The Ministry of Finance has recently published a draft bill aiming to amend to the personal income tax (PIT) and corporate income tax (CIT) laws as of 1 January 2019 (the "2019 Tax Bill"). The proposed changes are of a very comprehensive nature and, according to the explanatory memorandum, are aimed at (i) "simplification" and (ii) "tightening up" of the tax system. The most important changes are presented below.
Decrease of the CIT rate
The CIT rate is to be decreased to 9% for taxpayers whose income in the current tax year does not exceed the PLN equivalent of EUR 1.2 million (if they have the status of small taxpayers and their share of income in revenues does not exceed 33%). The reduced rate does not apply to income from capital gains.
Innovation (IP) box
The 2019 Tax Bill is to introduce into the Polish legal system preferences for innovation activities already available in other countries as Intellectual Property Box, Patent Box or Knowledge Development Box (e.g. the Netherlands, Great Britain, Ireland, Luxembourg, Hungary or France). The preferential treatment is to cover revenues from commercialization of created, developed or improved intellectual property rights (e.g. patent, protection law on invention, the right to a computer program, the registration of a medical or veterinary product). Such income is to be taxed with a preferential 5% PIT or CIT rate. The purpose of the regulation is to increase the attractiveness of Poland as a place for conducting R&D activities, supporting the development of companies investing in new technologies.
Income eligible for the reduced tax rate will be qualified income calculated as the product of income obtained from license fees or other receivables related to the use or sale of intellectual property rights and a special indicator calculated depending on the types of costs incurred for research and development (the higher the share of costs own research and development works or the results of such works purchased from unrelated entities, the lower will be the tax base).
The prerequisite for using the preferences is the requirement for the taxpayer to conduct R&D activities directly related to the creation, commercialization, development or improvement of intellectual property right. It will also be necessary to keep detailed accounting records.
2019 Tax Bill is also to introduce taxation of unrealized capital gains in the case of transfer of assets, change of tax residence or taxpayer's permanent establishment outside the territory of the Republic of Poland. Exit tax will be applicable both to legal and natural persons. Exit tax may also apply in case of certain transfers of assets to other persons or entities.
The taxable amount is to be the surplus of the market value of assets, with respect of which Poland would lose taxing rights, over their tax value. Exit tax will be charged at a PIT/CIT rate of 19%. Only in PIT, if the tax value of an asset is not determined, the rate will be 3%.
The obligation to submit a declaration and pay tax will have to be fulfilled by the seventh day of the month following the month in which the event triggering exit tax occurred. Under certain conditions, taxpayers may be able to apply for payment in installments for a period not exceeding 5 years.
The 2019 Tax Bill introduces fundamental changes in collection of withholding tax ("WHT") in Poland (and also in the WHT agent liability for unpaid tax). The planned changes are to replace the tax relief mechanism (application of WHT reduction by the WHT agent at source e.g. when paying interest) by tax refund mechanism. This means that the tax is to be collected by the WHT agent in full amount without the application of exemptions resulting from the Polish law and double tax treaties, and the taxpayer may receive (partial) WHT refund after proving the right to apply preferential rate.
The new rules are to apply when payments to one recipient exceed the amount of PLN 2 million in one tax year. The 2019 Tax Bill also provides for other solutions to remain in the tax relief system.
The amendments also introduce changes to the definition of the beneficial owner, which include, among others, the requirement to conduct genuine business activity in the country of its residency (as defined by the Polish CFC regulations) by an entity receiving payments from a source in Poland.
Mandatory disclosure rules
The 2019 Tax Bill is also to introduce an obligation to inform the head of the National Tax Administration about the details of applied tax schemes. The reporting entities will in principle be intermediaries (advisory entities called promoters - tax advisers, legal advisors, advocates and other experts), but also in certain situations taxpayers implementing tax schemes. The information provided as part of a special procedure will include details of the arrangements agreed upon as part of the transaction with a description of it and an estimate of the expected tax benefit.
Changes to GAAR
The 2019 Tax Bill is to introduce among others a penalty payment (sanction) in the form of an additional liability of 40% (or 10%) of the tax liability resulting from the application of the GAAR (sanction covers also application of other anti-abuse clauses, transfer pricing settlements and cases where the withholding tax payer issued incorrect statement and did not make the required verification with reference to the withholding tax rate). The 10% rate may apply to income taxes where income constitutes the tax base.
The above penalty payment rate may be doubled in the case of tax benefits exceeding PLN 15 million, where the taxpayer has previously received a final decision on the basis of anti-abuse provisions) or in the absence of transfer pricing documentation. In certain circumstances, the above rates may also be reduced by half.
The project also extends the applicability of the GAAR clause to tax agents (remitters) and introduces a number of detailed changes in the application of the GAAR clause (e.g. issues of statue of limitation, correction of declarations in the course of GAAR related proceedings, clarification of the artificiality condition) and GAAR proceedings (including proceedings for issuing of a protective opinion).
Notional Interest Deduction
The 2019 Tax Bill is also to introduce new Notional Interest Deduction mechanism, i.e. the possibility to deduct from the taxable base of 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.
Capital financing costs are calculated as the product of the financing amount and the NBP reference rate increased by 1% and may not exceed PLN 250 000 in the tax year. This mechanism is to apply from 2020 (including also retained earnings from 2019).
The 2019 Tax Bill also introduces to the Polish tax law the detailed rules of taxation of the income from virtual currencies. Revenues from trading in virtual currencies will be qualified as the revenues from capital in PIT or capital gains in CIT. The loss incurred while trading in virtual currencies will not be deducted from other taxpayer's income, for example from the sale of shares or from business activity.
Limitation of expenses for the use of vehicles
Expenses related to the use of a passenger cars serving the taxpayer also for purposes other than business activity will be included in the tax deductible costs only in the amount of 50% of these expenses. The possibility to include in the tax deductible costs 100% of such expenses will apply to the use of a car only for business purposes and only when accurate records are kept.
Amendments to the regulations on controlled foreign companies (CFC)
The proposed changes provide that the scope of the regulation will also cover entities unknown to the Polish legal system, such as private foundations or trusts.
The 2019 Tax Bill also introduces a number of other changes to the tax system (e.g. recognition of costs of receivables acquired for the purpose of collection which is of utmost relevance for securitization structures; introduction of exemption from WHT with regards to interest coupons payable on Eurobonds, modification of rules of recognition of costs upon debt-to-equity swap). In order for the provisions to enter into force on January 1, 2019, the legislative process must be finalized by the end of November 2018. In the next three months, the 2019 Tax Bill will be subject to public consultations and will likely be subject to some amendments. We, however, expect that the above changes will not materially change the scope of the changes finally introduced.