Foreign tax credit
Resident corporations are taxed on their worldwide income unless there is an applicable DTT in place between Poland and the relevant country that provides that the foreign income shall be exempt from taxation in Poland. In all other cases (in particular, when the income is not covered by any treaty), Poland uses the ordinary credit method to avoid double taxation. Therefore, a Polish resident is liable for income tax imposed on its worldwide income, but the tax is proportionately reduced by the income tax paid abroad.
Special Economic Zones (SEZs)
At the end of June 2018, new regulations concerning SEZs entered into force. The act is significantly altering the situation of the investors planning to get income tax incentives in relation to new investment projects. Zonal permits are no longer issued by the authorities, but entities may apply for decisions based on new regulations. The biggest change in the SEZ system is its availability, as obtaining a tax incentive does not depend on the location of the new investment.
The amount of the incentive depends on:
- the value of eligible costs of the investment (investment expenditure or costs of the two-year employment of new employees)
- permissible level of the state aid in a selected region, and
- the size of the enterprise.
The right to use the exemption is granted for 10, 12, or 15 years, depending on the location of the investment.
Gaining the income tax exemption by the investor due to implementation of a new investment requires one to meet numerous quality criteria. Some of them remain common for all types of investment projects.
The minimum number of points in qualitative criteria is from 4 to 6 points out of 10 possible.
The minimum number of points depends on the investment location; investments in less developed voivodeships are preferred.
The amount of tax exemption depends on the value of eligible costs of the investment (investment expenses or two-year labour costs of new employees) and the permissible intensity of state aid applicable in a given region, as well as the size of the enterprise.
Until the new regulation entered into force, Polish legislation provided investment incentives related to business activities carried out in 14 zones defined as SEZs. A business entity could benefit from tax incentives, provided that the entity obtained a permit from the Ministry of Economic Development to conduct business activities there and met other legal requirements. Note that a CIT credit applied only to income earned on activity conducted within the territory of SEZs and covered by permit. According to current regulations, the deadline for utilising the available tax credit from the previous SEZ system is the end of 2026 (previously 2020).
The new regulations also contain important changes for entities already operating in SEZs, even if they do not plan new investment projects. The provisions contain the possibility of losing the right to tax incentive in the event of taking actions for artificially increasing the incentive or making a fictional transaction aimed at avoiding taxation.
Tax relief for research and development (R&D)
Entrepreneurs have the possibility of a tax deduction of costs incurred for R&D. The value of the deduction varies depending on the size of the company and type of eligible costs.
Eligible costs include the following six categories of R&D expenditures:
- Employees’ wages and social contributions.
- Purchase of commodities and raw materials.
- Expertise, research, and opinions bought from scientific units.
- Payments for use of research equipment.
- Amortisation of intangible assets and fixed assets, excluding passenger cars, buildings, and constructions.
- Costs of obtaining IP protection.
To benefit from the tax relief, each entity needs to perform R&D works and prepare a record of the eligible costs incurred in relation to R&D works in a given year. It is not important whether the R&D works end with success or the level of innovativeness of future effects of those works. Tax relief is also allowed for qualifying projects in progress (e.g. projects launched in previous years).
From 2018, there is an increase of the existing deductions in income taxes from 50% and 30% (depending on the category of eligible costs and the size of the taxpayer) to 100% of qualified costs, irrespective of their category and size of the taxpayer (which has hitherto differentiated the allowed deduction limits). This means that all taxpayers benefiting from R&D tax relief will be able to save in income tax PLN 19 on every PLN 100 of qualified costs starting from 2018.
Also, taxpayers may deduct expenditure incurred on employees that covers the costs of staff hired by taxpayers for R&D purposes under selected civil law contracts (previously only on an employment contract basis).
The new regulations also clarify that R&D tax relief is available to taxpayers who, during the tax year, have operated in an SEZ on the basis of a permit, regarding eligible costs that were not recognised as costs of running the activity covered by the SEZ's permit.
As of 1 January 2019, a new mechanism reducing tax rate to be applied to income derived from intellectual property (IP) rights (Innovation Box) has been introduced.
The Innovation Box scheme reduces, to 5%, the tax rate applicable to an income derived from IP rights.
The adjustment relates to the ratio of costs incurred on self-developed of IP rights in R&D activity and costs of subcontracting of R&D activity.
Taxpayers applying the Innovation Box scheme shall be entitled to benefit from the tax preference until a given right expires (20 years in case of a patented invention).
The tax preference applies provided that a taxpayer conducts R&D activity related to development, creation, or improvement of a given IP component. In order to benefit from the scheme, taxpayers will be required to separate the discussed income in their accounting books.
The new provisions complement the Polish innovative activities tax preferences system by supplementing the existing R&D tax relief. Previously, an entrepreneur introducing an invention to the market was required to tax income with a standard tax rate. Upon R&D relief, the entrepreneur is now entitled to a tax relief calculated on the basis of qualified costs incurred (e.g. on development of an invention).