Poland poised to launch new corporate income tax regime

By Dr. Monika Laskowska, Center of Tax Analyses and Studies, Warsaw School of Economics

It’s going to be a very hot summer this year in Poland as the government has announced that it will introduce the so-called Estonian solution into Poland’s corporate income tax system.

The plan is for the new law to enter into force from 2021. The first draft for public consultations will be launched at the end of June.

Due to the unprecedented increase in tax compliance requirements in recent years, this law is highly welcome in Poland.

By issuing the new law, the government is responding to requests from Polish private businesses to launch incentives to boost investment.

A long-standing complaint from the small and medium private sector relates to insufficient funds and high cost of capital that have a negative impact on investments in this sector.

Main assumptions

According to the Ministry of Finance announcement, a new corporate income tax system will concern the redistribution of corporate profits in a way that would incentivize the reallocation of profits for investment purposes.

By this fiscal tool, the government is aiming to persuade companies to keep profits in the firm and increase the accounting liquidity to manage crises. Taxpayers will be exempt from the annual and monthly/quarterly payoff in corporate income tax. Tax will be levied only at the moment of redistribution of profit.

Additionally, a new system will be set up using a minimal administrative burden approach, which means savings for taxpayers on tax accounting and advisory.

Taxpayers may enter into a new regime for four consecutive years with the possibility to prolong if conditions are met in the fourth year.

Two solutions

According to the announcement, companies will be allowed to choose one of two solutions.

The first approach is a full model that allows for taxation only redistributed profits (Estonian solution). The second approach is based on setting up a separate investment account (fund) that would allow deductions from corporate income tax.

The second solution is designed for companies that decided to use previously introduced tax incentives, such as the IP box, that are interested in continuing the program.

Scope of regime

The new Polish tax system is going to be voluntary for companies with turnover over PLN 50 million (EUR 11 million).

The government estimates that over 97% of corporate income tax taxpayers in Poland meet this threshold. Exceeding the turnover in the course of the four-year period of participating in the regime does not exclude a taxpayer from the system.

However, other conditions for entering into the new system will drastically limit the potential of new law.

However, other conditions for entering into the new system will drastically limit the potential of new law.

According to the government, there is a need for private investments in Poland. Thus the system is structured for small and medium corporate income tax taxpayers with simple capital structures.

Only private limited companies are allowed into the regime (limited liability company and joint stock companies).

The government’s reasons for incentivizing incorporation is to act against the long-standing practice in Poland of using partnerships for tax avoidance structures. 

The main condition to enter is a requirement for all stakeholders to be individual persons.

Moreover, qualified companies are not allowed to keep the shares of other companies. The company should hire at least three employees (besides shareholders). Passive income can’t be greater than operational income.

Companies will be required to present investment funds. The increase in investment spending should be incremental and at least 15% in two consecutive years.

According to the government, additional requirements should be met by over 200,000 corporate income tax taxpayers with transparent and simple ownership structures.

Conclusions

While the new law is highly anticipated in Poland, it is also clear that some of the conditions might disincentivize the bulk of taxpayers to enter into regime even they meet conditions.

Demanding the requirement for proving an incremental rise in investments in uncertain economic times might significantly undermine the project.

There is also a significant group of companies that are out of the scope of the law. Introducing a preferential regime for a limited group of companies might create further distortions in the Polish market.