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. The last element of the definition of a tax-deductible cost was added to reduce uncertainties surrounding the deductibility of business expenses that do not directly generate revenue.
The CIT law provides 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 30k).
- 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 30k or EUR 50k in case of a passenger car which is an electric vehicle).
Please also note the following:
- Deductibility of interest from debt push-down structures is excluded.
- Deductibility of costs in sale and lease-back transactions is limited at the level of prior revenues.
- A one-off write-down for fixed assets of small value is possible for assets worth up to PLN 10,000.
There was also a limitation of deductibility of costs from certain intangible services and royalties, however as of 1 January 2022, this provision is no longer in force.
As of 1 January 2022, additional regulations regarding ‘minimum income tax’ were introduced. These regulations are applicable to all entities subject to CIT (incl. Tax Capital Groups), if their tax profitability (ratio of income to revenue) is less than 1%, or if they incur a tax loss for a given tax year.
Deductibility of financial costs is also subject to limitation. Deductibility restrictions are applicable both to internal and external financing costs (not only interest). The deductibility limit for the excess of financing costs applies if the excess is over the higher of:: PLN 3 million or the amount calculated according to the following formula:
[(P - Po) - (K - Am - Kfd)] × 30%
where individual symbols mean:
- P - total value of revenues from all sources of revenues, the revenues from which are subject to income tax,
- Po - interest income,
- K - total tax deductible costs without any deductions resulting from this regulation,
- Am - depreciation charges, classified as tax deductible costs in a given tax year,
- Kfd - debt financing costs, classified as tax deductible costs in a given tax year, not included in the initial value of fixed assets and intangible assets, before the deductions resulting from this regulation.
Furthermore, 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 a tax-deductible cost. 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).
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 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.
Accrued interest on loans and credit that were paid or capitalised are deductible for CIT purposes. Polish CIT law provides some exceptions, such as instances where costs are not associated with earning revenue.
In Poland, there are also some limitations of interest tax deductibility connected with thin capitalisation regulations. See Thin capitalisation in the Group taxation section for more information.
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. Taxpayer 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.
Conversion of debt into equity
As of 1 January 2019, taxpayers are able to include the value of the debt (e.g. value of the loan) in the tax deductible costs from contributing the debt in kind to the equity of the company, provided that the company actually received the loan.
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. These entities are as follows:
- Listed health care providers.
- The Material Reserve Agency for the purpose of performing statutory tasks.
- The Central Sanitary and Anti-epidemic Reserve Base for the purpose of carrying out statutory activities.
- Specific homes for mothers with minor children and pregnant women, night shelters, shelters for the homeless, including those with care services, support centres, family assistance homes, and social welfare homes.
- The COVID-19 Prevention Fund.
The value of the deduction depends on the date of donation, as follows:
- By 30 April 2020: An amount equal to 200% of the value of the donation is deductible.
- In May 2020: A deduction is made for an amount corresponding to 150% of the donation value.
- From 1 June 2020 to 30 September 2020: An amount equal to the value of the donation is deductible.
- From 1 October 2020 to 31 December 2020: An amount equal to 200% of the value of the donation is deductible.
- From 1 January 2021 to 31 March 2021: An amount equal to 150% of the value of the donation is deductible.
- From 1 April 2021 until the end of the month in which the COVID-19 outbreak was cancelled: An amount corresponding to the value of the donation is deductible.
The deduction is also possible when the donation was made with the participation of an organisation if:
- the donation was made to that organisation by the taxpayer between 1 January 2020 and 31 May 2020, and
- that organisation provided the taxpayer with written information about the month in which the funds from the donation were transferred and the name of the entity to which the funds were transferred.
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
A tax loss reported in a tax year may be carried forward over the next five consecutive tax years; however, in any particular tax year, the taxpayer may not deduct more than 50% of the loss incurred in the year for which it was reported. For example, a taxpayer that incurred PLN 100 annual loss in 2017 may carry it forward to 2018 through 2022. However, the maximum loss deduction in any of these years may not exceed PLN 50 (assuming that there are no other losses available for deduction).
Apart from the above-mentioned method, as of January 2020, a taxpayer has an additional option to carry forward the loss reported in previous years. A taxpayer may deduct from the tax base once over the next five consecutive tax years up to PLN 5 million of the loss incurred. Any loss above this limit may be deducted in the other years, but no more than 50% of the loss incurred in the year for which it was reported.
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, aforementioned regulation applies to the loss of the company forming the tax capital group incurred before the formation of this group, if:
- 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.
Payments to foreign affiliates
Deductions may be claimed for royalties, management services, and interest charges paid to foreign affiliates. However, note that interest expenses are subject to the thin capitalisation restrictions (see Thin capitalisation in the Group taxation section for more information). 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).
The Polish CIT Law also includes a so-called 'beneficial owner' clause with respect to interests and royalties. In line with the relevant provisions, similarly as in many DTTs, only the beneficial owner (i.e. not an agent, representative, trustee, etc.) can benefit from WHT exemptions under the Polish CIT Law.
The Polish CIT Law in connection with the Enterprise Law provides for a cash expense value limit, in line with which transactions having value over PLN 15,000 can only be recognised as tax deductible costs if settled using a bank transfer.