Polish Deal introduces new minimum tax for corporations

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

On 8 September, Poland’s government accepted a new tax bill called the “Polish Deal,” announcing after the public consultation on the bill a significant amendment to include a special anti-avoidance measure referred to as a minimum income tax for corporations.

The bill will now proceed to Parliament. The new provisions, if passed through the full legislative process, would enter into force from the beginning of 2022.

Scope of minimum income tax regime

According to the draft bill, the minimum income tax for corporations is designed as an alternative form of taxation of corporate income.

Despite earlier announcements, the scope of the new regime would not be limited to large companies.

The new minimum income tax would be imposed on corporate taxpayers in two separate circumstances. The first is when a taxpayer reports in a fiscal year tax losses from sources of revenue other than capital gains. The second circumstance is when a taxpayer reports taxable income from economic activity equal to less than 1% of tax revenue.

The two conditions also apply with respect to permanent establishments in Poland.

The estimated fiscal return from the new provision is about EUR 450 million (USD 532 million), and it is intended to balance the fiscal gap left by relinquishing the fiscal burden on small and medium entities proposed earlier in the Polish Deal draft.

Tax base for minimum income tax

In-scope companies would be required to calculate corporate tax under the alternative minimum income tax. The tax would equal 10% of a specified tax base.

The tax base for alternative taxation would be determined as the sum of the following elements. It would cover 4% of tax revenue other than capital gains. Companies would then add to that amount the surplus of expenses due to debt financing incurred in favor of associated companies, established according to a special algorithm, plus postponed income tax resulting in increasing the gross profit or decreasing the net loss. The last element to be added to the tax base would be expenses for specific intercompany services or intangibles.

Some tax deductions would be allowed, such as for donations and research & development qualified costs.

The minimum income tax could be carried forward and deducted from the regular corporate income tax calculated in the following three years.

Exclusions

Generally, the new regime is targeted at taxpayers avoiding taxation. Thus, the draft recognizes some “substance” based situations when companies might incur losses or register lower income in reasonable circumstances.

Accordingly, the draft includes several exclusions from the scope of the new regime. Exclusions would apply for start-ups for the first three years of activity, entities in the financial sector, companies that registered a 30% decrease in revenues based on year-to-year data, and companies with simple ownership structures.

Revoking limitation on deductibility of service costs and royalties

The new bill introduces a long-expected revocation of provisions introduced into the tax law in 2018 limiting the deductibility of intercompany payments such as royalties and some service payments. They will be replaced by the minimum income tax regime.

The limitation provisions were highly controversial with respect to their wording. However, companies were able to protect their cost deductibility when receiving an advance pricing agreement (APA). This created an immense growth in the number of APA applications. According to statistics from 2021, there are over 400 APA applications awaiting conclusion.

Surprisingly, together with revocation of the limitation provisions, the new bill cuts the benefits of APAs only for those companies that complete the APA by the end of 2021. The right for the deductibility will be saved for the period covered by APA.

Conclusions

The Polish government introduced the minimum income tax for corporations without public consultations, which results in faulty provisions. For example, it is not clear whether the carry forward deductibility of minimum income tax would limit the carry forward loss deduction. Moreover, the new provisions are set on a hard-to-justify stance of the Polish government that profit shifting is the only role of intercompany transfers through royalties, payments for services or interest from debt financing.

While revoking intercompany royalty/services tax deductibility is a positive change, it will leave uncertainty for most companies that are not able to conclude an APA before the end of 2021.