In this edition:
- Proposed amendments to CIT Act.
- Favourable changes in amortization.
- Retail tax violates EU law.
- General interpretation of Minster of Finance on services auxiliary to financial services.
PROPOSED AMENDMENTS TO CIT ACT
A proposal to amend Poland’s Corporate Income Tax Act was published on 13 July 2017 on the website of the Government Legislative Centre. The draft calls for introduction of numerous revolutionary and controversial changes to the CIT Act.
Currently the proposal is in the phase of ministerial consultations, after which the Council of Ministers will decide whether to forward the bill to the Sejm for consideration. Until the bill is enacted, its wording may change significantly from the proposal published this month. Nonetheless, considering the importance of the proposed changes, it is worthwhile to examine the likely direction the rules will take. The proposal assumes that the new regulations will enter into force on 1 January 2018. Below we present the most significant proposed changes.
- Changes in tax capital groups:
- Reduction of the average share capital to PLN 500,000
- Reduction in the threshold of capital involvement of the dominant company to 75%
- Loss of status of a tax capital group would make it necessary to tax the income of the individual members of the group from the date the group was established, and not—as now—from the end of the company’s tax year
- Gifts between members of the group could not be treated as a tax cost for the donor.
- Following the Personal Income Tax Act, a distinction would be introduced between sources of revenue, namely: (i) capital gains and (ii) other sources. In consequence, if revenue were earned from both of these sources at the same time, the taxpayer would be required to allocate the costs accordingly to each of the sources. Additionally, income from one of these sources could not be offset by a loss from the other source. Significantly, in light of the planned repeal of Art. 10 of the CIT Act, the source of capital gains would be equivalent to the concept of “dividends” as used in tax treaties. Items assigned to the source of capital gains would include among other things:
- Dividends, income from investment funds or joint financing institutions, income from redemption or reduction in value of shares
- Value of property received in connec-tion with liquidation of a legal person
- Value of undistributed profit and profit assigned to capital funds other than share capital, in the event of conversion into a partnership
- Interest on participatory loans
- Income from the disposal of receivables.
- The authors decided to propose regulations to end a dispute ongoing in the legal literature on when an indirect cost can be recognized for tax purposes. Under the proposed solutions, the taxpayer would be required to follow the rules dictated by accounting policy.
- Exclusion from tax costs of the net costs of debt financing (including interest) in the portion in which the cost exceeds 30% of EBIDTA. This limitation would not apply to taxpayers for whom these costs do not exceed PLN 120,000 per year, or enterprises providing financing.
- Exclusion from tax costs of the costs of services – consulting, accounting, market research, legal, advertising, management, audit, data processing, insurance, guarantees, licence fees – in an amount exceeding 5% of EBIDTA. This limitation would not apply to costs not exceeding PLN 1,200,000 per year.
- Taxpayers who are owners of retail/service buildings (shopping centres, department stores, freestanding shops and boutiques, other retail/service buildings and office buildings) whose initial value exceeds PLN 10,000,000 would pay a tax equal to 0.042% of the initial value of the building each month. Currently, the proposal for this additional tax does not apply to owners of industrial or warehouse buildings. This tax would be payable monthly, by the 20th day of the following month. Under the proposal, the amount of this tax paid could be deducted from the advance income tax payment.
FAVOURABLE CHANGES IN AMORTIZATION
Legislative work is currently underway on two bills to amend the Polish CIT Act and PIT Act which would have a major impact on the tax treatment of amortization.
On 30 May 2017 the Council of Minister approved a bill drafted by the Minister of Development and Finance (for the “Robotization Act”) which had been in the works since January 2016. The proposal carries out aims adopted in the Responsible Development Plan. Work is underway at the same time on a bill to amend the Personal Income Tax Act, the Corporate Income Tax Act, and the Act on Flat-Rate Taxation of Certain Income Earned by Natural Persons. The second draft, dated 6 July 2017, is at the stage of inter-ministerial consultations.
Under the first bill, the taxpayer will have a right to one-off deduction of expenditures on acquisition of fixed assets up to PLN 100,000. A minimum value of expenditures that can be covered by a one-off deduction is also set at PLN 10,000. Moreover, the bill includes the possibility of counting toward expenditures an advance payment of the purchase price of a fixed asset. This solution is to cover expenditures incurred from 1 January 2017.
Within the limit of PLN 10,000, the taxpayer will have the right to include the value of several fixed assets, but the individual value of each of them must exceed PLN 3,500. In situations where the purchase price of the fixed asset does not exceed PLN 10,000, and the taxpayer begins to amortize it under general rules and makes additional expenditures that together exceed the PLN 10,000 limit enabling one-off deduction, the unamortized value of the fixed asset may be claimed as an immediate tax cost.
The draft covers expenditures for purchase of machinery and equipment falling within groups 3 and 6–8 and does not apply to expenditures incurred for purchase of real estate or means of transport, including automobiles. The acquired fixed assets must meet additional criteria, i.e. they must be brand-new, never used by the buyer or another taxpayer, and may be jointly owned. The deduction will not qualify as de minimis aid, and it follows that there will be no requirement to fulfil additional formalities.
In the draft of 6 July 2017, a change is introduced raising from PLN 3,500 to PLN 5,000 the initial value of a fixed asset enabling the expenditure to be immediately fully deductible as a revenue-earning cost. Interestingly, the draft from July 2017 does not refer to the earlier proposal from May 2017 concerning the limit of PLN 100,000. If this issue is not caught by lawmakers, the new limit of PLN 5,000 may function alongside the limit of PLN 3,500 adopted in the Robotization Act.
RETAIL TAX VIOLATES EU LAW
On 30 June 2017 the European Commission found that the Polish tax on the retail sector violates EU rules on state aid (case SA.44351).
The proposed tax had attracted the Commission’s concern from the very start as potentially inconsistent with the rules of the internal market. Tax commentators had indicated a potential risk that the proposal could be found to be a parallel tax on turnover, and such taxes are generally subject to harmonization across the EU. The proposed tax was not consulted with EU institutions before it was introduced. The act introducing the tax was adopted on 6 July 2016 and entered into force on 1 September 2016. Based on a complaint filed in August 2016, on 19 September 2016 the Commission launched a special proceeding and at the same time requested that Poland suspend collection of the tax until the proceeding was concluded. In the application initiating the proceeding, the Commission indicated that because of the unequal treatment of entities, the newly introduced tax could discriminate against larger entities operating on the Polish market.
The tax was intended to be assessed monthly on the basis of retail sales (net of VAT). The act set three thresholds subject to three tax rates:
- Exemption for entities generating turnover no greater than PLN 17 million
- Tax of 0.8% on turnover of PLN 17–170 million
- Tax of 1.4% on turnover above PLN 170 million.
The Ministry of Finance issued a regulation suspending collection of the tax. According to responses to parliamentary inquiries, suspension of collection of the tax did not release retailers from the obligation to file a timely monthly declaration concerning the tax. Then an act was passed on 15 November 2016, entering into force on 22 December 2016, postponing introduction of the entire regulation until 1 January 2018, thus also releasing taxpayers from the obligation to file monthly declarations.
In its decision finding that the tax was inconsistent with EU law, the Commission pointed to the unequal treatment of retailers, as well as the failure by the Polish side to justify the progressive nature of the tax dictated by the desire to increase budgetary income, or to provide an economic justification for the greater rate applied to bigger retailers. Consequently, the Commission required Poland to eliminate the unfair discrimination against undertakings and to restore equal treatment on the market.
In the current situation, we are still awaiting publication of the justification for the Commission’s decision. According to media reports, the Polish government does not intend to back down from introducing a new tax. However, the Ministry of Finance is holding any further steps until it receives the written justification for the decision. An interested party will still have a right to file a complaint against the decision by the Commission with the Court of Justice of the European Union.
GENERAL INTERPRETATION OF MINSTER OF FINANCE ON SERVICES AUXILIARY TO FINANCIAL SERVICES
On 30 June 2017 the Polish Minister of Finance issued a general interpretation aimed at clarifying issues connected with VAT on services auxiliary to financial services.
The interpretation is related to the repeal as of 1 July 2017 of Art. 43(13)–(14) of the VAT Act, which provided that the VAT exemption for financial services also applied to performance of services constituting an element of a service auxiliary to a financial service. The change affects services—e.g. administrative, call centre, technical, claims adjustment, determination of the causes and circumstances of insured losses, and on-site assistance—provided by a third party to an insurer or bank, constituting a separate whole but necessary and proper to performance of exempt (financial) services.
Repeal of this provision might, but not necessarily, mean that services auxiliary to financial services would be subject to VAT. From 1 July 2017 the possibility of applying the exemption with respect to certain financial services, previously covered by the exemption under Art. 43(13) of the VAT Act, will remain, but its legal basis is changed. The right to the exemption will arise under Art. 43(1)(40) of the act, which provides that “services involving deposits of cash, operating of cash accounts, payment transactions of all kinds, money orders and transfers, debts, cheques and promissory notes, as well as intermediation in performance of such services, are exempt from tax.” These provisions must also be interpreted in light of the case law of the Court of Justice of the European Union involving financial services (including services constituting an element of financial services).
This change means that all activities which together make up a complex service will, in line with the CJEU case law, continue to be covered by VAT exemption. This will apply to complex activities for which various fees are charged at specific stages of realization of payment transactions, performed by payment organizations for acquirers and issuers of payment cards, insofar as necessary to carry out payment transactions made using payment cards.
The catalogue of activities necessary to realize payment transactions includes such items as:
- Authorization of the transaction, consisting of verification of the transaction and the payment card, its validity and the consistency of the card user’s data, access to the funds in the user’s account, which will result in blocking a certain amount of funds in the account
- Transfer of the funds which the payment card holder has with the issuer of the payment card to the merchant, via the payment organization and/or acquirer
- Settlement of the transaction, including processing, transmission and accessing the data necessary to determine the proper amount of the fees of the different participants in the payment transaction at the given stages of realization of the transaction, appropriate to the share in the process of settlement of the payment transaction and in accordance with the agreements in place.
These actions will make up realization of the payment transaction with respect to cash payout and transfer. Under the interpretation issued by the Minister of Finance, activities of an administrative and technical nature will not be included in the catalogue of services exempt as auxiliary services. These include for example:
- Services of preparing reports of all types not strictly connected with the transfer of funds and not a condition for realization of the transfer (e.g. preparing information for marketing purposes or for analysis and development of new business strategies)
- Training services provided by payment organizations, not strictly connected with the performance of cash transfers (e.g. on promotion of brands, offering and sale of bank payment card products, and the like).
Thus the change does not eliminate the VAT exemption for financial services and auxiliary services, but it does narrow its application.