Tax abolition – introduction of a temporary income tax solution for taxpayers

Draft law introducing changes in taxation related to the Polish Deal also contains one institution of tax abolition (voluntary disclosure), which has been rarely encountered in the Polish legal system. By the authors of these regulations this solution is referred to as a transitional income tax on certain income of legal persons, natural persons and other organisational units.
Author:
Rafał Zuchowicz
Senior TAX Specialist

Since tax amnesty is of an exceptional nature and is valid for a specific period of time, the provisions regulating this issue are not provisions introduced to the CIT or PIT act; they constitute a separate chapter 2 of the act introducing changes resulting from the Polish Deal, entitled "Episodic provisions".

This solution is addressed to entities wishing to disclose to the tax authorities their previously untaxed income, but also to entities wishing to withdraw from tax optimisation measures undertaken earlier, including cross-border measures. The Ministry of Finance - probably encouraged by the effects of such regulations in other countries - plans to obtain additional budget revenues in this way. The use of this form of taxation is to be voluntary and additionally connected with the possibility to obtain an anonymous security opinion in the scope of disclosure and the possibility to take advantage of tax relief connected with investing capital from disclosed income in Poland or in the EU.

Taxpayer

Individuals, legal persons and other organizational units without legal personality, regardless of their place of residence, registered office, management or registration, who are taxpayers or tax remitters of income tax may use the transitional flat-rate tax on income. The only restriction in the application of these regulations is that these entities may not, as at the date of submitting an application for transitional taxation, be subject to tax proceedings, tax inspection or customs and fiscal inspection whose subject matter is undisclosed income.

Subject of taxation

  • The transitional flat-rate tax may be applied to income which has not yet been reported for taxation in Poland in whole or in part, in particular due to:

1) failure to disclose them in whole or in part,

2) failure to disclose, in whole or in part, the source of their generation,

3) transfer or holding of capital in any form outside the territory of the Republic of Poland, including in a foreign entity,

4) application of the provisions of double taxation conventions in a manner inconsistent with the context of application of the provisions of these conventions, with their aim and intentions of the states parties to these conventions

5) non-actual tax residence,

6) achievement of a tax advantage other than that specified in items 1-5 above in the form specified in the Tax Ordinance Act.

The taxpayer or tax remitter as part of the disclosure should include all events affecting the transitional flat-rate sum, both direct and indirect in nature.

  • However, the following may not be subject to such taxation:

1) income that arose as a result of the commission of a crime,

2) income which has arisen as a result of committing a fiscal offence or fiscal misdemeanor, unless the entity or the perpetrator of the fiscal offence or fiscal misdemeanor acting on behalf of the entity notifies the competent head of the tax office of the commission of that offence simultaneously with the submission of an application for taxation of such income with the transitional flat-rate sum on income.

Tax base

The basis for taxation with the transitional flat-rate sum is the income earned up to the date of filing the application for taxation with this flat-rate sum, representing:

1) the amount of income that would be determined by the taxpayer on the basis of the provisions of the CIT or PIT Acts, reduced by the expenses incurred directly in order to obtain it, if such expenses were not deducted when determining the income tax liability in any form, and the evidence presented by the entity of the incurrence of such expenses does not raise any doubts, or

2) the amount of revenue that would be determined by the taxpayer or the payer on the basis of the provisions of the CIT or PIT Act and taking into account the provisions of the relevant double tax treaty, if the tax obligation was executed in a manner consistent with the subject and purpose of this treaty, or

3) the amount of income from the capital transferred or held outside the Republic of Poland, including in connection with a change of tax residence, reduced by expenses incurred directly in order to obtain this income, if these expenses were not deducted when determining the liability for income tax in any form, and the evidence presented by the entity to incur these expenses does not raise any doubts, or

4) 25% of the value of capital transferred or held outside the territory of the Republic of Poland, including in connection with a change of tax residence, or

5) the value of a tax benefit, within the meaning of the Tax Ordinance Act, other than those listed in items 1-3 above.

In the case of earning the income referred to in items 3 and 4 above, the taxpayer is required to choose one of the indicated sources of taxation.

As part of the disclosure of the tax base, you must also indicate the source of the income, how the income was earned, and the amount of the income, which must be determined in the manner most appropriate to the facts and circumstances of its generation (taking into account the costs of its generation).

Tax rate

The transitional income tax rate is 8% of the tax base.

Transitional flat-rate sum taxation procedure

The application for transitional flat-rate taxation is to be submitted in an electronic form. The application will be addressed to the head of the tax office with jurisdiction over income tax, and in the absence of such jurisdiction for income tax purposes - to the head of the tax office with jurisdiction over the taxpayer's/tax remitter's registered office. Together with the application it will be necessary to submit a statement of compliance with the factual and legal situation and that there are no circumstances excluding the subject of taxation from taxation in the form of transitional flat-rate sum.

The application is subject to a fee of 1% of the taxable income, not less than PLN 1,000 and not more than PLN 30,000. If for any reason the income reported in the application is increased, it will be necessary to supplement the fee to the amount resulting from the increased income. Proof of payment of the fee must be attached to the application (if the fee is increased no later than on the 7th day following the date of the increase of income reported earlier, a proof of payment must be attached to the application). Unpaid applications will not be considered.

If the application does not meet all the requirements and the taxpayer/tax remitter does not remedy the deficiencies within 14 days after being summoned by the authority, the application will be considered ineffective and the fees paid will not be refundable.

The taxpayer/payer may submit separate applications for different incomes.

A properly completed, paid and filed application will be treated the same as a filed return of income and the interim flat-rate sum paid on the income will become tax payable on the declared income, no later than the 1st day of the third month following the month in which the application is filed.

Deadlines

The template for the transitional flat-rate sum tax application will be determined by August 31, 2022. However, the applications themselves will be able to be submitted from 1 October 2022 to 31 March 2023. The filing of the application interrupts the running of the limitation period of the right to determine or establish the tax liability in CIT or PIT, on the income reported for taxation with the transitional flat-rate sum on income. Once the limitation period is interrupted, it runs anew from the day following the date of filing the application.

As an exception, an application may be filed after December 31, 2022 if the taxpayer/tax remitter has previously requested an opinion as to the March of the flat-rate tax to the Capital Repatriation Board (vide the "Protective Opinion" section below). If an opinion is received, the request may also be made within 30 days of receipt of that opinion, notwithstanding the March 31, 2022 deadline. 

Thus, taxpayers and tax remitters in the second half of 2022 will have the opportunity to evaluate their past tax returns and voluntarily elect to disclose income that has not yet been taxed in whole or in part in Poland.

The transitional flat-rate sum on income disclosed in the application is payable within 30 days following the date of the application.

Protective Opinion

The taxpayer/tax remitter, before submitting an application for transitional flat-rate sum taxation, may apply to the Capital Repatriation Board for an opinion as to the tax consequences in the transitional flat-rate sum on income, in his/her individual case.

Any entity may submit the request on its own or by acting through an attorney who is a tax advisor (in the latter case, it is possible to submit the request anonymously without disclosing the details of the principal).

The Council is a new independent body appointed by the Minister of Finance and composed of persons indicated by him, judges of the Supreme Administrative Court, persons from scientific and research circles dealing with taxes and tax advisors. The Council will operate until the date of issuance of all opinions, but no longer than until 30 September 2023.

An application for an opinion is subject to a fee of PLN 50,000 and the Board issues its opinion no later than within 2 months of receipt of the application. In the event of deficiencies in the application, if they are not remedied by the party within the time limit set by the Council, the Council will refuse to issue the opinion and the fee will not be refundable.

Applying to the Council for an opinion is not tantamount to the necessity of a subsequent application for taxation of income with the transitional flat-rate sum. Despite obtaining it, the taxpayer/tax remitter may decide not to file an application for taxation.

Other issues

An entity or a perpetrator of a fiscal offence or a fiscal misdemeanour acting on behalf of an entity that has submitted an application for taxation of income with the transitional flat-rate sum and has paid the transitional flat-rate sum on income in full on the income reported in the application is not subject to punishment for a fiscal offence or a fiscal misdemeanour with respect to the income reported in the application, if the disclosure of this prohibited act has been made solely on the basis of a notice of commission of a prohibited act submitted by this entity or this perpetrator.

Payment of the transitional flt-rate sum on the income reported in the application results in the exemption of such income from personal income tax, lump sum personal income tax and corporate income tax.

Relief for investment of capital from disclosed income

If after the date of income declaration and payment of the transitional flat-rate tax on this income the taxpayer/tax remitter makes the following acquisitions of property components or makes the following contributions or surcharges, he/she will be able to reduce his/her tax liability in CIT or PIT obtained from these property components, including from their rental or sale, from the activity in which these components were used and from participation in a company having legal personality seated in Poland or within the EEA, by an amount equal to 30% of the transitional flat-rate tax on income.

The relief applies to making, within a period not exceeding 1 calendar year counting from the day of filing the application for taxation in the form of transitional fla-rate sum:

1) investments in the form of the acquisition of tangible or intangible assets, with a value corresponding to at least the value of the reported income for taxation in the form of a transitional flat-rate sum, from entities with their registered office in Poland or within the EEA,

2) Investments in the form of acquisition of shares or stocks in companies having legal personality or other securities, from entities with seat in Poland or in the EEA area,

3) Investments in the form of cash contributions or additional payments to the capital of companies with legal personality.

An additional condition to take advantage of the deduction is the prohibition to dispose of the aforementioned assets and to withdraw the contributions and additional payments from the company for a period of at least 12 months from the moment of its execution (completion).

The deduction can be made for the tax year in which the investment was made and for the following 2 tax years. The return on income earned in the tax year in which the deduction is made must be accompanied by evidence that the investment was made, as well as a copy of the application for a transitional flat-rate sum taxation.

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