Generally, a tax-deductible cost is defined as a cost incurred for the purposes of deriving revenues, as well as for the purpose of securing or preserving a source of revenue. Based on common practice, in order to determine tax deductibility of the expense, it must be incurred by the taxpayer, be definitive, be related to the taxpayer’s business activity, be properly documented, and not specifically excluded from deduction (by means of limitation, likewise interest, or being listed as non-deductible).
In addition, the expense must be paid by a bank transfer, in particular included on a white list of taxpayers in case of a payment to a VAT payer and/or paid without the split payment mechanism if indicated on the invoice (for more details, see comments on the 'White list of VAT payers’ and ‘Split payment system in VAT settlements’ in Other taxes section). Obligation to settle expenses with use of bank accounts is applicable to B2B transactions exceeding a value of PLN 15,000 (gross). Expenses paid in violation of these rules cannot be treated as tax deductible costs.
As a rule, the CIT Act divides tax-deductible costs into:
- costs directly related to taxable revenues (‘direct’ costs), which generally should be recognised in the tax year in which their corresponding revenues are achieved, and
- other (‘indirect’) costs (e.g. management costs, media, advertising), recognised at the moment when incurred, or spread over time in case of costs relating to a period exceeding the tax year.
There are few groups of expenses defined as non-deductible, i.e.:
- Expenses incurred in connection with the acquisition of fixed and intangible assets that are subject to tax depreciation; a one-off write-down for fixed assets of small value is possible for assets worth up to PLN 10,000.
- Expenses deducted only at the moment of payment (e.g. interest).
- Expenses included on a list of items that are not deductible for tax purposes, even if the items meet the general conditions described above. This list contains over 60 items, including, among others, the following:
- Written-off, lapsed accounts receivable.
- Entertainment costs.
- Accrued but unpaid interest.
- Accounting and comparable provisions.
- Tax penalties and penalty interest.
- A portion of the insurance premium paid on a passenger car (i.e. the portion calculated on the excess of the car value over EUR 30,000).
- A portion of the depreciation write-offs made on a passenger car (i.e. the portion calculated on the excess of the car value over EUR 30,000, or EUR 50,000 in case of a passenger car that is an electric vehicle).
Expenses incurred in connection with the acquisition of fixed and intangible assets (e.g. licences, trademarks, know-how) are not directly deductible. Instead, the acquired assets are subject to depreciation. If such assets are sold, a business is entitled to deduct the net value (cost of acquisition reduced by the overall value of the tax depreciation allowances made).
Similar treatment relates to the acquisition of shares or land, except that these particular assets are not depreciable. Therefore, the full cost of an acquisition of shares or land may be deducted when such assets are sold.
Depreciation write-offs are treated as tax-deductible costs. Generally, depreciation allowances are calculated based on the straight-line method and the maximum annual rates provided in the CIT law. If this is the case, a taxpayer deducts equal annual write-offs, calculated by multiplying the maximum rate of depreciation by the asset’s initial value until the total value of write-offs equals the initial value (typically, the initial value equals the purchase price/manufacturing cost).
Standard depreciation rates can be decreased (and increased back up to the standard rate) at the beginning of each tax year. Taxpayers can rather freely decrease depreciation rates according to their needs.
For certain categories of machinery and vehicles (but not passenger cars), the reducing-balance depreciation method may be applied. Under this method, the tax depreciation may be accelerated during the initial period of the asset’s use by multiplying the statutory maximum rate by two. The rate is then applied to the net value of fixed assets (i.e. initial value reduced by earlier annual write-offs). The reducing-balance method is applied until the annual depreciation write-off equals the hypothetical write-off that would be made under the straight-line method. From this point, the depreciation allowance is taken based on the straight-line method for its remaining useful life.
The main categories of assets and the related statutory annual tax depreciation rate are as follows:
|Assets||Depreciation rate (%)|
|Various buildings and constructions||2.5 to 10|
|Machinery and equipment (general)||7 to 20|
|Machinery for road building and construction||18 to 20|
|Machinery for paper industry||14|
Apart from the above, the Polish CIT law includes provisions for accelerated depreciation (within specified limits) for assets used in deteriorated conditions and for second-hand assets.
Under the rules introduced by the 'Polish Deal' programme, as from the beginning of 2022 the tax deductibility of tax depreciation write-offs in real estate companies is limited up to the value of the accounting depreciation. In practice, this regulation may have an adverse impact on the entities whose tax depreciation write-offs are higher than the accounting ones if the entity applies the cost model. Moreover, if a given entity measures its investment properties under the fair value model from the accounting perspective, then no tax depreciation deduction is allowed.
Under the provisions of CIT law, goodwill is subject to tax amortisation if it is created as a result of acquisition of an enterprise, or its organised part, made in one of the following ways: (i) purchase; (ii) payable use, provided that the user of such enterprise/organised part of an enterprise makes the depreciation write-offs; or (iii) contribution to a company based on commercialisation and privatisation regulations. The goodwill is amortised for tax purposes for a minimum period of five years.
There are no specific provisions in the Polish CIT law relating to start-up expenses; the general rules of tax deductibility described above apply.
Generally, interest on loans should be deductible on a cash basis, provided that: (i) the loan is used to earn or secure sources of taxable revenues, (ii) the loan has been provided at arm’s-length terms, (iii) deductibility is not excluded based on thin capitalisation (interest deductibility) limitations, (iv) and this interest is not specifically listed in the CIT Law as non-tax deductible (e.g. interest listed as non-deductible based on the anti-debt push down provisions or the provisions implementing the ATAD2 Directive).
As of 1 January 2018, new interest limitation rules entered into force. Previously, the amount of tax-deductible interest on intra-group loans was correlated with the level of equity. New rules introduced deductibility restrictions:
- applicable both to internal and external financing, and
- correlated with tax EBITDA.
Tax deductibility of ’debt financing costs‘ is disallowed to the extent in which they exceed (i) the amount of PLN 3 million or (ii) 30% of so-called ‘tax-EBITDA’ (whichever is higher).
The amount of non-deductible interest in a given tax year may be carried forward and deducted in five subsequent years (still subject to general limitations of 30% EBITDA).
Restrictions are not applicable to financial entities (e.g. banks, credit institutions, as well as open-end and closed-end investment funds).
Starting from 1 January 2022, the costs of debt financing obtained from a related entity in the part in which they were intended, directly or indirectly, for capital transactions (in particular for acquisition or taking up of shares and acquisition of all the rights and duties in a partnership with regard to other related entities, making additional payments, increasing share capital, or repurchase of own shares for purposes of their redemption) cannot be treated as tax deductible. Restrictions are not applicable to costs of debt financing granted by a bank or a cooperative savings and credit fund having its seat in an EU member state or in another state belonging to the European Economic Area.
Notional Interest Deduction (NID)
As of 1 January 2019, a new NID mechanism has been introduced. NID allows one to deduct from the taxable base the hypothetical costs of obtaining external capital in the case the company receives funding in the form of additional payments to capital or retained profits. The maximum limit of NID is PLN 250,000 in a tax year. This mechanism is applied from 2020.
As of 1 January 2020, creditors may reduce their tax base by the value of receivables if monetary payment has not been paid or sold. After 90 days from the invoice due date as specified in the invoice or contract, the taxpayer may reduce/increase the tax base.
The reduction or increase should be shown in the tax return submitted for the tax year as well as monthly advances. Taxpayers may reduce the tax base if the liability has not been settled by the date of tax return submission. If the liability is settled in the following tax period, the taxpayers are required to increase or reduce the tax base in the subsequent period.
Companies are entitled to deduct donations for the purposes of public benefit and to volunteer activity organisations up to a total amount not exceeding 10% of income; however, deductions may not be made for donations to:
- natural persons or
- legal persons or organisational units having no legal personality who carry on economic activity consisting in the production of electronic goods; fuel; tobacco; spirits, wines, beers, and other alcohol beverages containing over 1.5% alcohol; products made of noble metals or containing such metals; or incomes received from trading in such goods.
Donations for religious practice purposes can be deducted up to a total amount not exceeding 10% of income.
Additionally, the donations of food products made for the purposes of so-called public benefit constitute tax deductible costs in the amount of production costs or purchase price.
Donations to combat COVID-19
The taxpayer may also deduct donations to prevent COVID-19 to selected entities made from 1 January 2020 through the end of the month in which the epidemic was cancelled. The value of the deduction depends on the date of donation, in particular in the period from 1 April 2021 until the end of the month in which the COVID-19 outbreak was cancelled (i.e. May 2022) an amount corresponding to the value of the donation is deductible.
Fines and penalties
Fines and penalties can be recognised as tax deductible items if they meet the general conditions. However, the Polish CIT law provides some exceptions, which include contractual penalties and indemnities for defects in supplied goods, works, and services performed; delayed supply of non-defective goods; and delay in the elimination of defects in goods, works, and services performed, unless it is caused by an epidemic emergency or an epidemic declared due to COVID-19.
Income tax, certain industry-specific taxes (e.g. banking tax), and, in most cases, VAT incurred on purchases are not deductible. However, as a rule, VAT is deductible for CIT purposes if it cannot be offset against the company’s output VAT. Other taxes, if paid in the course of business activities, are generally deductible in full.
Net operating losses
Tax losses may be carried forward for five consecutive tax years, subject to the restriction that not more than 50% of the amount of the tax loss from a given past year can be utilised in any single subsequent tax year.
Alternatively, a tax loss generated in a tax year commencing after 31 December 2018 may be also set-off during one of the immediately following consecutive five tax years by an amount not exceeding PLN 5 million. The amount not utilised may be deducted within the remaining years of this five-year period (however, the amount of such reduction in any of these years may not be higher than 50% of the amount of the tax loss; this is controversial if the latter limit is 50% of the full amount of loss (our view) or the unsettled amount of loss).
Tax losses carried forward in one ’basket‘ may be utilised solely to set-off taxable income from the same ’basket‘. Under grandfathering rules, tax losses carried forward from years preceding the tax year 2018 may be set-off against any taxable income, irrespective of the baskets.
As of 1 January 2022, this regulation also applies to the situation when a tax capital group loses its taxpayer status, or its agreement is terminated. In this case, the aforementioned regulation applies to the loss of the company forming the tax capital group incurred before the formation of this group, provided:
- the loss was incurred not earlier than in the fifth tax year of the company preceding the year for which the deduction is made, provided that this period also includes tax years of the tax capital group created by this company, and
- the income of the tax capital group has not been deducted by the amount of this loss.
Currently, there is no possibility to carry back tax losses in Poland, except for the specific measure introduced in recent years with regard to countering the impact of COVID-19. The taxpayers were allowed to carry back and set-off against taxable income of FY19 the tax loss incurred in FY20 (considering also shifted tax years) if certain conditions were met.
Tax losses of the entity expiring upon the restructuring (i.e. transformations, mergers, and demergers) are unavailable for utilisation, except for transformation of a company being a taxpayer into another company also being a taxpayer. However, with regard to restructurings taking place as of 2021, the taxpayer is disallowed to deduct tax losses carried forward in case of certain types of restructurings, i.e. a take-over of another entity or an acquisition of an enterprise or organised part thereof, if any of the following conditions is met:
- The scope of taxpayer’s core business activity afterwards is different (in full / in part) than it was before the takeover/acquisition.
- At least 25% of shares of the taxpayer is held by entity/entities that did not hold such rights on the last day of the tax year in which the tax loss was incurred.
Payments to foreign affiliates
On 1 January 2022, the provisions on the so-called ’diverted profits tax‘ came into force. The aim of those provisions is to eliminate the possibility of obtaining tax benefits through the transfer of profits to a tax jurisdiction with a marginal effective tax rate. The new regulations on diverted profits replaced the repealed provisions on the limitation of costs of certain intangible services and royalties incurred towards related entities (Article 15e of the CIT Act). This tax can be imposed at 19% rate on ’diverted profits‘ understood as certain costs (e.g. intangible services, royalties, debt financing cost, or payments for transfer of functions, assets, or risks) incurred, directly or indirectly, for the benefit of related entities (provided that certain conditions are met).
The tax on diverted profits is not applicable if the recipient conducts real economic activity in one of the EU/EEA countries.
Furthermore, note that transactions with related companies should be made according to the market conditions. Where a company shifts income to another entity (especially a foreign entity), the tax authorities may adjust the taxable base upward (see Transfer pricing in the Group taxation section for more information).