The CIT law includes provisions on group taxation (i.e. in theory, a group of companies). If a group of companies meets certain conditions, it can be treated as a single taxpayer. However, the required conditions are extremely demanding and very few taxpayers of this type exist.
There is a minimum revenue-to-income ratio of the tax group established at 2%. The tax group will lose the status of taxpayer retroactively (from the date of registration as a tax group) in case of breach of certain conditions, and companies forming the tax group will be obligated to reconcile for CIT purposes as independent taxpayers retroactively for prior years. Group members will be obligated to set intra-group transaction terms at arm’s length. However, there will be no formal obligation to prepare statutory transfer pricing documentation for such transactions.
Transactions between related parties should be conducted in accordance with the arm’s-length principle. The tax authorities may increase the taxable base if the pricing method applied between related parties differs from what would have been applied between unrelated parties in a similar business transaction and the difference results in income being understated by a Polish taxpayer. The regulations apply to domestic transactions as well as cross-border ones. Similar rules also apply to transactions between Polish residents and the residents of tax havens. These transactions may be subject to the transfer pricing principles even if the parties thereto are not related. The CIT law also contains detailed requirements for transfer pricing documentation.
The biggest Polish capital groups (with consolidated revenues exceeding EUR 750 million) are obligated to provide, in Poland, information on their taxable income, tax paid, and their place of business unless the consolidating entity is a subsidiary of a foreign party. In this case, the obligation is shifted abroad.
Taxpayers are also obligated to prepare transfer pricing documentation in an extended format covering not only the description of a transaction but also ‘other events included in the accounting books’ if they were agreed to by related parties and influence the taxpayer’s taxable income or loss.
The scope of mandatory elements of transfer pricing documentation was changed in January 2019 and later amended by minor changes in February 2020 and December 2020. In particular, taxpayers must present the actual result achieved on a specific related-party transaction (which will, in most cases, require segmentation of the profit and loss account).
Transactional materiality thresholds applicable for transfer pricing documentation (local file) since January 2019 have been set at:
- PLN 10 million for transactions concerning tangible assets and financing.
- PLN 2 million for other transactions.
The materiality threshold for the master file has been set at PLN 200 million of consolidated revenue. The master file may be prepared in English; however, the tax authorities may request for the translated version.
Benchmarking studies are a compulsory element of the documentation for each transaction described in a local file, except for those to which safe harbours apply. If conducting such analysis is impossible, a taxpayer is required to prepare an analysis justifying compliance of the related-party transaction with the conditions that would have been set by unrelated entities.
Taxpayers are also required to explain any discrepancy between the actual results achieved on related-party transactions and results of relevant benchmarking studies. This will, in most cases, require segmentation of the profit and loss account.
Non-recognition and re-characterisation
The law, which entered into force as of 1 January 2019, granted the tax authorities additional tools. They are able to re-characterise or even disregard related-party transactions if they conclude that unrelated entities would not enter into transaction declared by the taxpayer or would conclude different transactions. Consequently, when assessing the arm’s-length level of remuneration in a given transaction, they could refer to other transactions or terms that, in their opinion, could have been applied by unrelated parties.
As of 1 January 2019, safe harbours have been introduced for two transaction types, i.e. loans meeting specific requirements and low-value-adding services. In the case of the former, an official announcement on the arm’s-length level interest rates has been published. For the latter, a mark-up of 5% is recommended.
In addition, for the transactions conducted after 31 December 2020, the safe harbours have been introduced for:
- transactions concluded by related entities that are micro or small entrepreneurs within the meaning of the Entrepreneurs' Law - This means additional simplifications for entities that employed less than 50 people and with a turnover of less than EUR 10 million or whose total assets did not exceed EUR 10 million at the end of the year.
- transactions other than controlled transactions, which are subject to the documentation obligation, concluded with the so-called tax havens, or in which the beneficial owner is a resident of the so-called tax havens.
Taxpayers are required to submit an electronic form (TP-R form), which replaces the CIT-TP / PIT-TP reporting forms used before 2019. The TPR form must be submitted within nine months after the end of the financial year and should contain information on the transactions carried out with related entities.
The new requirements require taxpayers to submit within nine months after the end of the tax year a statement to the tax authorities confirming that the transfer pricing documentation had been prepared and related-party transactions described therein had been conducted according to the arm’s-length principle. The statement must be signed by management board members. Submission of a false statement may lead to personal fines.
Taxpayers can mitigate the transfer pricing risk by applying for an APA. The tax authorities may not challenge the methodology agreed upon but may verify whether the methodology is followed in practice.
Indirect tax haven transactions
The new obligations are broad and are relevant for all transactions conducted after 31 December 2020 exceeding PLN 0,5 million in a given tax year. They refer not only to transactions with related parties, but with unrelated entities as well. The taxpayer is obliged to prepare the Local File documentation for each transaction exceeding the threshold and made with a counterparty whose beneficial owner is registered in tax haven.
The scope of obligations is extensive, but due to the additional amendments refer only to the cost generating transactions (from the perspective of the taxpayer).
However in those cases, taxpayers are obliged to verify their contracting parties and gather appropriate documentation confirming that these obligations have been complied with. Depending on the results of the verification, additional review of the location of the beneficial owner or preparing transfer pricing (TP) documentation may be required.
The new regulations include presumption that if the counterparty conducts a transaction with a tax haven entity that exceeds PLN 0,5 million in value, the beneficial owner of the counterparty is a tax haven entity. This presumption can be rebutted if the necessary evidence is provided.
Changes introduced in the Polish Deal
The Polish Deal package introduced a series of both major and minor changes to the Polish Transfer Pricing regulations. The changes affect transactions conducted after 31 December 2021, which means they will apply for for the first time for the Transfer Pricing documentation prepared for Fiscal Year 2022.
The major changes include:
- Merger of the statement on the preparation of transfer pricing documentation and TPR form. This means that at the end of the year, taxpayers will have to submit one electronic document instead of two submitted through different channels.
- Changes to the deadlines:
- the deadline for the submission of local documentation by the taxpayer at the request of the tax authority has been extended from 7 days to 14 days,
- the deadline for the preparation of local transfer pricing documentation was extended from 9 months to 10 months after the end of the fiscal year,
- the deadline for submitting information on TPR transfer pricing has been extended from 9 months to 11 months after the end of the fiscal year.
- Exemptions from the obligation to prepare documentation:
- Transactions between foreign establishments located in Poland, the parent entities of which are related entities, and between a midwife in Poland, a foreign establishment of a non-resident related entity and its related entity having tax residence in Poland.
- Transactions covered by a tax agreement and an investment agreement.
- Safe harbor transactions for low value added services, loans, credits and bonds.
- Transactions regarding settlements in the so-called clean re-invoicing under the following conditions:
- no added value is created and the settlement is performed without taking into account the profit margin or mark-up;
- settlement takes place without the use of an allocation key;
- the settlement is not related to another controlled transaction;
- the settlement was made immediately after the payment was made to an unrelated entity;
- a related entity is not an entity having its place of residence, seat or management board in the territory or in a country applying harmful tax competition.
Advance pricing agreement (APA) provisions
New provisions of the Act of 16 October 2019 on the settlement of disputes regarding double taxation and the conclusion of APAs (Journal of Laws from 2019, No. 2200) clarified the current procedure of issuing an APA decision.
The regulations also provide new possibilities to apply for an APA:
- by the foreign investor that is planning to start its operations in Poland, and
- for the transactions subject to the tax control, tax proceedings, or administrative proceedings conducted for a period earlier than the last two fiscal years preceding the year of submitting the APA application.
The provisions also introduced change in the rules regarding ensuring compliance with the issued APA decision. According to the regulations, possible audits will be carried out by the authorities as verifying activities.
Mutual agreement procedure (MAP)
In 2019, a MAP was implemented, which is the result of implementing the Council Directive (EU) 2017/1852 on the tax dispute resolution mechanisms in the European Union. In Poland, the regulations on the matter are provided in the Act of 16 October 2019 on the settlement of disputes regarding double taxation and the conclusion of APAs (Journal of Laws from 2019, No. 2200).
This procedure is intended to protect a taxpayer operating in two or more membership countries from the potential effects of double taxation.
The introduced rules based on which the MAP will be initiated and considered, and based on which the execution of those procedures will take place. The required elements of MAP application were also clarified and their scope slightly increased in comparison to previous regulations.
Country-by-country (CbC) reporting
The Act of 9 March 2017 on the exchange of tax information with other states (Journal of Laws from 2017, No. 648) introduced a comprehensive regulation concerning the international exchange of tax information within a single legal Act. It was later amended by the Act of 4 April 2019 (Journal of Laws from 2019, No. 694)
In particular, this Act contains regulations requiring the taxpayers belonging to a group with consolidated net turnover in the previous financial year exceeding the amount of:
- EUR 750 million (or the equivalent of this amount, converted according to the rules determined by the country or territory in which the ultimate parent company has its registered office or seat of management), or
- PLN 3,250 billion (in case the capital group prepares consolidated financial statements in Polish zloty)
to provide additional information about entities that form part of a group of entities (CbC report).
Such obligation lays on the ultimate parent company of the group, which prepares the consolidated financial statement. Related controlled entities located in Poland are required to submit the CbC notification, providing information on the entity that is submitting the CbC report.
Information about entities that form part of a group of entities
The obligation to file a CbC report applies to entities operating in groups that:
- prepare consolidated financial statements,
- conduct cross-border operations, and
- earned consolidated net turnover for the previous financial year exceeding EUR 750 million (or PLN 3,250 billion, in case denominated in Polish zloty).
The obligation is effective for the reporting financial year beginning after 31 December 2015.
The Act provides that, as a rule, a CbC report is to be provided by the ultimate parent company in the group (in Poland: if it has its registered office or seat of management here).
Additional obligations for the Polish taxpayers
However, a Polish taxpayer that is not an ultimate parent company may be obligated to submit a CbC report if:
- the ultimate parent company is not under such obligation in the state in which its registered office or seat of management is located
- the authorities of the state in which the ultimate parent company’s registered office or seat of management is located did not conclude an agreement on the exchange of information with Poland within 12 months from the end of the reporting year
- the state in which the ultimate parent company’s registered office or seat of management is located has suspended the automatic exchange of information, or
- no other group entity has been designated to prepare such information.
In addition, each Polish entity that belongs to a group obligated to submit a CbC report will have to:
- notify that it is an ultimate parent company, or
- specify the reporting entity and the state in which the information will be provided.
This information must be submitted to the Head of the National Revenue Administration (Krajowa Administracja Skarbowa or KAS).
A CbC report should, as a rule, be provided within 12 months from the end of a reporting year (i.e. for 2019: by the end of 2020).
If the ultimate parent company does not prepare information about the group, the Polish company is obligated to prepare and provide such information on its own no earlier than for the year beginning after 31 December 2016. However, the Polish taxpayer may voluntarily file such information also for the year beginning after 31 December 2015.
Polish taxpayers will have to notify the Head of the National Revenue Administration of the entity responsible for preparing the CbC report by submitting the CbC notification, which is submitted electronically, within three months of the end of the end of the group’s financial year.
The Head of the National Revenue Administration can audit taxpayers compliance with the rules set for preparation of the CbC reporting. If deficiencies or irregularities that do not require an audit will be indicated, the taxpayer will receive a written request from the Head of the National Revenue Administration for providing the necessary information within 14 days from the receipt of the notification.
Taxpayers can apply for correcting the information presented in CbC reports and CbC notifications that have been submitted if there is no ongoing audit.
Non-submission of CbC report or notification, submission of a CbC report or notification with incorrect data, or submission of an incomplete CbC report or notification could result in penalty payments.
As of 1 January 2018, new thin capitalisation 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 internal financing, and
- correlated with tax EBITDA.
Tax deductibility of interest is disallowed to the extent: (the excess of interest costs over interest revenue) exceeds 30% * ((taxable revenues - interest revenues) - (tax deductible costs - depreciation of fixed assets and intangibles - interest cost))
However, the new rules should provide for a ‘safe harbour’ of PLN 3 million of tax deductible interest per year. The amount of interest non-deductible 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).
Under the grandfathering rules, loans granted and effectively disbursed by the moment of entry of the amendments into force are still subject to previously binding thin capitalisation rules; however, no longer than by 31 December 2018.
Controlled foreign companies (CFCs)
An additional income tax is imposed on direct and indirect shareholders (Polish tax residents) of a company/PE from the EU/EEA (or other country that concluded a DTT with Poland) if the following conditions are jointly met:
- Polish tax residents have directly/indirectly, solely or jointly with related entities, 50% participation in foreign company’s income, voting rights, or capital for at least 30 days.
- At least 33% of foreign company revenues is derived from passive sources.
- Tax actually paid abroad (not subject to refund or credit in any form) is lower than the difference between the tax that would be paid by this foreign company in Poland (if it was a Polish tax resident) and tax actually paid abroad.
The tax regime also affects taxpayers that are owners of foreign companies located in countries recognised as applying harmful tax competition or countries not participating in exchange of tax information with the European Union or Poland under a certain treaty.
As of 1 January 2019, the definition of a 'controlled foreign company' has been changed. The list of entities qualified as CFCs has been extended to foundations, trusts, and other fiduciary entities.
Under the regime, income earned by the CFCs is subject to the 19% CIT rate. As a general rule, taxpayers are allowed to decrease the tax due in Poland by the amount of tax already paid abroad by the CFCs. The tax base is to cover the whole amount of income earned by the CFCs (including the passive income and the income earned on the actual business) that can be allocated to the Polish shareholders. The tax base is calculated proportionally to the period in which particular taxpayers were foreign entity’s shareholders. If the CFCs are located in tax havens, the shareholders are to pay the tax on the whole amount of income earned by the CFCs (independently of their actual share in the income).
In certain cases, tax on income from the CFCs will not be levied if the CFC performs actual economic activity, defined as below, inter alia:
- Incorporation must correspond with an actual establishment intended to carry on genuine economic activities. In particular, the CFC should physically exist in terms of premises, staff, and equipment.
- The CFC does not create an artificial arrangement without a link with the economic reality.
- There is proportionality between the actual economic activities carried out by the CFC and the extent to which the CFC exists in terms of premises, staff, and equipment.
- Agreements concluded by the CFC have business justification and are in line with its economic interest.
Furthermore, certain administrative and reporting obligations have been introduced with CFC rules (e.g. obligation to maintain a register of the CFCs, filing separate tax returns presenting the amount of income generated through the CFC).
As of 1st January 2022, due to an entrance into force of the provisions of the Polish Deal, the definition of a foreign entity has been changed. From January 2022, as a controlled foreign company may be considered entities whose co-owners have at least 25% of shares in the capital or voting rights in the bodies controlling, constituting, managing or having the right to participate in profit and are Polish tax residents who, in the wording of the proposed regulations no longer have to be related parties. (until January 2022 only the participation of related entities was taken into account)
With regard to the modification of the current rules, the regulations change the current definition of a CFC by extending the scope of the so-called list of passive revenues, by taking into account revenues such us, among others, those for intangible services, rental, sublet, lease, sale of rights in a partnership, investment fund, or even in some cases the sale of goods. The test of the low effective income tax rate paid by the the controlled entity has also been changed, by increasing it from 50% of the standard CIT rate to 75% of the standard CIT rate (hence the effective income tax rate condition determining the CFC status was increased from the current 9.5% to 14.25%).
Finally, it was proposed to add two additional CFC definitions introducing completely new conditions that must be examined in order to qualify as a CFC. These tests are related to the value of assets (i.e. shares in other companies, real estate, movable property, intangible assets, receivables) owned by a foreign entity. The introduction of new regulations requires Polish taxpayers to constantly monitor not only revenues but also foreign balance sheets subsidiaries.
Under the new regulations, TEST 4 replaces the taxation of CFC income with a rate of 19%, something that we can define the minimum rate of the CFC’s wealth tax, calculated as follows:
- the tax base is equal to 8% of the value of the entity's "passive" assets (e.g. stocks / shares, real estate - cash would not be included in the tax base);
- the tax rate is equal to 19%
As a result, the effective tax rate on "passive" assets is 1.52%
In the introduced TEST 4, among others, the following conditions must be met:
- The new extended passive revenues are lower than 30% of the sum of the value of the following assets held:
- shares (stocks) in another company, rights and obligations in a company which is not a legal person, participation titles in an investment fund, collective investment institution or other legal person, receivables resulting from the possession of the above-mentioned rights,
- value of real estate or movable property owned or jointly owned by the taxpayer or used by him under a leasing contract,
- intangible assets,
- receivables from new extended passive titles towards related entities.
- The assets listed above constitute at least 50% of the value of the entity's assets.
However, it should be emphasized that TESTS 1-3 and 5 are examined in first place - analysis of TEST 4 conditions takes place only after examining the conditions of the other tests.
In the introduced TEST 5, among others, the following conditions must be met:
- the entity's income exceeds the income calculated according to the formula: (a + b) x 20%, where the individual letters mean:
(a) the balance value of assets increased by accumulated value of depreciation write-offs;
(b) the annual employment cost of the entity;
- less than 75% of revenues will come from transactions with unrelated entities seated in the same jurisdiction.