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August 26, 2022
2022-1302

Poland | A review of changes in the “Polish holding company regime"

  • One of the significant changes proposed under the draft amending act (announced at the end of June) relates to modifications in the "Polish holding company regime," which include an increase of the exemption for dividends received from qualified subsidiaries to 100% (from 95%) and the easing of certain conditions required to benefit from the regime.
  • The proposed changes are aimed at expanding of the scope of applicability of the preferential holding company regime and at easing of the conditions for exemption to make the regime more attractive internationally and domestically.
  • As the use of a holding company may have a favorable impact on the cost-effectiveness of ongoing and planned investments, taxpayers should consider eligibility both before a new investment is started and for the purpose of planning the distribution of profits or the transfer of shares in a subsidiary.

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 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 changes and undertake the necessary actions.

One of the significant changes proposed under the draft amending act relates to modifications in the "Polish holding company regime," which include, inter alia, an increase of the exemption for dividends received from qualified subsidiaries to 100% (from 95%) and the easing of certain conditions required to benefit from the regime.

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

Detailed discussion

One of the major amendments introduced under the Polish Deal as of 1 January 2022, is a new form of a holding company with preferential rules of taxation, i.e.,:

  • Full CIT exemption for profits from the transfer of shares in subsidiaries (with exceptions) to unrelated entities.
  • A 95% exemption for dividends received from subsidiaries (including entities from outside of the European Union (EU)).

Based on the proposed legislation changes, the latter preferential rule will be enhanced by increasing of the exemption for dividends received from qualified subsidiaries to 100% (from 95%), if the relevant conditions provided in the CIT Act have been met for at least two years.

Some other conditions that are required to benefit from the regime will also be eased:

  • Based on the current regulations, a Polish holding company, which applies tax exemptions resulting from the EU Parent-Subsidiary Directive (PSD) or the Interest and Royalties Directive (IRD), is not entitled to benefit from the new holding company regime. However, according to the draft proposal, the definition of a holding company will be amended to allow for the regime to apply even in case of benefiting from the above-mentioned PSD or IRD tax exemptions.
  • In addition, the catalogue of legal forms in which a holding company may operate under, namely Limited Liability Company (Polish: Spólka z ograniczona odpowiedzialnoscia) and Joint Stock Company (Polish: Spólka Akcyjna), will be extended to include a Simple Public Limited Company (Polish: Prosta Spólka Akcyjna).
  • Furthermore, significant changes will be made to the definition of a subsidiary. Under the new legislation, the subsidiary will be allowed to hold participation in partnerships as well as to hold more than 5% of shares in capital of other companies (which is not possible under the current legislation). The subsidiaries will also be allowed to benefit from an exemption within a special economic zone or the so-called Polish Investment Zone (which is prohibited under the current regime).

The new legislation will also exempt qualified domestic subsidiaries from obligations to withhold tax on dividends paid to a Polish holding company that are subject to exemption under the holding company regime.

Next steps

According to the explanation supporting the above new legislation, the proposed changes are aimed at expanding of the scope of applicability of the preferential holding company regime and at easing of the conditions for exemption to make the regime more attractive internationally and domestically. Since the use of a holding company may have a favorable impact on the cost-effectiveness of ongoing and planned investments, it is worth considering eligibility for the preferential holding company regime both before a new investment is started and for the purpose of planning the distribution of profits or the transfer of shares in a subsidiary, especially if application of the favorable treatment may require additional clearance procedures.

Future Global Tax Alerts will report on further developments in this area.

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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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