In general, businesses in Poland tend to adopt a corporate form. This tendency is mostly driven by factors such 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 July 2021, another corporate form will come into play, a simplified joint-stock company as a hybrid between the two 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, 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. Their 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:
General and limited partnerships have been the most commonly used. However, this may no longer be the case as since 1 January 2021 limited partnerships are separate taxable entities (with some tax credit reliefs for general partners). Limited partnerships issuing shares also used to be popular when they were transparent entities and were used mostly by real estate investors. However, this is also 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 and 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 that 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 of the 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, 9%. In addition, outbound dividends are subject to local withholding tax at the rate of 19%, and outbound royalty and interest payments 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 2020.
As a 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 "Innovation Box" or "IP Box" tax regime).
On 1 January 2021, Poland introduced so-called Estonian CIT. Taxpayers who meet certain conditions will only pay CIT once they decide to distribute profits. The tax rates in this regime vary from 10 to 25%. The conditions for applying the Estonian CIT regime are quite strict, therefore it is difficult to assess whether it will become a popular tool among CIT payers.
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 the 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 CIT and personal income tax, or PIT) on qualified 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 IP rights that have been created, developed or improved by the taxpayer. The intellectual property rights that 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
Both CIT and PIT payers may make an 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 an exemption from 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 special economic zone status. Tax exemptions are granted upon the administrative decision of the respective minister for the period of 10 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; a not 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. Such possibility was only given to taxpayers temporarily during the COVID-19 pandemic. Tax losses are linked to the legal entity that incurred them. The possibility of offsetting losses resulting from restructuring operations such as mergers, acquisitions or transfers of going concern are limited.
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 payers, 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 the 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 corporations 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 DTTs or under domestic rules (such as the CIT exemption for dividends paid to entities holding at least 10% of shares in the paying entity for an uninterrupted period of at least two years, even if this minimum holding period expires after the dividends were paid). There is no participation exemption for selling shares in other corporation.
The 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 value added tax (VAT), even though it is VAT exempt.
Civil law transaction tax rates are 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 VAT are based on EU legislation, which means that the principles of VAT 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%.
A 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.
A 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 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 2021 are PLN24.84 per square metre for buildings connected with business and PLN0.99 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.
Tax on Retail Sales
The tax on retail sales was firstly introduced to Polish tax law in 2016. However, due to the position of the European Commission aimed at challenging the tax before the Court of Justice of the EU, its collection was suspended. The new tax eventually entered into force on 1 January 2021.
The tax on retail sales is levied on the biggest stores, earning monthly revenues exceeding PLN17 million. The tax is levied on the monthly surplus of revenues from retail sales over PLN17 million. A tax rate of 0.8% applies to revenues not exceeding PLN170 million and a 1.4% tax rate applies to the part of revenues exceeding PLN170 million.
Other, less notable, taxes include:
Most closely held local businesses operate in Poland 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. However, due to a change of the rules regarding the taxation of limited partnerships starting from 1 January 2021, the popularity of this legal form may decrease.
In Poland, individual professionals (eg, architects, engineers, consultants, accountants) working under employment contracts or civil law contracts are subject to PIT, calculated, as a rule, according to a progressive tax scale between 17% and 32%. Employees under the age of 26 can benefit from a tax exemption.
Individual professionals conducting business activity are also taxed according to the tax scale. However, such individuals may elect for the 19% flat-rate PIT, taking into account restrictions on services for former/current employers and an exclusion of management services from that rate. Additionally, as of 1 January 2021, a lower 15% lump-sum taxation may apply to a broader group of professionals (eg, lawyers, architects, accountants) conducting business activity. 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 that 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 (WHT) at the rate of 19%. DTTs may stipulate a lower rate or a tax exemption.
Income on the sale of shares is subject to 19% PIT.
No participation exemptions apply.
As with the case of closely held corporations, dividends payable to individuals are subject to WHT at the rate of 19%. DTTs may stipulate a lower rate.
Income on the sale of shares by an individual is subject to 19% PIT.
No participation exemptions apply.
In the absence of income tax treaties, WHT 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 WHT, including:
Entry into force of these new compliance rules has been postponed until 1 July 2021. The Ministry of Finance is also working on modifications to these new WHT rules aimed at making them less burdensome for WHT agents.
In general, Poland has an extensive double tax treaty network with 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 Luxembourg, the Netherlands, Sweden, Switzerland, Ireland, Cyprus and Malta. This is mostly due to relatively low domestic corporate taxation in these countries, and 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 choice of tax treaty countries can change in time due to amendments in double tax treaties that will proceed due to ratification of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) by Poland.
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 exempt under DTTs concluded by intermediary countries and benefit from preferential tax treatment in 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.
For a few years, the Polish government’s tax policy, including transfer pricing rules, has conformed with global trends and 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, or 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 mutual agreement procedures (MAPs) have not been popular in Poland in recent years. The main reason seems to be the long waiting time for the application to be processed by the tax authorities. However, at the end of 2019, a new domestic legislation entered into force as an implementation of EU Directive 2017/1852 that clearly defined the timeframe within which a MAP should be completed by the local authorities. This should shorten the process and may increase the popularity of MAPs.
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 MAP. Moreover, Poland has recently implemented EU Directive 2017/1852, which provides for the shortening of the MAP.
A 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 also be 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 DTTs.
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.
Additionally, from 1 January 2021, a separate definition of a real estate company has been introduced in CIT and PIT laws. Under this definition, a real estate company is an entity whose balance sheet asset value consists of at least 50% of the rights to real estate worth more than PLN10 million. The 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 or fulfils the definition of a real estate company, such a transaction is deemed taxable in Poland. In the event of a sale of shares in the real estate company, the real estate company will be obligated to withhold the tax from the sale. Also, the sale of shares in a local corporation admitted to public trading 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 the shares of a listed company, such a transaction should generally not be taxable in Poland.
The above-mentioned provisions may be modified by applicable DTTs 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 DTT. The use of real estate clauses in DTTs concluded by Poland will be broadened in the coming years due to implementation of the MLI.
A 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% on civil law transactions 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 on civil law transactions 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 a 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 by the tax authorities. In such cases, the tax authorities 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 CIT Act, tax deductibility of expenses incurred to purchase certain intangible services (including management services) from related entities (within the meaning of TP rules) is limited. Under the limitation rule, expenses incurred for such services that exceed in a given tax year 5% of tax EBITDA 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, subject to certain exemptions. The 9% rate applies to small taxpayers (with revenues not exceeding EUR2 million in a tax year), 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 DTT.
As a 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 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 CIT 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 CIT and PIT payers 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 CIT and PIT laws.
Since 2019, the notion of a CFC has been broadened to 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 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 the 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 with 19% CIT. DTTs 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 is 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 MLI Convention, as stipulated in BEPS Action 15, which entered into force in Poland on 1 July 2018.
The MLI Convention is already applicable to more than 30 DTTs concluded by Poland.
The Polish government’s tax policy conforms with current global trends and is focused on closing the remaining loopholes (see 4.6 Comparing Local Transfer Pricing Rules and/or Enforcement and OECD Standards).
The Polish tax administration is more focused on TP issues than in the past, by challenging the arm’s-length character of transactions. 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. The current government’s policy aimed at closing the remaining tax loopholes seems to be even more intensive during the COVID-19 pandemic, as the government seeks additional revenue that could supplement the strained state budget.
International tax is very important in transactions that trigger various issues with international tax aspects, in public debate and in 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 DTTs, 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, which already applies to more than 30 DTTs concluded by Poland.
Apart from a relatively low CIT rate, Polish corporate taxation is not particularly competitive compared to jurisdictions such as Luxembourg or the Netherlands. It is in line 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, Estonian CIT 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 (since 2021, up to EUR2 million revenue) and 19% CIT for others – nonetheless, the CIT rate is outside the scope of BEPS regulations.
In January 2021, a new regulation concerning, inter alia, hybrid instruments entered into force. The primary objective of the proposed new law is to continue the process of the implementation of the EU Anti- Tax Avoidance Directive (ATAD 2).
Specifically, anti-hybrid rules provide for non-deductibility of payments resulting in double deductions of costs or deductions of costs without inclusion of corresponding revenue in other country. The following hybrid mismatch arrangements are, in particular, covered by the Polish anti-hybrid rules:
This introduces to the Polish CIT Act measures that prevent companies from artificially shifting profits to minimise the effective tax rate through making use of discrepancies (mismatches) between different tax jurisdictions in the assessment of the same category of payment.
According to the explanatory memorandum accompanying the new 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 of taxable revenues.
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 payers, 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 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 the 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 that are tax residents of other countries may be considered CFCs despite performing substantial business activity.
Poland has ratified the MLI Convention, due to which, a general principal purpose test (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 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 TP 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 TP rules generally follow the OECD guidelines. CIT payers’ TP reporting obligations increased significantly, and TP 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 TP regulations. From that moment, TP documentation is generally not applicable to domestic transactions (with certain exceptions). TP 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).
Additionally, from 2021, the scope of transactions with unrelated entities established in low-tax jurisdictions that should be subject to the arm’s length principle and TP documentation is extended to cover transactions with pass-through unrelated entities where the ultimate beneficiaries are established in low-tax jurisdictions.
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, in particular with respect to proper determining of economic owner of such property. DEMPE (development, enhancement, maintenance, protection and exploitation) analysis, especially with regard to intellectual property, is more frequently used by Polish tax authorities during tax controls these days.
The regulations concerning CbCR 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.
CbCR 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 TP policies. The automatic exchange of tax information aims at combating 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.
The Polish government announces from time to time that it plans to introduce a digital services tax to the Polish tax system but at the same time, it was recently declared that the adoption of a digital tax had been suspended until new rules on taxation in the digital economy were proposed at EU and OECD forums in which Poland takes an active part. The first step in taxation of digital businesses in Poland was the introduction of an additional 1.5% tax imposed on video-on-demand platforms in July 2020. Additionally, at the beginning of February 2021, a draft law was introduced on tax that is to be levied on revenues derived from, inter alia, internet advertising.
Poland has suspended its work on digital taxation as the government is waiting for EU and OECD initiatives to be finalised. However, in February 2021, a proposal of a draft law regarding a digital services tax was introduced by the Ministry of Finance. The proposed draft provides for the taxation of certain digital services rendered on the territory of Poland, such as internet advertising.
The draft law provides for a number of exemptions from the digital tax and is to apply only to companies with a significant digital presence in Poland. The tax would be imposed on companies that derive revenues of more than EUR5 million from internet advertising in Poland and derive revenues of more than EUR750 million worldwide, on an annual basis. The rate of the digital tax is to be 5%.
As a rule, royalties paid to non-residents are subject to 20% WHT 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 that have not concluded a DTT 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.
Additionally, use of IP rights between related parties is more frequently challenged by Polish tax authorities under TP rules aiming at determining the real beneficial owner of IP rights to which the income from the IP rights should be assigned.
Tax Highlights of 2020
2020 was dominated by the fight with the COVID-19 pandemic. Therefore, many legislative measures have been taken to prevent a negative impact from the economic breakdown. In particular, deadlines for multiple statutory obligations have been postponed until the end of the state of epidemic that was declared and temporary tax preferences were introduced throughout the year in order to minimise COVID-19's impact on the business activity of taxpayers. Those were, in particular, the following.
Exemption from commercial property tax
An exemption from commercial property tax has been introduced in corporate income tax (CIT) law for the period from 1 March 2020 to 31 December 2020 and further extended after 31 December 2020 until the state of epidemic is over.
Bad debt relief
Creditors whose businesses had been adversely affected by COVID-19 can reduce their revenues derived during the state of epidemic by applying a relief for bad debts under personal income tax (PIT) and CIT regimes within a shorter period of 30 days instead of 90 days after their accounts receivable became overdue.
Carry back of a tax loss
Taxpayers who incurred a loss in tax year 2020 because of the COVID-19 outbreak and, as a consequence, derived revenues at least 50% lower than the revenues generated on the same operations in tax year 2019 were granted a possibility of a one-off reduction of the income generated in 2019 by the loss incurred in 2020 (up to the maximum amount of PLN5 million).
Tax capital groups
Tax capital groups that in 2020 suffered adverse economic effects of the COVID-19 outbreak and, for that reason, failed to meet the profitability and no-tax-arrears conditions, which triggers a dissolution of the group, nevertheless could retain the status of a tax capital group, until the end of the original period that is determined when the given tax group is established and may not be shorter than three years.
Tax residency certificates
Tax residency certificates whose validity period of 12 months expired during the state of epidemic can be used when collecting WHT until the lapse of two months after the state of epidemic has been cancelled. In addition, tax residency certificates issued for 2019 may also be used if the tax remitter holds the taxpayer’s statement on the validity of the data contained therein.
Extensions of deadlines
Multiple statutory deadlines have been extended or suspended during the COVID-19 pandemic. For instance, the deadlines for fulfilling the transfer pricing (TP) obligations have been significantly extended, allowing taxpayers to submit relevant statements much later than usual. Additionally, the deadlines for filing the annual CIT and PIT returns and for payments of respective taxes were deferred.
Changes in law also concerned the reporting of tax arrangements and resulted in a suspension of all statutory deadlines in this respect. First, deadlines regarding cross-border arrangements that were implemented as of February 2020 started to run only at the beginning of 2021. Additionally, improper implementation of the DAC 6 EU directive resulted in another change in mandatory disclosure rules, imposing an obligation on intermediaries and relevant taxpayers to report again already notified cross-border arrangements.
New Developments in 2021
From 2021, a number of amendments to CIT law entered into force, partially as a response to the COVID-19 crisis.
The government has visibly intensified its policy aimed at closing tax loopholes in order to supply the strained state budget with additional resources. Therefore, the tendency to quickly introduce the OECD's recommended tools preventing base erosion and profit shifting is likely be continued in the coming years. As part of this policy, the following taxation rules have been introduced in 2021.
CIT on partnerships
Limited partnerships with a registered office or place of management located in Poland that until the end of 2020 were classified as tax-transparent entities became CIT payers subject to a 19% CIT rate levied on their income starting from 1 January 2021. General partners are allowed to deduct a percentage of a limited partnership's CIT liability proportionally to their profit participation from their CIT/PIT liability once a limited partnership distributes profits.
Additionally, in certain cases, general partnerships may also become CIT payers. This applies to general partnerships whose partners are not only individuals and that did not submit the information on the participation of particular partners within the statutory deadline. If a general partnership fails to comply with this requirement, its income will be subject to 19% CIT and its partners will be liable to CIT/PIT upon the distribution of profits by the general partnership.
Tax strategy reporting obligation
Tax capital groups and taxpayers whose revenues exceed EUR50 million annually are required to prepare and disclose to the public a report on their tax strategy for a given tax year, starting from 2021.
The report on tax strategy should take into account the nature, type and size of a taxpayer's business and should include, in particular, the following information:
According to the new anti-hybrid rules, taxpayers, including local branches of foreign enterprises, are obliged to deny deductions of expenses or tax exemptions or other tax incentives relating to income if such expenses or income results from using the following hybrid measures:
Transfer pricing changes
The scope of transactions with unrelated entities established in low-tax jurisdictions subject to the arm’s-length principle has been extended since 1 January 2021 and now covers transactions with pass-through entities whose ultimate beneficiaries are operating in low-tax jurisdictions. This may have a significant impact on taxpayers' due diligence procedures as there is now a requirement to determine the place of establishment of ultimate beneficiaries of all unrelated counterparties.
Taxpayers will be obliged to prepare transfer pricing documentation covering such transactions if the value of transactions in a tax year exceeds PLN500,000.
Real estate companies
The definition of a real estate company has been introduced to Polish PIT and CIT laws. Under this definition, a real estate company is an entity meeting jointly the following conditions:
In the case of a disposal of at least 5% of the shares in a Polish real estate company, the obligation to settle Polish tax liability will be imposed on the real estate company whose shares are sold if at least one of the transacting parties is a Polish non-resident.
Additionally, with respect to real estate companies having their seat or place of management in foreign countries, an obligation was imposed to appoint a tax representative in Poland.
All the above measures are aimed at closing tax loopholes and increasing the Polish tax base. However, it should be noted that next to solutions aiming at imposing additional tax obligations on taxpayers, preferential tools are also being introduced in Polish income tax law. In 2021, these were, in particular, the following.
As of 2021, a so-called Estonian CIT has been implemented in Poland. In general, this new regime allows businesses eligible for this new form of taxation to pay tax only on part of the income paid out to shareholders in the form of dividends (also in other forms of hidden profit distribution). The Estonian CIT is dedicated for small and medium joint-stock and limited liability companies deriving income no higher than PLN100 million. The conditions for qualifying for this new regime are rather strict and comprise:
Taxpayers that qualify for Estonian CIT should be able to apply this regime for four years if they record 15% investment costs growth. If the taxpayer meets all the criteria, it may be taxed this way for the next four years. The tax rates in this regime vary from 10 to 25%. The strict application conditions mean it is difficult to assess whether it will become a popular tool among CIT payers.
Increase of the income limit qualifying for the 9% CIT rate
Since 1 January 2021, the annual revenue threshold to apply the preferential 9% CIT rate instead of the standard 19% CIT rate has been increased from EUR1.2 million to EUR2 million. However, the lower rate still may not be applied to capital gains.
Strict WHT regime postponed again
Additionally, a new strict WHT regime that limits the use of domestic tax exemptions and double tax treaty benefits has been postponed again and is to apply from July 2021.
Even though the new regime does not apply yet, the Polish Ministry of Finance has already announced that it is working on an amendment of the WHT regime in order to address at least some of the concerns raised by withholding tax agents with regard to potential difficulties in the application of the new regime in its current wording.