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Renata Kabas-Komorniczak

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The amended Corporate Income Tax Act (CIT Act) will bring about important changes for enterprises. Not much time is left to study and get ready for the novelties which will come into force as soon as 1 January 2018. 

The amended act is first of all meant to tighten up the CIT system and limit the use of the so-called aggressive tax optimisation. The aim is to make the amount of tax paid by large enterprises (especially international ones) linked to the actual place of earning the income. It is worth noting that some of the new CIT solutions are a response to the Council Directive (EU) 2016/1164 (ATAD) laying down rules against tax avoidance practices. 

Stringent rules of borrowing foreign capital

The modified regulations which limit the tax-deductibility of interest in the case of debt financing represent the direct implementation of the EU directive. The statutory limit of tax-deductible borrowing costs is going to apply to the excess of debt financing costs, which means the amount by which the debt financing costs incurred by the taxable person (tax-deductible in a given tax year) exceeds the interest income achieved in the tax year.

According to the amended act, the limit is going to be 30% of the amount corresponding to the excess of the total revenues from all revenue sources (less interest income) over the total of tax-deductible costs (less depreciation charges recognised in the tax year under tax-deductible costs) and debt financing costs (30% of EBITDA). The excess of debt financing costs over the above limit will be non-deductible. However, it will be possible to deduct it within the next five tax years, in accordance with the above rules.

The limit will not apply to financial enterprises such as, without limitation:

  • national banks,
  • credit institutions,
  • credit unions,
  • domestic or foreign insurance companies,
  • domestic or foreign reinsurance companies,
  • open investment funds and alternative investment funds created under the Investment Fund Act.

The statutory limit will not apply to the excess of debt financing costs over interest income in the portion not greater than PLN 3,000,000. 

Example: 

Financial figures of X sp. z o.o. for 2018:

  • total revenue from all revenue sources (R): PLN 10,000,000
  • interest income (ii): PLN 250,000
  • tax-deductible costs (C): PLN 7,000,000 
  • depreciation charges for the tax year (D): PLN 50,000
  • debt financing costs (DFC): PLN 6,500,000

[R-ii-(C-D-DFC)]×30%=limit of tax-deductible borrowing costs

[PLN 10,000,000-PLN 250,000-(PLN 7,000,000-PLN 50,000-PLN 6,500,000)]×30%= PLN 2,790,000

The excess of debt financing costs (except for the portion below PLN 3,000,000)::PLN 6,500,000-PLN 3,000,000-PLN 250,000=PLN 3,250,000  

Amount that cannot be recognised as tax-deductible costs: 

PLN 3,250,000 – PLN 2,790,000 = PLN 460,000

More stringent inspections of tax havens

Changes dictated by the requirements of the ATAD are going to include also regulations concerning Controlled Foreign Companies (CFC). They are supposed to prevent tax avoidance or evasion by transferring profits to countries offering preferential tax regimes, including to the so-called tax havens. 

 

The criteria for considering an entity a CFC are going to change too. The required share of the taxable person in a foreign company is going to increase from 25% to 50%. At the same time, the so-called passive income threshold is going to be decreased from 50% to 33%. The passive income is going to include income from:

 

  • dividends and other revenues from share in profits of legal persons,
  • sale of shares,
  • receivables,
  • interest and benefits from all kinds of loans,
  • interest on financial lease,
  • guarantees and warranties,
  • copyrights or industrial property rights, including from the disposal of those rights,
  • disposal and exercise of rights attached to financial instruments,
  • insurance and banking activities or other financing activities,
  • transactions with associated enterprises if they do not create added value (in the economic sense) or the added value is insignificant.

 

The condition related to the tax rate in the country where the CFC has its registered office is going to be modified as well. Under the amended regulations it will no longer be necessary to compare the tax rate applicable in another country with the 19% rate applicable in Poland. From 1 January 2018, the effective (actual) taxation in the country of the registered office of a CFC will be compared with hypothetical effective (actual) taxation determined in accordance with Polish regulations. One of the conditions that an associated enterprise has to meet to be considered a CFC is to pay in another country a tax that is half lower than the hypothetical tax obligation which would be payable in Poland. 

Division of income by revenue sources

Another far-reaching change will be to separate capital gains from income derived from other sources. Capital gains include:

  1. revenue from share in profits of legal persons, which is the actual revenue earned on the share,
  2. revenue in the form of an in-kind contribution made to a legal person or a company, revenue from disposal of all rights and obligations in a partnership,
  3. revenue from selling debts previously acquired by the taxable person and debts resulting from revenues classified as capital revenues, revenues from property rights, securities and derivative instruments (excluding instruments used to secure the cash flow or revenues or costs not recognised as capital gains) and revenues from investment fund units or collective investment institutions, including revenues from rental, lease or other similar agreements, as well as revenues from their disposal, 
  4. revenues of banks, credit unions and financial institutions.

What this means for enterprises is that if they earn both income from capital sources and income from other revenue sources during the year, then income tax will be payable on the total income derived from both sources. However, if the taxable person derives income from only one of the sources, and incurs a loss on the other, income tax will be levied on the income derived from one source and will not be reduced by the loss incurred on the other source. 

Enterprises will be allowed to deduct the loss from revenue earned from the same source in the next five consecutive tax years, but the deducted amount in any of those years must not exceed 50% of the loss. This will apply also if the taxable person incurs a loss on both revenue sources.

New operating principles of tax-consolidated groups

The amended act obliges the members of the now former TCG to account for income tax for the period from the second tax year counted back from the beginning of the tax year in which the circumstances underlying the loss of the TCG's taxable person status (a) and from the beginning of the year in which the changes occurred until the day of losing the status (b) – as if the TCG did not exist in those periods at all. Pursuant to the proposed legislation, if a tax-consolidated group operates for less than three full tax years, the obligation to account for income tax will apply to its entire lifetime. Entities which formerly made up a TCG will have to account for the tax within three months of the day of the status loss. 

The individual companies will have the right to credit the advances and tax (pro rata to the income of the individual member companies of the former TCG) for each accounting period, paid by the TCG in its lifetime, towards their due tax and advances. If the advances or income tax due from the individual companies is higher than the advances or tax paid by the TCG, the difference will be considered tax arrears. In such a case the taxable person will have to pay default interest counted from the date of the agreement registration.

To let smaller enterprises form a TCG, the following threshold values have been reduced:

  • the average share capital of entities creating a TCG (from PLN 1,000,000 to PLN 500,000), 
  • the direct share which the parent company must hold in the subsidiaries (from 95% to 75%), 
  • the profitability ratio of a TCG (from 3% to 2%).

The amended law will also oblige the parent company to represent the TCG. Once the TCG agreement is registered, no company will be allowed to exit the TCG. Furthermore, every case of reduction of a parent's share in the subsidiary belonging to a TCG to less than 75% will be a breach of the group's operation rules. 

Example: 

Minimum income tax – additional obligation

The amended act will also introduce the so-called minimum income tax. It will be an additional obligation on taxable persons owning commercial real properties worth more than PLN 10,000,000 (the initial value of assets). The minimum income tax will apply to:

  • commercial buildings classified as: shopping centres, shopping malls, independent shops and boutiques, other commercial real properties,
  • office buildings classified as office buildings.

The taxable base will be the revenue corresponding to the initial value of the asset determined as of the first day of each month less PLN 10,000,000. The resulting amount will be taxable monthly at the rate of 0.035% and payable by the 20th day of the following month. 

Taxable persons will not have to pay the tax if it is lower than the tax advance for the month. Furthermore, the tax will be deductible from the due CIT. As a result, the new payables should be neutral for entities which duly meet their tax obligations.

Restrictions on tax deductibility of intangible and legal services

The amended act will introduce provisions that will limit the tax deductibility of costs related, among other things, to agreements for intangible services and to the use of intangible assets. The limits will apply to expenditures on associated enterprises or entities having the place of residence, registered office or management board in a territory or country applying harmful tax competition,

and made for: 

  • advisory services, market research, advertising, management and control, data processing, insurance, guarantee and surety services and similar,
  • all kinds of fees and charges for use or the right to use rights or values, 
  • transfer of the risk of debtor's insolvency in terms of debt receivables due to loans other than loans granted by banks and credit unions, including under derivatives agreements and similar.

Costs of up to PLN 3,000,000 will not be limited and the surplus will be subject to the above-mentioned restriction on the tax deductibility of the abovementioned costs. The threshold is going to be set at 5% EBITDA, i.e. the surplus of the total of revenues from all revenue sources less interest income over the total of tax-deductible costs reduced by the value of depreciation charges recognised in the tax year under tax-deductible costs and interest. Costs exceeding the above limit will be non-deductible. However, they will be deductible within the next five tax years, in accordance with the above rules.

Example:

Financial figures of S.A. for 2018:

  • total revenues from all revenue sources (R) – PLN 12,000,000
  • interest income (ii) – PLN 200,000
  • tax-deductible costs (C) – PLN 10,000,000 
  • depreciation charges from the tax year (D) – PLN 150,000
  • cost of interest (CI) – PLN 3,000,000

In 2018 the company incurred costs of an advertising campaign of a new product for an associated enterprise operating in Germany. The costs amounted to PLN 4,000,000 (in this case the surplus over the statutory limit amounts to PLN 1,000,000).

[R-ii-(C-D-CI)]×5%=Limit of tax-deductible costs of intangible and legal services

[PLN 12,000,000-PLN 200,000-(PLN 10,000,000-PLN 150,000-PLN 3,000,000]×5%=PLN 247,500

Amount that cannot be recognised as tax-deductible costs: 

PLN 1,000,000 – PLN 247,500 = PLN 752,500

The effects of the planned amendments on the taxable person's situation must be analysed on a case-by-case basis. We are happy to help and provide you with tax advice on CIT, PIT and VAT in Poland issues. Our tax advisers working in Rödl & Partner offices in Gdansk, Gliwice, Cracow, PoznanWarsaw and Wroclaw will also answer other tax-related questions that you may have. 

1.12.2017