Polish Order - a new tax for large companies

On 8 September 2021, a draft bill amending the Personal Income Tax Act, the Corporate Income Tax Act and certain other acts, i.e. the so-called Polish Order Tax Bill, was published on the parliamentary website. One of the solutions proposed in the draft is the introduction of a new form of taxation - a minimum CIT, or a tax on income.

The aim of the changes is to tighten up the tax system and generate tangible income for the budget from corporate income tax.

Minimum CIT - the key points of the draft bill

The draft tax bill of the Polish Order provides for the introduction of a new minimum corporate income tax, and the new form of taxation is to be implemented by linking the amount of tax paid by large companies, especially multinationals, with the actual place in which they generate their income.

Income tax - who will be covered by it?

A minimum CIT of 10% of the tax base will cover resident companies as well as tax capital groups which:

• incur losses from revenue sources other than capital gains, or
• have a specified low operating profitability ratio arising from the ratio of revenues to deductible costs (i.e., the share of income in revenues amounting to no more than 1% of the tax base).

The minimum CIT will also be paid by non-residents operating through a foreign permanent establishment located in Poland, to the extent to which this permanent establishment generates income and incurs losses from its activities.

Tax for large companies - exclusions

Certain categories of entities have been excluded from minimum CIT taxation, also under a supplementary self-amendment to the Act, and they include entities which, despite meeting certain conditions, are:

• entities with a specific business profile in which a low level of profitability is not a source of tax avoidance, but results from the nature and particularities of the business (concerns cases in which international treaties do not allow the prevention of tax avoidance or the entity is not free to set the price),
• entities commencing activities, in the year of commencement of activities and in the consecutive 2 tax years immediately following that year (which means that an obligation arises only from the 4th year of activity),
• financial companies such as a national bank, a credit institution, a cooperative savings and credit union, the National Cooperative Savings and Credit Union,
• taxpayers who in consecutive years (starting from the 4th tax year) have shown a specific decrease in revenue (by at least 30%) in comparison with the revenue of the year immediately preceding that tax year, and
• entities operating in a simple organisational and legal structure, without extensive relations - i.e. in which shareholders or partners are exclusively natural persons and the taxpayer company does not hold shares in the capital of another company, titles of participation in an investment fund or in a joint investment institution, all rights and obligations in a company that is not a legal person, as well as other property rights related to the right to receive a benefit as a founder or beneficiary of a foundation, trust or other entity or legal relation of a fiduciary nature.

Minimum CIT - what is the tax base and the amounts reducing it?

The taxable base will be the sum of the amounts specified in the provision, which will consist of:

• 4% of the value of revenue from a revenue source other than capital gains,
• debt financing costs incurred to related parties,
• deferred income tax resulting in an increase in gross profit/reduction in net loss,
• and costs incurred to related parties (entities in a country or territory which applies harmful tax competition) for the acquisition of certain services or intangible rights.

The draft also specifies that the minimum income tax will be deductible in subsequent tax years from the classic CIT when filing the tax return for the consecutive 3 tax years immediately following the year in which the minimum income tax was paid.

The values that reduce the tax base will be:

• any deductions reducing the tax base, such as tax deductible depreciation charges and reliefs under Article 18 of the CIT Act, including the R&D relief and new reliefs under the Polish Order programme,
• income which is included in the calculation of tax-exempt income under Article 17 of the CIT Act, including the value of deferred income tax resulting from the disclosure in tax settlements of intangible assets not yet subject to depreciation.

It is worth noting that the new minimum corporate income tax will be calculated annually and paid into the account of the tax office. Taxpayers will also be required to show reductions to the tax base, as well as the amount of the minimum income tax.

The income tax, or minimum CIT for legal entities, is due to come into force effect from 1 January 2022.