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October 5, 2021

Poland plans to limit tax deductibility of payments considered hidden dividends

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). The 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 limiting the tax deductibility of payments classified as “hidden dividends.”

For an overview of 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, payments classified as “hidden dividends” would not be tax deductible for Polish CIT purposes. According to the legislative explanation, the intention of the new regulations is to prevent the tax deductibility of payments which economically are profit distributions.

According to these new provisions, costs incurred by a corporate taxpayer in relation to a service or other performance provided by a related entity (not only a shareholder though) can be disallowed for CIT purposes if they are determined to constitute hidden dividends.

These costs would be regarded as the hidden dividends if one of the following conditions is met:

  • The amount and/or timing of the payment are dependent on the profit earned.
  • A taxpayer acting reasonably would not incur such costs or would incur them in a lower amount if the benefit was provided by a non-related entity.
  • These costs comprise remuneration for the right to use assets which were owned by the shareholder or an entity related to the shareholder prior to establishing the paying entity.

However, fulfilment of the tests under the second and third bullets above can be waived, if the total amount of costs regarded as the hidden dividends (based on these two bullets) in a given tax year is lower than the amount of gross profit (based on the accounting provisions) generated in a financial year in which these costs were included in the taxpayer’s financial result.

Next steps

The draft legislation will now be discussed in the Polish Parliament and it is likely that the effective date for rules regarding hidden dividends will be postponed until 1 January 2023.

However, as the potential impact could be very broad, including on payments and arrangements under genuine business operations, taxpayers should begin to assess the impact on affected entities and determine the action to be taken.


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