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August 4, 2021
2021-1462

Polandís proposed tax reform includes significant changes to tax system

Executive summary

On 26 July 2021, the Polish Government announced draft legislation implementing broad tax reform. The changes affect several areas of taxation including Corporate Income Tax (CIT), Personal Income Tax (PIT), and Value Added Tax (VAT). Their potential impact should be assessed by businesses in order to prepare for change and undertake the necessary actions.

Detailed discussion

The draft legislation consists of over 220 pages of new provisions. From the CIT perspective the changes impact in particular the following areas:

  • Withholding pay-and-refund regime, which after a few deferrals finally enters into force. Despite some adjustments as compared to the previous version of these provisions, the most impactful change, which is an obligation to collect withholding tax at the statutory rates of 19% or 20% regardless of potential reliefs, remains (see EY Global Tax Alert, Polish Ministry of Finance publishes decree deferring certain provisions of the new withholding tax reform to 31 December 2021, dated 30 June 2021).
  • Changes in the way that a maximum threshold of tax deductible financing cost is calculated, which may reduce deductions and increase the tax base.
  • Limitations in deductibility of costs, including intra-group debt, financing share acquisitions or costs of certain services provided by shareholders and board members.
  • Tax depreciation of real property could not exceed write-offs for accounting purposes.
  • Tax depreciation of residential properties would be disallowed.
  • A new form of agreement with the tax authorities available for strategic investors (see EY Global Tax Alert, Poland announces plans to introduce an investment agreement for strategic investors, dated 26 July 2021).
  • New tax exemptions for Polish holding companies, including an exemption for 95% of dividends received from qualified subsidiaries and a capital gains tax exemption on sales of shares of such qualified subsidiaries, subject to conditions.
  • New definition of a place of effective management, which is to limit situations whereby Polish residents set up entities in foreign jurisdictions, while not carrying out real business operations in that foreign jurisdiction.
  • Changes to the Controlled Foreign Company (CFC) regime.
  • Amendments to the CIT consolidation regime (see EY Global Tax Alert, Poland plans to simplify requirements for corporate income tax consolidation regime, dated 28 July 2021).
  • Obligation to provide an electronic version of accounting books to the tax authorities on a regular basis (to be effective from 2023).
  • Changes to the transfer pricing compliance obligations.
  • Amendments to the alternative CIT model (based on taxation deferred until distribution), which so far has not been well received due to various limitations. The changes are expected to broaden the group of Polish business owners who might be interested.

With respect to other areas of taxation, the changes include among others:

  • Implementation of a new Tax Incentives Package including:
    • Enhancement of the existing research and development relief and Intellectual Property Box regime
    • New relief for robotization
    • New relief for prototypes
    • New relief for innovative employees
    • Relief for business expansion, initial public offerings, and business consolidation
  • Far reaching changes regarding PIT taxation and the Social Security burdens related to employment, self-employment, and entrepreneurs, which can significantly impact employments costs.
  • Changes in the area of VAT, including:
    • Optional taxation of financial services
    • VAT consolidation mechanism (VAT grouping)
    • Amendments in VAT compliance and reporting obligations

The majority of changes are expected to be effective as of 1 January 2022.

Next steps

The proposed changes impact a broad range of tax areas. This Alert provides a general overview of certain selected issues covered by the new provisions. Additional Global Tax Alerts will cover more details regarding the most significant changes for multinational groups and the progress in the legislative process.

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For additional information with respect to this Alert, please contact the following:

EY Doradztwo Podatkowe Krupa sp.k., Warsaw

EY Doradztwo Podatkowe Krupa sp.k., Wroclaw

Ernst & Young LLP (United States), Polish Tax Desk, New York