under the condition that:
If a local affiliate pays management and administrative fees to a non-local affiliate, such payments are particularly prone to scrutiny of tax authorities. Tax authorities in such cases tend to verify most closely if management and administration services were actually performed (ie, are not fictitious), whether they were performed to the benefit of a local affiliate and whether the fees paid were at arm’s length.
In addition, under the Polish Corporate Income Tax Act, tax deductibility of expenses incurred to purchase certain intangible services (including, inter alia, management services) from related entities (within the meaning of transfer pricing rules) is limited. Under the limitation rule, expenses incurred for such services, which exceed in a given tax year 5% of tax EBIDTA and PLN3 million combined, are not tax-deductible.
There are several constraints that should be taken into consideration for related party borrowing, namely:
Domestic tax law does not provide for a general exemption of foreign income. Foreign income of corporate taxpayers is subject to 19% (or 9%) CIT 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% rate applies to small taxpayers, with the exception of new taxpayers created via the restructuring of existing businesses; this rate does not apply to capital gains.
However, Polish companies receiving foreign (inbound) income in Poland may credit against Polish CIT taxes withheld in the country of source. Such credit may not exceed the Polish income tax on the same income.
Foreign income of local corporations is exempt from corporate tax in Poland if such exemption is expressly provided for in an applicable double tax treaty.
As a general rule, to determine taxable income, the taxpayer should group tax expenses into (i) costs related to the taxable income and (ii) expenses related to non-taxable (exempt) income. The latter are non-deductible.
However, where a taxpayer incurs tax deductible expenses to earn revenue from sources generating income subject to income taxation and expenses related to revenue from sources generating income not subject to income tax or exempt from income tax, and where it is not possible to classify expenses under their respective revenue sources, such expenses shall be deductible pro rata to the ratio of the revenue earned from the former sources to the total amount of revenue in a given year.
As a general rule, inbound dividends are included in the general CIT base and taxed accordingly at 19%. However, 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) 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 Polish inbound dividend tax exemption.
This dividend tax exemption may not apply to dividends and other income from participation in corporate profits if they result from a transaction or a series of transactions lacking business reasons and aimed solely or mainly at obtaining tax exemption rather than avoiding double taxation of corporate profits.
Any inbound dividend 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 a credit, however, may not exceed the Polish income tax on the same income.
Intangibles developed by local corporations and used by foreign subsidiaries in their business activity are not subject to corporate income tax in Poland for the foreign subsidiaries.
From the perspective of local corporations, licence fees for the use of intangibles paid by foreign subsidiaries are subject to 19% CIT in Poland. However, local corporations may credit taxes withheld in the country of the foreign subsidiary against Polish CIT resulting from received licence fees. This credit may not exceed the Polish income tax due on such fees.
Polish CFC rules apply both to corporate and personal income taxpayers shifting profits (ie, in the form of royalties, dividends and other passive income) to a foreign company, other entity or permanent establishment (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 Polish Corporate Income (personal income) Tax Law.
Since 2019, the notion of a CFC has been broadened to also include any entity with or without 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 performs substantial business activity in that state.
There are no explicit requirements related to the substance of non-local affiliates. However, substance is of importance for outbound payments subject to WHT in Poland and in case of CFC taxation. In the former case, benefiting from a WHT exemption or reduced tax rate (either as a relief at source or as a tax refund) is essentially only possible if a receiving entity runs "actual business operations" in its country of residence. The term is a Polish equivalent of "business substance" since the Polish CIT Act features an open catalogue of exemplary substance requirements that, if present, demonstrate that actual business operations are conducted (eg, premises, qualified personnel, equipment, business justification). In the latter case, there is no CFC taxation if a foreign entity runs actual business operations in its country of residence, provided that such operations are "substantial".
There are no substance rules that would relate to situations where local corporations receive payments from non-local affiliates.
According to the general rule provided for in the CIT Act, companies that are Polish tax residents are taxed on their entire income regardless of where it is earned. This means that the income of a Polish taxpayer from the sale of shares in a Polish or foreign company is, in principle, taxed in Poland. Double tax treaties may provide for different taxation, particularly if they feature the real estate clause.
In July 2016, Poland introduced a general anti-avoidance rule, according to which, tax authorities may disregard tax benefits resulting from a transaction or a 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, there are no reasonable business or economic rationale behind the transaction. This general anti-avoidance rule does not apply to VAT settlements. 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 the purposes of achieving tax benefits, and that the general anti-avoidance rule does not apply to that transaction.
The Polish tax authorities do not carry out audits in a regular routine cycle.
Poland has already implemented various Organisation for Economic Co-operation and Development (OECD) base erosion and profit shifting (BEPS) recommendations, such as:
On 7 June 2017, Poland signed the Multilateral Instrument to Modify Bilateral Tax Treaties (MLI Convention), as stipulated in BEPS Action 15, which entered into force in Poland on 1 July 2018.
From 1 January 2019, the MLI Convention is applicable to withholding taxes in respect of double tax treaties with Austria, Australia, France, Israel, Japan, Lithuania, New Zealand, Serbia, Slovakia, Slovenia and the UK.
As for other taxes (including taxes on income from employment), since 1 January 2019, the MLI Convention is only applicable for double tax treaties with Austria and Slovenia.
Since 2016, the Polish government’s tax policy conforms with current global trends and is focused on closing the remaining loopholes in Polish tax system by changing the existing provisions and introducing various regulations, such as exit tax, or other measures – for example, more stringent controlled foreign corporation (CFC) rules, new transfer pricing documentation requirements or mandatory disclosure rules (MDR). These measures are taken to prevent base erosion and profit shifting, aggressive tax optimisation, indirect tax fraud and tax leakage.
The Polish tax administration is more focused on TP issues than in the past by challenging the arm’s-length character of the transaction. Furthermore, large multinational corporations are under scrutiny of the Polish tax authorities since they are believed to be involved in aggressive tax planning schemes. The BEPS project does have a substantial impact on the Polish government’s tax policies.
International tax is very important in transactions which trigger various issues with international tax aspects, in public debate and in actual legislation that is being enacted. This is due to the fact that not only customers but also Polish tax authorities are becoming more focused on closing the loopholes in income taxation, and they are aware that the bulk of base erosion and profit shifting takes place across borders. As part of this strategy, during the period from 2012 to 2015, Poland concluded seven new double tax treaties, eight protocols amending double tax conventions and 15 agreements on the exchange of information on tax matters. Additionally, in 2017, Poland signed the MLI Convention.
Apart from a relatively low corporate income tax rate, Polish corporate taxation is not particularly competitive as compared to such jurisdictions as Luxembourg or the Netherlands. It is in line both with EU and OECD standards and already features most BEPS developments. Nonetheless, it offers taxpayers certain favourable preferences, such as the Innovation (IP) Box, R&D relief or notional interest deduction, but those should not be compromised by further implementation of anti-avoidance measures.
The Polish tax system does not have any competitive features that would differ from the standard of other OECD jurisdictions. Poland has relatively low tax rates (9% CIT for the smallest taxpayers and 19% CIT for others), nonetheless, the CIT rate is outside the scope of BEPS regulations.
In November 2019, a new draft law concerning, inter alia, hybrid instruments was published. The primary objective of the proposed law is to continue the process of the implementation of the EU Anti Tax Avoidance Directive (ATAD 2).
This draft law proposes to introduce to the Polish CIT Act measures that prevent companies from artificially shifting profits to minimise the effective tax rate through making use of discrepancies between different tax jurisdictions in the assessment of the same category of payment.
According to the explanatory memorandum accompanying the draft law, the proposed regulations will substantially contribute to the elimination of hybrid mismatches. The key objective of the proposed changes is to counter double deductions or a deduction without inclusion.
Taxpayers with 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.
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.
From 2018, CIT taxpayers, including local branches of foreign enterprises, are obliged 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% of their EBITDA in a given fiscal year. 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 parts 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.
The limitation of tax-deductible costs refers to costs of financing, irrespective of whether they are payable to related entities or unrelated entities. 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 specific years.
The interest-limitation rule in place may encourage investors to rethink their financing structures, which may eventually result in the greater importance of equity financing.
Until 2019, in essence, only corporations could qualify as CFCs. Polish entities with a sufficient percentage of shares in a CFC had to increase their taxable base by income earned by the CFC and tax it at 19%. However, they were entitled to reduce their taxable CFC basis by dividends paid out by the CFC (as long as they were not tax-exempt) and by capital gains from sales of shares in that CFC in order to prevent double taxation.
Since 2019, the notion of a CFC has been broadened to also include any entity with or without legal capacity, a foreign foundation, trust, any nominee relationship or direct or indirect representative. Yet, it is still the case that only dividends may be deducted from the taxable CFC basis, due to which, payments received from foreign foundations or trusts that do not qualify for dividends are taxed twice. This is a major defect of current CFC rules.
The introduction of CFC rules to the Polish tax system revolutionised international tax planning. The Polish legislator’s aim was to tax income derived by Polish tax residents from foreign companies when the income is not taxed in the company’s country of residence or the tax is too low.
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 performs substantial business activity in that state. Foreign entities which are tax residents of other countries may be considered CFCs despite performing substantial business activity.
Poland ratified the MLI Convention, due to which a general PPT clause has already been or eventually will be introduced to all agreements covered. In addition, Poland does not preclude the possibility of introducing the limitation of benefits (LOB) clause through bilateral negotiation to those DTTs that currently lack it. Some of the DTTs to which Poland is a party already feature the LOB clause but its practical application has been limited thus far.
It is hard to predict if the principal purpose test (PPT) and the LOB clauses are likely to impact investors in the future. It seems that the Polish tax authorities still have a long way to go to learn how to effectively harness international anti-avoidance rules as a weapon in the fight against aggressive tax planning. So far, they are more focused on exploiting domestic anti-avoidance rules, with the general anti-abuse rule (GAAR) serving as a prime example.
Cross-border transactions within an international group are targeted by the Polish tax authorities with respect to transfer pricing compliance.
Taxpayers conducting transactions (including the transfer of intangible assets) with related entities, or transactions involving 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, the 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.
The Polish transfer pricing rules generally follow the OECD guidelines. 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 are required.
On 1 January 2019, Poland introduced significant changes to its transfer pricing (TP) regulations. From that moment, transfer pricing documentation is generally not applicable to domestic transactions (with certain exceptions). Transfer pricing documentation must be prepared for related party transactions exceeding the following thresholds in a tax year:
The changes were adopted in order to achieve a high level of transparency of related party transactions (eg, intellectual property as a subject matter of the transaction).
Transactions between related parties involving intellectual property are the source of particular concern of the tax authorities with respect to their conformity to the arm’s-length principle.
The regulations concerning country-by-country reporting were introduced in Poland in 2015 and were amended a number of times afterwards. In 2017, Poland adopted the Act on the Automatic Exchange of Tax Information with Other Countries.
Country-by-country reporting provides the tax authorities with a fair view of operations performed by multinationals and helps identify possible areas of aggressive tax planning through the use of strategic cross-border transfer pricing policies. The automatic exchange of tax information aims at combatting tax evasion and profit shifting to offshore companies. While both measures create a certain additional compliance burden for the taxpayers, it seems that the burden is justified by the objectives the measures try to achieve – ie, greater transparency and tax fairness.
At the beginning of March 2019, the Prime Minister's office announced that next year’s Polish budget would include revenue from the introduction of a digital tax. Furthermore, the Official Polish Financial Plan for 2019-22 also foresaw the introduction of the digital tax. The tax was planned to come into force from 1 January 2020. However, at the end of August 2019, the Polish government announced a draft budget for 2020, which did not include a digital tax.
Later in 2019, the Polish government declared that the idea of adopting a digital tax had been suspended until new rules on taxation in the digital economy were proposed at EU and OECD forums. The Polish Prime Minister confirmed that the Polish government would implement a harmonised digital tax that would apply across the EU.
Poland has suspended its work on digital taxation as the Polish government is waiting for EU and OECD initiatives to be finalised. No official proposals of how the tax should work have ever been presented.
As a general rule, royalties paid to non-residents are subject to 20% withholding tax in Poland. The local royalty withholding taxation may be reduced or even eliminated if so stipulated by a relevant DTT.
Poland has implemented Council Directive 2003/49/EC on a common system of taxation applicable to royalty payments made between associated companies of different member states. In particular, payments of outbound royalties are exempt from withholding taxation if certain conditions are met.
The aforementioned withholding tax exemption of outbound royalties is limited to recipients from the EU, the EEA and Switzerland. Payments to other countries (including tax havens) do not qualify for the exemption.
Royalty payments made to entities from countries perceived as tax havens which have not concluded a double tax treaty with Poland are subject to the general 20% WHT rate.
With regard to the taxation of offshore IP, the Polish CFC rules may be applicable. This may take place when the intellectual property is assigned to a controlled entity in a low tax jurisdiction and income arising from the exploitation of the intellectual property in Poland is transferred to the jurisdiction in the form of royalty payments.
Thus far, Poland has been an early adopter of BEPS measures. This trend should continue in the coming years, especially since the government’s efforts are slowly but gradually shifting from closing the VAT gap to combatting the avoidance of corporate tax.
Tax Highlights of 2019
In 2019, for the first time, investors and local taxpayers fell under the scope of new Mandatory Disclosure Rules in Poland, according to Polish legislation implementing the DAC 6 EU directive, and had to report certain transactions to the Head of Tax Administration. Therefore, foreign and local investors and local payers of corporate income tax (CIT) implemented internal procedures for mandatory disclosure of certain domestic and cross-border transactions that may qualify as aiming at avoidance of taxation. Investors also 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.
In 2017, 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 2019 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.
In 2019 the notion of a controlled foreign corporation (CFC) has been broadened to also include any entity with or without 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 is 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.
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:
The exit tax applies at a rate of 19% 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.
CIT taxpayers’ transfer pricing reporting obligations increased significantly, and transfer pricing documentation became more complex from 2018. For the largest entities, benchmarking analysis for documented transactions and a master file documenting a whole group of related taxpayers are required. Simultaneously, a number of tax audits aimed at scrutinising by the tax authorities of taxpayers' transfer pricing reporting and tax settlements taxpayers increased visibly. Therefore, taxpayers concentrated on preparing pertinent documentation and other practices envisaged by those obligations during 2019.
In turn, the administrative courts issued the following positive judgments:
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% of their earnings before interest, tax, depreciation and amortisation (EBITDA) in a given fiscal year.
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.
In 2019, 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: transferring IP assets to a special purpose vehicle (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. Consequently, a number of tax audits and tax disputes in cases relating to such transactions increased significantly.
Since 2019, new rules introduced a general principle of due care which requires withholding tax agents to scrutinise and document if DTTs' or domestic conditions for application of DTTs’ withholding tax rates and local withholding tax exemptions are satisfied with respect to cross-border royalties, interest, dividends and payments for intangible services. As a result, there arose many doubts and discussions between foreign recipients of such payments if such conditions are met. In many cases, cross-border payments were postponed significantly (even by one year) until the conditions can be scrutinised and documented properly.
In turn, local tax authorities issued general and individual tax rulings confirming the following:
Tax authorities also issued many rulings broadening the scope of prohibited deductions of costs spent for management, advisory, marketing and other intangible services rendered between related parties, where expenses paid for such services should be excluded from tax-deductible costs to the extent such expenses exceed 5% of a CIT taxpayer's EBITDA.
New Developments in 2020
From 2020, 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 deny deductions of expenses or tax exemptions or other tax incentives relating to income if such expenses or income results from using hybrid (debt and equity) instruments – ie, instruments qualified differently for taxation in countries of a recipient and an issuer of such instrument.
The new legislation also governs other tax issues, including: