Draft amendments to CIT for 2018 - a brief guide to increasing taxes without raising the rate itself

17 July 2017

The Ministry of Finance has published the draft amendments to income taxes. As announced previously, the proposed draft constitutes a genuine revolution staged under the banner of looking for budgetary revenue. And revolution invariably means a guillotine, which means that some innocent heads will roll – just the first reading of the draft is enough to indicate that when striving to prepare specific regulations aimed at attacking the currently used optimizations, the Ministry of Finance will make the life of ordinary entrepreneurs significantly miserable (in particular the ones that unfortunately “happen” to operate on a much bigger scale than micro- and small businesses.) What seems to be especially striking is being prejudiced against the sector of services and commercial property market (but only its selected parts!) In general, the Ministry of Finance is running an extraordinary campaign of increasing taxes not by way of changing the tax rate (it is still 19 percent), but through raising the taxable base – a much simpler and politically more digestive solution. And 19 percent on the generated revenue (and not on the income) in some industries could be surprisingly close, but that is a horse of a different colour…

Below you can find a brief summary of several most substantial changes in CIT.

Separating capital income from operating income

  • a definition of capital gains has been introduced, including, among others, (i) income from a share in profits of legal persons (a detailed catalogue has been introduced), (ii) from disposing of shares, stocks, rights in partnerships, (iii) in-kind contributions, (iv) disposing of debts and securities, (v) revenue from some property rights (licenses, know-how, copyrights);
  • operating profits are separated from capital earnings, as a result of which losses from one source cannot be deducted from the income from the second source (for example, a loss on the disposal of shares cannot be deducted from the income derived from the sales of products).

Costs of financing

  • excluding from tax deductible expenses the costs of financing exceeding 30 percent (of the income constituting the taxable base + depreciation write-offs from a given year + a positive difference between the revenue and the costs of financing) (”tax” EBIDTA);  
  • the costs of debt financing are defined as all kind of costs related to obtaining from other entities, including from the entities that remain unaffiliated, funds and using the funds in question, including but not limited to interest (also capitalized ones), fees, commissions, bonuses, the interest on the lease payment, penalties and late payment interest as well as the costs of securing receivables and liabilities (including the costs of derivative financial instruments), irrespective of the entity to the benefit of which they have been incurred;
  • such limitations are not applicable in the case of the taxpayers whose surplus of financing costs in a given year does not exceed PLN 120 000.00 as well as, inter alia, financial companies (for instance banks);
  • the costs of financing excluded in a given fiscal year can be deducted in the following years, in accordance with the above-mentioned rules;
  • the current rules will be applicable to the interest on the loans that have been effectively transferred to a taxpayer prior to the day of the amendment coming into force; nevertheless, not longer than by 31st December 2018;
  • it is worth mentioning that the Ministry of Finance indicates that the provisions have to be introduced in conjunction with a European directive; yet it conveniently forgets to mention at the same time that the regulations are being implemented at a much earlier stage and in a significantly more stringent form as compared with the content of the directive itself; 
  • as an indirect result of the amendment the regulations pertaining to insufficient capitalization have been eliminated.

 Intangible services and intangible and legal assets

  • The draft amendment also introduces a limit as regards the right to include in tax deductible expenses the following:   
    - expenses for intangible services, including advisory, managerial, accounting, legal, data processing services, etc.
    - license fees for using the selected intangible and legal assets, including trademarks – up to 5 percent of EBITDA in relation to excess over PLN 1.2 M.
  • The limit as regards including costs in tax deductible expenses shall also be applicable to depreciation write-offs from the selected intangible and legal assets (trademarks, copyrights) and fees and other receivables for using such intangible and legal assets   – if they had been previously acquired– up to the amount of the revenue generated by the disposing entity.
  • The limitation applies to all advisory services, and not only the ones rendered by affiliated entities.

Income tax on commercial property

The draft amendment envisages a somewhat preposterous attempt to impose a tax structured as an income tax and used only and exclusively in relation to some commercial property. In practical terms, it is a strictly property-related tax, since it is paid irrespective of the generated income and its taxable base are the owned assets.

Pursuant to the provisions set forth in the draft amendment:

  • the tax includes office buildings, shopping centres, department stores, shops and other mixed use commercial buildings with the initial value exceeding PLN 10 million. The draft document does not specify whether the tax shall include for example hotels or logistics centres;
  • the taxable base shall be the initial value of a fixed asset. At the same time, according to the draft amendment, the taxable base shall constitute the total initial property value (not only a surplus exceeding the amount of PLN 10 million);
  • the tax shall be payable on a monthly basis and its rate shall total 0.042 percent, which annually means a tax obligation amounting to approximately 0.504 percent of the property value. Therefore given a fixed asset with the value of PLN 100 million, a taxpayer will be obliged to pay PLN 504 thousand in tax annually;
  • it will be possible for taxpayers to deduct the paid tax from advance income tax payments and next to include themin the process of calculating their annual tax obligation.

Tax Capital Groups

The draft bill envisages a modification of the legislation regulating the functioning of tax capital groups:

  • forfeiting the income tax payer status by a tax capital group retroactively (from the day of registering a tax capital group) as a result of violating the terms and conditions according to which tax capital groups operate. This signifies that the companies making up a tax capital group shall be under obligation to provide a tax settlement for the purposes of the income tax for the period starting from the day of the tax capital group registration to the day of losing the payer status as independent entities;
  • introducing a limitation as regards joining a different tax capital group by any of the companies that had previously been a member of the group which forfeited the status not earlier than after the expiry of a 3-year period (exception: when forfeiting the payer status results from violation – the requirement of the income share in revenue – 1 year).

Some supportive solutions have also been introduced as far as the functioning of tax capital groups is concerned (depicted by the Ministry of Finance as highly positive, though given the above-mentioned changes they can hardly be considered good news), that is:

  • reducing the requirement of the minimum income share in tax capital group revenue from 3 percent to 2 percent;
  • shortening the time for submitting a notification about a tax capital group being founded from 3 months to 45 days prior to the commencement of a new fiscal year.

CFC

  • As regards CFC the most pivotal change pertains to introducing an effective tax rate in lieu of the nominal one as a CFC assessment criterion. As a result, the companies with their registered offices in a country with high nominal taxation, yet taking advantage of specified types of deductions or tax refunds will be likely to be deemed as controlled foreign corporations.
  • Moreover, the proposed changes introduce a new catalogue of earnings considered to be subject to CFC. Apart from standard passive income from interest, dividends or liabilities, it is particularly worth underlining earnings derived by a foreign corporation from “transactions with affiliated entities in the event of the company failing to produce any economically added value as a result of such transactions or in the event of this value being negligible” as well as from insurance-related or banking activity.
  • The remaining changes touch upon the percentage range of owned shares (it used to be 25 percent, now it is 50 percent), the threshold of qualified income generated by CFC as compared with the remaining income (it used to be 50 percent, now it is 33 percent), adding to the shares held in a given entity also the shares held in a company by other affiliated entities.
  • Another significant change will consist in an obligation of including in a CFC register a controlled foreign corporation, even if it conducts a factual economic activity in another EU/EEA State.  

Exemption for dividends

  • Another aspect that shall be amended is the scope of exemption from the withholding tax, that is a tax at the source of gains paid out by taxpayers on account of dividends and other types of income on account of participating in the gains of legal persons. Pursuant to the amended regulations, the tax exemption shall include only and exclusively payments made by Polish companies to their Polish or foreign shareholders from the UE/EEA on account of dividends, increasing the share capital from gains accumulated on share capital as well as the so called retained earnings at the moment of the company being restructured. This means that the income from, for example, the redemption of shares/stocks or the liquidation of a subsidiary cannot be exempt from the withholding tax.

Let’s hope that this is a draft law that will be subject to extensive social consultations by the Ministry of Finance, following which some part of highly controversial and dramatic ideas will be alleviated. Nevertheless, it seems that the Polish CIT is bound to become increasingly cumbersome, not only owing to the higher tax rate but, first and foremost, due to the growing complexity of regulations. All in all, we do not want the budget to benefit from the Polish saying, according to which it is worth fishing in troubled waters…    

Paweł Toński

Managing Partner
Tax Advisory Services

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