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August 26, 2022
2022-1297

Poland plans to amend provisions implementing tax on shifted profits

  • At the end of June, the Polish Government announced draft legislation implementing changes to the Corporate Income Tax Law.
  • One of the significant changes makes certain modifications to the shifted profit tax regulations. This Alert outlines the proposed changes.
  • Since the shifted profits tax can have a very broad impact and affect payments or arrangements under genuine business operations, it is important to assess such an impact for each organization that could occur and undertake actions as necessary.

Executive summary

On 28 June 2022, the Polish Government announced draft legislation implementing changes to the Polish Corporate Income Tax (CIT) law. The proposed changes affect several areas of taxation; however, most of them are related to areas which were covered by the latest tax reform implemented as of 1 January 2022.

The potential impact of the proposed changes, including the areas where the 1 January 2022 tax reform has not yet become effective, should be assessed by businesses in order to prepare for the changes and to undertake the necessary actions.

One of the significant changes under the proposed amending act makes certain modifications to the shifted profits tax regulations.

For an overview of the other proposed amendments, see the EY Global Tax Alert, Poland proposes significant changes to Corporate Income Tax Law, dated 7 July 2022.

Detailed discussion

According to the currently applicable rules, the 19% shifted profits tax applies to Polish entities and to entities with a permanent establishment (PE) in Poland and is levied on certain categories of costs (such as financing costs, royalties payments, payments for selected services) incurred in a tax year by a Polish CIT payer towards (directly or indirectly) a related entity applying a low effective tax rate. For an overview of the current legislation, see the EY Global Tax Alert Poland plans to introduce tax on shifted profits, dated 28 September 2021.

The draft proposal will make, among others, the following modifications to the current provisions:

  • Clarification that the condition regarding a low effective tax rate should be verified with respect to income earned from the qualified categories of costs (as above) and not with respect to the entire income of the foreign recipient.
  • Inclusion of the possibility to trigger tax on shifted profits in the case the qualified income is subject to partial exemption from taxation (regardless of the effective tax rate).
  • Modification of the remaining conditions triggering the tax on shifted profits so that:
    • 50% of revenues earned by the receiving entity are comprised of all qualified payments made by related Polish entities; and
    • Introduction of an additional condition that at least 10% of shifted profits paid by the Polish entity must be, subsequently, transferred by a foreign recipient to another entity.
  • Automatic application of the tax on shifted profits to payments made to entities in jurisdictions with which Poland or the European Union has not ratified an international agreement, in particular, an agreement for the avoidance of double taxation constituting the basis for obtaining tax information from the tax authorities of this jurisdiction.
  • Introduction of a mechanism allowing the application of a tax on shifted profits also with respect to payments made towards related partnerships (under certain conditions).
  • Indication that if the qualified costs are deducted for tax purposes in other fiscal years, they should be included in a tax base of shifted profit tax in a year when they were actually incurred.

Next steps

Since the shifted profits tax can have a very broad impact and affect payments or arrangements under genuine business operations, it is important to assess such an impact for each organization that could occur and undertake actions as necessary.

The legislative process is still ongoing, so it is expected that the wording of the regulations may change. EY will continue to monitor these developments.

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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

  • Sylwia Migdal | sylwia.migdal1@ey.com
 

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