In Focus: Top Tax Issues for Business in Poland

The Polish tax system in its general rules for tax collection does not deviate from any other European tax system, as it includes corporate income tax (CIT) and value-added tax (VAT), both of which are common in the EU, as well as worldwide.

Corporate Income Tax

With regard to CIT, taxpayers are generally corporate entities, such as private limited companies, public limited companies and other legal persons (e.g. foundations, associations and cooperatives), as well as capital companies in organization, partnerships limited by shares, and other entities without legal personality that are still considered legal persons in accordance with tax law.

Taxpayers whose registered office or place of management is in Poland pay CIT on their entire income in Poland, regardless of where this income was earned. However, taxpayers whose registered office or place of management is not in Poland pay tax only on the income earned in Poland.

The basic CIT rates are currently 19% or 9% on income other than from capital gains. The reduced rate of 9% is available to small taxpayers who had a gross revenue from sales (including the amount of output VAT) of 2 million euros ($2.3 million) in the previous tax year. In addition, companies commencing business activities benefit from this lower CIT rate in their first tax year.

The subject of taxation is the income (surplus of revenues over incurred costs) that the company obtained in a given tax year, which is the sum of income earned from capital gains and income earned from other sources of income. Capital gains is a source separate from other sources of income, which means revenue and costs from capital gains cannot be combined with revenue and costs from other sources of income. Capital gains income is always subject to the 19% CIT rate.

Apart from the basic CIT rates, Polish tax regulations include a special tax on revenue from commercial real estate and a minimum corporate income tax.

The tax on revenue from commercial real estate is applicable to CIT taxpayers who own real estate in Poland that has been leased out. The tax base is the revenue from the commercial real estate, which is the initial value of the real estate calculated for depreciation purposes as of the first day of every month. However, if less than 5% of the property is put to use, the tax does not apply. There is a tax-free allowance of 10 million Polish zloty ($2.5 million), and the tax rate is 0.035%. The amount of tax paid decreases the CIT payable in the month in which it is paid. If the amount of tax is lower than the CIT payable, the taxpayer does not need to pay it.

At the same time, a different type of minimal CIT applies to taxpayers if they incurred a loss (excluding capital gains) in a given tax year, or if their income constitutes less than 1% of their taxable revenue (excluding capital gains). This is one of new developments in the so-called Polish Deal tax reform, described in more detail below.

The minimum CIT rate is 10%. The tax base is calculated according to a formula provided in the CIT regulations. In general, the tax base is the sum of 4% of taxable revenue (excluding capital gains), the costs of intragroup debt financing above a certain limit, the cost of intragroup intangible services above a certain limit, and certain categories of deferred tax, provided that they increase the gross income or decrease the gross loss of the taxpayer.

The minimum income tax does not apply in certain situations, for example to newly established companies (the tax does not apply during the first three years of the company’s existence), to financial institutions, or to companies which suffered a 30% loss of revenue as compared to the previous tax year.

It should also be noted that companies hiring employees act as tax remitters obliged to calculate, collect and pay to the tax authorities personal income tax and social security contributions on employees’ remuneration.

Value-Added Tax

Polish VAT regulations are an implementation of the EU VAT Directive and generally tax the supply of goods and services, intra-EU transactions, as well as exports and imports. The basic VAT rate in Poland is 23%, but there are also lower tax rates available (8%, 5% and 0%), as well as certain tax exemptions.

To prevent the growing VAT gap in Poland, the Polish legislature has introduced additional tools to eliminate fraud and abuse. These include the split-payment mechanism and the taxpayers’ whitelist. The split-payment mechanism is mandatory in the case of specific goods. As for the so-called whitelist of VAT taxpayers, before making a payment for a transaction, the number of the bank account of the contracting party must be consistent with the one indicated in the publicly available whitelist, otherwise certain fiscal penalties may apply.

CLAT/RET

Apart from the above, Poland also applies tax on civil law transactions (CLAT), if VAT is not applied or, in the case of sales of real estate, the transaction is exempt from VAT. The tax rates depend on the type of civil law transaction, and range from 0.5% to 2%.

Entities which own real estate are required to pay real estate tax (RET). The tax is imposed on the owners, holders or users of land, buildings or structures. The amount of RET depends on the area of the land and buildings, while for structures the tax rate is 2% of the structure’s initial value for income tax purposes.

Current Tax Environment in Poland

The prevailing European and worldwide tax legislative trends are also evident in Poland and are becoming an everyday element of the tax environment in the country. These include expanding digitalization and increasing tax compliance obligations.

Digitalization

The digitalization of services and legal instruments related to tax collection in Poland is particularly evident in relation to VAT. All companies are obliged to file VAT reports using electronic tools.

Each of the periodic VAT reports filed with the tax office is accompanied by a “Standard Audit File” (SAF-T), which presents general information on transactions executed by the companies in a settlement period (name and tax number of the contractor, date of transaction, net and VAT value, applicable tax rate).

This information is collected by the tax authorities and electronically processed for the purpose of identifying any irregularities or trends.

Further, in 2022 the Polish government is aiming at establishing an e-invoicing system, within which all invoicing will be performed electronically only between the parties to the transaction and with the oversight of the tax authorities. This system is currently voluntary and in the trial phase, but the government is seeking to make it mandatory from 2023.

Since 2018 Poland has also been gradually expanding the obligation for business entities/entrepreneurs making sales to individual customers to use online cash registers, and is aiming at ending the use of paper-based cash registers altogether.

Lastly, taxpayers may communicate with the tax office electronically using different digital tax platforms.

Tax Compliance and Reporting

Tax compliance and reporting obligations are now widely applied and imposed on business entities globally: This trend is also evident in Poland. For example, in 2019, Poland was one of the first EU member states to implement the mandatory disclosure rules obliging entities to report tax schemes to the tax authorities, and did so in a broader and more restrictive manner than that envisioned by the EU legislation.

Moreover, capital groups and companies with more than 50 million euros in revenue must prepare and publish their tax strategies for each tax year, including:

• tax compliance processes and procedures;
• voluntary forms of cooperation with the tax authorities;
• the amount of information on tax schemes reported;
• information on transactions with affiliated entities, restructuring actions, requests for tax rulings, etc.

These trends are currently evolving and should be observed carefully. On the one hand, digitalization may result in a more straightforward and simple tax system; on the other hand, increased reporting obligations will place a greater burden on business.

Tax Incentives, Major Pitfalls and Issues Affecting Enterprises Setting Up/Doing Business in Poland

The most important recent development in Polish tax legislation is the introduction of a broad tax reform known as the Polish Deal, which came into force on Jan. 1, 2022, and changed many essential elements of business taxation, resulting in an increase in tax liabilities and tax-related obligations.

Withholding Tax

The changes concern the application of Polish withholding tax (WHT) rules. Pursuant to the new regulations, Polish companies that make qualified payments to foreign related parties exceeding 2 million Polish zloty in a given tax year should disregard the regulations that provide for an exemption from WHT or the application of a lower WHT rate (for example, the provisions of double tax treaties), and instead pay the tax to the tax office.

Subsequently, the WHT will be refunded to the foreign-related party or to the Polish company (provided it bore the economic cost of the WHT pursuant to, for example, a gross-up clause). Qualifying payments are listed in the CIT regulations and include interest, dividend and other payments of profit from legal entities, or payments for certain intangible services such as for copyright or know-how.

The above regulations will not apply if a Polish company provides the tax office with a statement confirming that it is in possession of documents allowing it to apply a WHT exemption or lower WHT rate and that it does not have any information that would suggest that the exemption or lower rate should not be applied. Providing a statement that proves to be false may result in a criminal fiscal penalty for the signatories and an additional tax payment.

Alternatively, it is possible to receive an opinion from the Polish tax authorities confirming the application of the exemption or lower WHT rate. The opinion is valid for 36 months and should be issued within six months of the date of the application.

Hidden Dividend

The Polish Deal implemented new limitations on tax-deductible expenses for companies. From Jan. 1, 2023, payments for services performed by related entities will, in certain cases, be qualified as a non-deductible hidden dividend. These will include all payments where the amount or the timing is contingent on the company’s profit. These will also include non-market level payments, or remuneration for the right to use assets which were owned or co-owned by a partner or shareholder or an entity associated with a partner or shareholder before the company was created, if these payments are equal to or exceed the company’s gross profit.

Incentives

Despite the new measures, Poland is still considered by investors to be attractive for its relatively high economic growth and the investment opportunities that exist in many business sectors. In addition, there are several incentives which merit closer attention.

Polish Investment Zone

In 2018 Poland established the Polish Investment Zone (PIZ) to support new investments. The PIZ covers the entire territory of Poland and enables companies carrying out new investment—on both publicly and privately owned land—to benefit from, among other things, CIT exemption. This support is granted by a decision issued by an investment zone operator on application by the company.

The decision determines the period of validity of the benefits and the subject of the company’s economic activity, as well as the conditions that the company must meet. The period for which the decision on support is issued depends on the public aid level in a particular area. This period is the same for all companies, regardless of the type of economic activity carried out and the size of the company, and extends for 10-15 years.

Holding Company

The Polish Deal tax regulations have introduced the concept of a holding company into the tax system, and these regulations may be beneficial for potential investors who own Polish holding companies. The new regulations include a tax exemption applicable to the dividend received by the holding company from its subsidiaries. The remaining part of the dividend, not covered by the exemption, will be subject to CIT in Poland according to the general rules, at the 19% rate.

An additional preferential treatment for holding companies is the exemption from CIT of income obtained by the holding company from the paid disposal of shares in the subsidiary (so-called participation exemption), but only for transactions with unrelated entities.

To obtain the status of a holding company in Poland, a number of conditions must be met; for example, the holding company is required to directly own not less than 10% of the shares in the subsidiary for at least one year. Additionally, preferences apply only to single-tier holding companies in which dividends are transferred from operating companies directly to the holding company.

Estonian CIT

The Polish Deal has introduced important amendments to the so-called Estonian CIT system, making it much more attractive for individual investors. The main benefit of this system is that it makes it possible to tax only those profits which are intended for distribution or covering of losses.

The Estonian CIT system is available for companies that meet certain conditions, the main ones being that they are held by individuals, employ at least three persons, and don’t hold any shares in other companies.

The system provides for two tax rates—10% for small taxpayers and 20% for other taxpayers— and makes it possible to reduce the tax payable by most of the income tax withheld by the company for distribution of the dividend to the shareholders.

Going Forward

Considering the above factors, there are many challenges to be expected for investors and their tax advisers in Poland in the near future. Careful planning and cautious action will be required in the following months, not only to avoid an unexpected tax burden but also to effectively benefit from the existing and new tax incentives, and to take advantage of ongoing economic growth in Poland.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Andrzej Posniak is a Partner, Paulina Karpinska-Huzior is a Senior Associate, Piotr Nowicki is Counsel and Mateusz Rowicki is a Lawyer with CMS Poland.

The authors may be contacted at: andrzej.posniak@cms-cmno.com; paulina.karpinska-huzior@cms-cmno.com; piotr.nowicki@cms-cmno.com; mateusz.rowicki@cms-cmno.com