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October 3, 2022
2022-1484

Poland proposes change to shifted profits tax that places burden of proof on the Polish taxpayer

  • At the end of August, the Polish Government submitted to Parliament draft legislation implementing changes to the Corporate Income Tax Law. On 19 September 2022, the draft bill was passed to the Upper Chamber of the Polish Parliament with some additional modifications.

  • The amendments also include additional modifications to the shifted profit tax regulations. This Alert outlines the key proposed change regarding shifting the burden of proof to the Polish taxpayer. It also outlines the overall proposed changes under the draft legislation.

  • 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 25 August 2022, the Polish Government submitted to the Parliament draft legislation introducing changes to the Polish Corporate Income Tax (CIT) law. Although the submitted proposal provides for several amendments compared to the initial version published by the Government on 28 June 2022, the main focus of the proposed changes is still to modify areas covered by the reform implemented as of 1 January 2022. During the parliamentary process, the draft bill was further amended.

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 change and 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 September 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 EY Global Tax Alert Poland plans to introduce tax on shifted profits, dated 28 September 2021.

The current draft provides for the following modifications to the shifted profits tax provisions:

  • Clarification that the condition regarding a low effective tax rate (lower than 14.25% or exemption from taxation) should be verified with respect to income earned from the qualified categories of costs and not with respect to the entire income of the foreign recipient.
  • Introduction of the provisions setting forth detailed rules on how the effective tax rate should be calculated.
  • Modification of some 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.
    • 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.
    • Narrowing of the condition regarding the ratio of qualified costs at the level of the Polish payer (at least 3%) of all tax costs only to transactions with related parties.
  • Introduction of the rule shifting the burden of proof connected with verification of applicability of the shifted tax to the Polish taxpayer (i.e., the Polish taxpayer will be required to prove that the conditions for triggering the shifted profit tax are not met).
  • Clarification of the rules to be applied by Tax Capital Groups (tax consolidation system in Poland).
  • Automatic application of the tax on shifted profits to payments made to related 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 the tax on shifted profits also with respect to payments made towards related partnerships (under certain conditions).

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.

With the new rule regarding the burden of proof placed on the taxpayer, groups should make sure that sufficient analysis is done and properly documented as part of an ongoing activity of the tax function in their structures.

The legislative process is still ongoing, so it is expected that the text 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

 

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