CIT on pass-through income

Amendments to the Corporate Income Tax Act introduced by the Polish Deal also include additional, previously non-existent fiscal burdens, which are intended to further tighten the existing tax system in Poland. The tax on pass-through income governed by Art. 24aa of the CIT Act is to be a new burden.
Author:
Rafał Zuchowicz
Senior TAX Specialist

This solution is to replace the current restriction on classifying as tax-deductible costs the costs of intangible services provided by related parties, under the current Art. 15e. If and when the changes under the Polish Deal come into force, Art. 15e will disappear, but not entirely: it will be included as relevant in the provisions defining the alternative minimum income tax and will become one of the elements of the tax base (Art. 24ca).

According to the justification of the draft amendments, the purpose of the proposed solution is to eliminate the possibility of obtaining tax benefits through tax schemes aimed at transferring income from intangible assets to tax jurisdictions with a low effective tax rate. Such transfers are considered relatively simple, and determining the value of the revenue is sometimes problematic because the schemes can be innovative and unique.

Tax rate

The tax rate on pass-through income is to be set at the same level as the basic corporate tax rate, 19%.

Tax base

While the current Art. 15e limits costs for services from related parties, the new tax implies the taxation of such costs. The following are considered to be costs of revenue passed through directly or indirectly to a related party:

  1. Consulting services, market research, advertising services, management and control, data processing, insurance, guarantees and warranties, and services of a similar nature
  2. Fees and charges of any kind for the use of, or the right to use, copyrights, licences, industrial property rights and know-how
  3. Transfer of the risk of a debtor’s insolvency under loans other than those granted by banks and cooperative savings and credit unions, including under liabilities arising from derivative financial instruments and benefits of a similar nature
  4. Costs of debt financing related to obtaining funds and using such funds, in particular interest, fees, commissions, bonuses, the interest portion of leasing instalments, penalties and charges for delay in payment of liabilities, as well as costs of securing liabilities, including costs of derivative financial instruments
  5. Fees and remuneration for the transfer of functions, assets or risks.

Costs in the form of depreciation write-offs on tangible and intangible assets, as well as costs attributable to participation in a partnership that is not a legal entity, from joint ownership, a joint venture, joint possession or joint use of property or property rights, are also considered to fall within the foregoing set of costs.

Conditions of taxation

Expenses incurred directly or indirectly for the benefit of a party related to the taxpayer are considered to be pass-through income if they represent a receivable from that party and:

  1. The income tax actually paid by that related entity for the year in which it obtained the receivable, in its country of residence, is at least 25% less than the amount of income tax that would have been payable by it if the income of that entity had been taxed at the 19% tax rate [and/or]
  2. These costs constituted at least 50% of the value of income obtained by this entity determined in accordance with the provisions on income tax or the provisions on accounting.

To avoid the negative effects of double taxation in the economic sense, a provision is to be introduced whereby in case income (or revenue) and costs are treated as earned or incurred by at least one other entity or at least one other individual, for the purposes of point 1 above, the income tax actually paid by those other entities or individuals will be taken into account.

Taxation of pass-through income will be subject to the condition that the sum of costs incurred in the tax year for the benefit of entities, including unrelated entities, exceeds the threshold of 3% of the sum of deductible costs incurred in that year in any form, and the limitation on debt financing costs will not apply to the determination of the sum of such costs.

The provisions on taxation of pass-through income will not apply to the extent that the taxable costs were incurred for the benefit of an affiliate in a country in the EU or the EEA that carries on taxable real economic activity in that country.

Taxable subject and tax amount

The shifted income is not to be aggregated with other income (or revenue) of the taxpayer, and the remitter of the tax is to be the company shifting the income. In the case of a tax capital group, each of the companies forming the group would be a remitter.

The tax on pass-through income is to be reduced by:

  1. The amount of the flat-rate withholding tax collected by the remitter of this tax, and
  2. The value corresponding to the product of the value of debt financing costs excluded in the company in the tax year from deductible costs and the tax rate in effect for the taxpayer in the tax year.

Remitters of the tax on pass-through income are to be obliged to calculate this tax for the tax year in the annual return and pay it to the account of the tax office by the date of submission of the annual return.

Provisions concerning taxation of pass-through income will apply also to taxpayers conducting business through a foreign permanent establishment located in Poland.

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