NEWSLETTER
No. 22, September 2022
Malinowski & Associates. Legal Advisors. Partnership
Table of contents
Amendment of the Corporate Income Tax Law and some other laws.
Modification and postponement of the entry into force of the minimum income tax regulations.
The repeal of the regulations on the so-called. “hidden dividend.”
Amending regulations on taxation of flipped income.
Withholding tax (WHT) changes.
Tax exemption for dividends received by a holding company.
Government program to support entrepreneurs in connection with the energy market situation.
What does the government program to support entrepreneurs consist of?
Difficult situation in the energy market.
Method of granting public assistance.
Amendment of the Law on Corporate Income Tax and Certain Other Laws
On August 25, 2022, the Sejm received a government bill on amendments to the Law on Corporate Income Tax and certain other laws (print No. 2544), commonly referred to as the Polish Order 3.0. During the third reading at the Diet, a decision was made to pass the law, which was sent to the President and the Speaker of the Senate on September 19, 2022. The most important of the changes, which, in principle, are scheduled to take effect on January 1, 2023, will be discussed below.
Modification and postponement of entry into force of minimum income tax regulations
The current regulation stipulates that entities liable for the minimum income tax are companies and tax capital groups, which in the tax year, within the framework of their operating activities, incurred a loss or whose share of income in income (the so-called profitability ratio) amounted to no more than 1%. This tax amounts to 10% of the tax base.
According to the proposed amendments, the value of the profitability ratio is to be increased to 2%, and the current method of calculating it will also be changed. In addition, the taxpayer will be entitled to choose the tax base, which can be an amount equivalent to 3% of the value of the income he earns or an amount equivalent to 1.5% of the value of the income he earns plus passive expenses.
The catalog of taxpayers who are not required to pay the minimum income tax will be expanded to include the so-called “taxpayers”. small taxpayers, i.e. taxpayers whose annual revenues did not exceed the equivalent of €2,000,000.00, municipal companies, taxpayers whose profitability rate in one of the last three tax years was above 2%, as well as taxpayers who have been placed in bankruptcy, liquidation or under restructuring proceedings.
The draft provides for postponing the entry into force of the minimum income tax regulations until January 1, 2023.
The repeal of the regulations on the so-called. “hidden dividend”
A hidden dividend, within the meaning of the Corporate Income Tax Law, would be a profit payment to the company’s shareholders, which, due to the inclusion of a certain payment as a deductible expense in the company, would have the effect of reducing the company’s income. In particular, costs considered to be disguised dividends would be those costs whose amount or timing is in any way dependent on the taxpayer’s profit or the amount of that profit. The decision to repeal the hidden dividend regulation was motivated by the interpretative doubts that arose having to do with the transfer pricing regulations, as well as the overly broad and imprecise definition of the prerequisites that qualify the costs incurred as hidden dividends.
The introduction of increased materiality thresholds for. preparation of transfer prices in paradise transactions
The CIT Law operates with the notion of the so-called “CIT”. materiality thresholds, beyond which an obligation to prepare transfer pricing documentation arises with respect to the taxpayer. Materiality thresholds are associated with haven transactions, i.e. transactions with entities from a country with harmful tax competition. The proposed amendments provide for the introduction of increased materiality thresholds of respectively: PLN 2,500,000.00 for a financial transaction and PLN 500,000.00 for another transaction. Currently, the threshold is PLN 100,000 regardless of the type of transaction.
Change in taxation rules on flipped income
Pass-through income, as a rule, is any cost incurred directly or indirectly for the benefit of a related party. Under the proposed changes, only deductible expenses will be taxed at a rate of 19%. Under current regulations, a related party should be subject to income tax on all income earned at an effective rate of 14.25% or less. On the other hand, costs that have been incurred directly or indirectly for the benefit of a related party should be included in any form in its deductible expenses, deducted from income, tax base or tax, or should be paid by the party, e.g., in the form of dividends, and at the same time should account for at least 50% of the value of income earned by the party. The new wording of the regulations defines the prerequisites that must be met by a related party in a more precise manner. Namely – the entity should have its registered office or management outside the territory of the Republic of Poland, receive at least 50% of its revenues from certain passive receivables, and transfer revenues it received from a Polish company of at least 10% to another entity.
Changes in withholding tax (WHT)
The tax payer’s statement that it has the documents required by tax law for the application of the tax rate or the exemption or non-collection of tax resulting from special provisions or double taxation treaties generally entitles the tax payer for a period of two months to refrain from collecting lump-sum income tax on payments made to a related party that exceeded the amount of PLN 2,000,000 in the tax year of the tax payer. The proposed amendments provide for an extension of the validity of this statement until the last day of the tax year in which the payer submitted such a statement. As a result, the payer will be able to not apply the pay & refund mechanism until the end of its fiscal year.
Tax exemption for dividends received by a holding company
The fundamental purpose of the changes regarding PSH regulation is to increase its attractiveness. Applying the proposed amendments, a simple joint-stock company will be able to be considered a domestic subsidiary in addition to a limited liability company and a joint-stock company. The previous income tax exemption of 95% of dividends received by the holding company will be replaced by a full tax exemption.
Government program to support entrepreneurs in connection with the energy market situation.
What does the government program to support entrepreneurs consist of?
On September 29, the Parliament passed a law on the principles of implementing programs to support entrepreneurs in connection with the energy market situation in 2022-2024. The bill is awaiting the President’s signature.
The law’s drafters indicate that the Council of Ministers would have the ability to introduce programs to provide assistance to entrepreneurs by resolution. The government program would specify the entrepreneurs eligible to receive assistance under the program, the forms, criteria, conditions and period of granting assistance, the method of calculating the amount of assistance, the maximum amount of assistance, the scope of the application for assistance, the deadline and method of submitting applications for assistance, the rules and deadlines for the entrepreneur to account for the assistance.
It was pointed out that the essence of the solutions included in the draft is to provide financial support to certain groups of entrepreneurs in connection with their incurring additional costs resulting from the increase in electricity and natural gas prices.
The Council of Ministers will be tasked with appointing the operator of the government program from among units supervised or subordinate to members of the Council of Ministers, central government administration bodies or companies carrying out a public mission within the meaning of the rules on state property management. The designated program operator will carry out the instructions and recommendations of the Minister in charge of economic affairs in the field related to the government program and provide, upon any request from the Minister in charge of economic affairs, information related to the implementation of the government program.
As we read in the bill’s explanatory memorandum, the source of funding for the support programs will be the financial surplus accumulated in the Fund for Compensation of Indirect Emission Costs (FRPKE), and funds from a loan from the state budget, which will reach PLN 5 billion in 2023.
Difficult situation in the energy market.
As reported on the Polish Power Exchange, the average price of natural gas in July this year was PLN 824.4/MWh, 380% higher than a year earlier, and electricity in the same month was 198% higher than a year earlier, costing PLN 1125.94/MWh.
The current situation is the aftermath of Russia’s aggression against Ukraine, and since then there has been a surge in energy commodity prices. Poland has seen significant increases in electricity and natural gas prices relative to 2021. Of course, these dynamic changes are taking a toll on industrial companies. Some Polish companies, such as those in the ceramic or metallurgical industries, are already forced to halt production of some products. Given the size of the companies operating in these industries, which are often very significant employers in the local labor market, the current situation in the energy market could threaten many thousands of jobs.
Method of granting public assistance.
According to Article 4 of the draft law of the day on the principles of implementation of programs to support entrepreneurs in connection with the situation in the energy market in 2022-2024, state aid will be provided at the request of the entrepreneur. The submission of such an application is tantamount to consenting to undergo an audit of the amount of aid received, the fulfillment of the conditions for its receipt and the correctness of accounting for the aid provided.
The justification notes that in the event that the total amount of aid resulting from applications that meet the criteria for granting aid exceeds the maximum limit of funds allocated to them, the amount of aid granted will be proportionally reduced so that the total amount of support granted is equal to the maximum limit specified in the entrepreneurial support program.
State Aid Agreement.
The basis for granting the aid will be a contract for assistance concluded by the program operator, acting on behalf of the minister responsible for the economy, with the entrepreneur in question. The agreement will stipulate, among other things, the conditions and amount of assistance to be provided.
Return of Compensation.
In a situation where the program operator determines that the aid was wrongfully granted to an entrepreneur, the entrepreneur will be required to return all funds collected, including interest. The provisions of the Law of June 17, 1966 will apply to the enforcement of recovery. On enforcement proceedings in administration.
Regulatory Impact Assessment.
The purpose of implementing this regulation is to mitigate the negative effects of the sudden increase in energy prices. According to the project proponent, the cumulative effect of all entrepreneurial support programs will be a low percentage of enterprises in financial distress.
The problem of many companies that faced the specter of bankruptcy will be solved (according to assumptions). The program to support entrepreneurs is primarily intended to allow companies to maintain profitability, jobs and production capacity during the crisis period. The proposed regulation should affect the labor market by securing many jobs. However, the details of the assistance program will be determined by a resolution of the Council of Ministers, so its final shape and dimension will be known at a later stage.
Aid Limits.
Article 19 of the draft law of the day on the principles of implementation of programs to support entrepreneurs in connection with the situation in the energy market in 2022-2024 introduces spending limits for the implementation of programs, which are as follows:
- 2022 r. – PLN 5,079,416,000;
- 2023 r. – PLN 8,212,659,000;
- 2024 r. – PLN 4,136,240,000.
The Minister of Economy will be responsible for monitoring the use of the spending limit. If a situation arises where the maximum spending limit adopted for a given year is exceeded or threatened to be exceeded, a corrective mechanism will be put in place to reduce expenditures intended to finance or subsidize the cost of implementing the government program.
