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Alternative minimum corporate income tax and changes regarding limiting costs of intangible services provided by related parties

On 8 September 2021, an updated draft of amendments to tax laws to the Polish Deal programme was published. The most important of them - which comes as somewhat of a surprise - concerns a completely new solution involving a minimum tax payable by certain taxpayers
Rafał Zuchowicz
Senior TAX Specialist

According to the grounds provided by the Ministry of Finance, this solution is dictated by the unsatisfactory tax amounts declared so far by large taxpayers (according to 2019 data, a share of income in revenues not exceeding 1% was achieved by only 22% of these taxpayers). Unfortunately, the introduced regulations do not include any criteria showing that they are directed at large taxpayers, meaning that potentially all taxpayers will be subject to the changes (with a few exceptions discussed below, which do not have any relation to the scale of a business).

It should be emphasised that on 8 September 2021 the whole draft of changes resulting from the Polish Deal was submitted to the Sejm and was referred for the first reading. This means that a stage of parliamentary work on the draft has begun.

Taxable entity and rate of taxation

The minimum tax rate has been set at 10% and the new regulations are to apply to taxpayers and tax capital groups which:

1) suffered a loss from a source of revenues other than capital gains, whereby the loss does not take into account:

The costs of acquisition or improvement of fixed assets recognised as deductible costs in the tax year, including depreciation write-offs,
Income and costs related to transactions within which the price or method of its determination results from statutory provisions or normative acts issued on their basis, and the taxpayer has incurred a loss, from a source of revenue other than capital gains, from such a transaction, or obtained an income share in revenue from such a transaction which does not exceed 1% in a given tax year, while the loss and the share of income in revenues are calculated separately for the same kinds of transactions.
2) have achieved a low operating income ratio resulting in no tax payable, meaning a share of income from a source of income other than capital gains in income other than capital gains of no more than 1%.

The alternative income tax will not apply to taxpayers:

1) in the year of commencement of business and in two consecutive tax years immediately following this tax year, except for taxpayers formed as a result of transformations and mergers (including transformation of a sole trader and a company not being a legal person, but excluding transformation of a company into another company), as well as taxpayers, upon the formation of which - both at the time of formation and in the following year - a previously existing enterprise, its organised part or assets of the enterprise were contributed to the capital, or in-kind contributions were made in the form obtained from liquidation of other taxpayers,

2) being financial undertakings,

3) if in the tax year they reported revenues lower by at least 30% in comparison with the revenues obtained in the tax year immediately preceding this tax year,

4) those operating in a simple organisational and legal structure, i.e. those whose shareholders, stockholders or partners are exclusively natural persons and if the taxpayer does not hold shares in the capital of another company, titles of participation in an investment fund or in a joint investment institution, the entirety of rights and obligations in a company that is not a legal person, and other property rights connected with the right to receive a benefit as a founder or beneficiary of a foundation, trust or another entity or legal relationship of a fiduciary nature.

The new regulations on the alternative minimum tax are also to apply to taxpayers who conduct their business through a foreign permanent establishment situated in the territory of the Republic of Poland.

Tax base

The tax base will be the sum of:

- 4% of the value of revenues from a source of revenues other than capital gains,

- debt financing costs incurred for the benefit of related parties, if they exceed the amount of the limit determined on the basis of the formula (the limit is 30% of revenues without taking into account interest income, less costs without taking into account their reduction by the excess over and above the debt financing limit and depreciation write-offs),

- deferred income tax resulting in an increase in gross profit/decrease in net loss,

- as well as the part of the costs incurred for the benefit of related parties or entities from a country applying harmful tax competition of the costs of acquisition of certain services or intangible rights above a certain limit.

At the same time, the proposed regulation indicates that the tax base is to be reduced by:

- any deductions having an impact on the reduction of the tax base under Article 18 (e.g., donations), excluding, however, deductions under Article 18f (relief for bad debts), subject to the rule that if the taxpayer made deductions from income and subsequently received a refund of the amounts deducted, in his tax return for the tax year in which he received the refund he must add the amounts previously deducted accordingly,

- income included in the calculation of the tax-exempt income under the provisions concerning the Polish Investment Zone.

Payment of tax

The minimum income tax is to be calculated annually. The minimum income tax paid for a given tax year may be deducted from the basic tax for the following years. The deduction is to be made in the return for 3 consecutive tax years immediately following the year in which the taxpayer paid the minimum income tax. According to the grounds presented by the Ministry of Finance, the reason for this solution is that the minimum income tax and the basic income tax may to some extent encumber the same income and, consequently, lead to double taxation. The introduction of the deduction mechanism is intended to eliminate this situation.

Changes to the limit on intangible services from related parties

As a consequence of the above change, the existing Article 15e regulating the limitation of classifying as tax deductible costs certain services and intangible rights acquired from related parties and from countries applying harmful tax competition will be repealed. However, this regulation does not disappear altogether - according to the planned changes it will be appropriately included in the provisions defining the alternative minimum income tax and will become one of the elements of the tax base.

As mentioned before, the tax base of the alternative minimum tax will include the part of costs of services or intangible rights incurred for the benefit of related entities. Thus, the tax base will be increased by these costs in the part in which in the tax year they exceed by PLN 3,000,000 in total the amount calculated according to the formula of calculation of 5% EBITDA (however, for simplicity reasons, there is a proposal to replace the existing descriptive method of calculation with a formula). Thus, the amount of costs which, pursuant to the previously binding Article 15e, was excluded from costs, will under the new regulation of Article 24ca become the basis for taxation with the alternative minimum tax. However, the taxable base in this respect will not include re-invoiced services, as well as insurance services and guarantees and sureties provided by certain financial companies (e.g., banks, SKOK, insurance companies).

It should also be noted that Art. 60 of the Act introducing changes related to the Polish Deal contains a transitional rule according to which CIT taxpayers who, before the end of the tax year started before 1 January 2022, acquired the right to deduct the costs on the basis of Art. 15e, retain the right to deduct them after 31 December 2021 within the scope and under the rules set out in this provision. Thus, despite the repeal of Article 15e, the amount of costs of intangible services from related parties not deducted by the end of 2021 still will continue to be deductible in the subsequent 5 tax years.

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