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September 28, 2021
2021-1758

Poland plans to introduce tax on shifted profits

Executive summary

Representatives of the Polish Government, on 8 September 2021, submitted draft legislation to the Polish Parliament on the major tax reform referred to as the “Polish Order." The changes would affect several areas of taxation including Corporate Income Tax (CIT), Personal Income Tax (PIT), and Value Added Tax (VAT). A majority of the provisions are expected to come into force as of 1 January 2022.

One of the significant changes proposed under the Polish Order is imposing additional tax on shifted profits.

For an overview of the other proposed amendments, see EY Global Tax Alert, Poland: Major tax reform proposal moves to Parliament, dated 17 September 2021.

Detailed discussion

According to the draft proposal, a new “tax on shifted profits” would be levied on Polish entities as well as entities with a permanent establishment (PE) in Poland. According to the legislative explanation, its intention is to eliminate tax schemes aimed at shifting income to tax jurisdictions with a negligible effective tax rate.

The new tax would amount to 19% of the costs incurred, directly or indirectly, with respect to payments to a related entity if the following conditions jointly exist:

  • The effective CIT paid by this related entity in the country of its tax residence is lower by at least 25% than the hypothetical CIT that would be due on such payments at the standard Polish rate of 19% (i.e. 14.25% CIT or lower)
  • These costs amounted to at least 50% of the revenues earned by this related entity and:
    • Are deductible from revenues, income, a tax base or a tax of this related entity, or
    • Were paid by this related entity in the form of a dividend or other form of participation in profits for a tax year in which the payment was received.

Costs forming a tax base for the purpose of the new tax would include certain types of payments, among others: payments for advisory services, marketing, market research, control and management, guarantees, financing costs (including interest, commissions), royalties, licenses, payments for the transfer of functions, assets, risks and only if the sum of these costs incurred in a tax year by a Polish CIT payer for the benefit of all recipients (including unrelated entities) amounts to at least 3% of the total sum of tax deductible costs of a given tax year. Certain deductions and exceptions could apply.

The new tax would not be levied on costs connected with payments to a related entity tax resident in a European Union / European Economic Area country if this entity undertakes a significant, real economic activity in this country.

Next steps

The draft legislation will now be discussed in the Polish Parliament.

Since the potential impact could be very broad, including on payments and arrangements under genuine business operations, it is important to assess such impact on each organization that can be affected and undertake any necessary action.

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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

 

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