The Polish (New) Deal – Major tax reform to corporate income tax (CIT), personal income tax (PIT) and social security and health service contributions (ZUS and HSC) effective from the tax year 2022.
This article is relevant for candidates sitting the Taxation – Poland (TX-POL) exam in the June and December 2023 sessions. It is based on the tax legislation applicable to the tax year 2022 and onwards.
For several years prior to 2022, the Polish government has been preparing a major tax reform of CIT as well as PIT and ZUS/HSC regulations.
The changes were primarily aimed to achieve the following goals:
In CIT:
In PIT and ZUS/HSC:
Whether the above goals will be met, only time will tell, however it is important to note that the New Deal was introduced in stages, making its introduction quite complicated.
The first set of rules ('New Deal 1.0') was passed according to normal standards in 2021 and introduced into force as of 1 January 2022.
From its onset the New Deal 1.0 created a number of disputes, in particular relating to unclear PIT vs ZUS/HSC regulations and several internal inconsistencies, which led to further amendments being made after the initial introduction of the new rules.1
The legislator introduced several tax changes during the year, eg calibrating the levels of PIT with so called 'middle class relief' and in the spring, further changes were introduced regarding the method of determining the basis for HSC. From July 2022, another major amended version of the Polish Order, the so-called 'New Deal 2.0' was introduced.
Still, the legislator did not stop. Another list of amendments commonly referred to as the 'New Deal 3.0' was passed in October 2022 clarifying certain regulations (eg profit shifting) and suspending others (eg minimum tax).
For TX-POL, exams in June and December will be based on legislation passed before the previous 30 September, the cut-off date for examinable legislation. Hence, in TX-POL exams in June and December 2023, the legislation provided as per New Deal 1.0 and New Deal 2.0 was passed into law prior to 30 September 2022 and is therefore examinable. However, the New Deal 3.0 changes were passed into law after 30 September 2022 and are therefore outside of the scope of the June and December 2023 exams (ie not examinable).
It should be noted that certain regulations which were passed into law before the cut-off date of 30 September 2022 and in force between January and July 2022 were subsequently amended but still impacted the tax calculations during the period (eg higher PIT rates influencing monthly instalments). Furthermore, the New Deal 2.0 and New Deal 3.0 suspended or abandoned certain elements of regulations (eg minimum tax in CIT was suspended and hidden dividend tax was abandoned) or further modified rules were established at the beginning of the year (eg regulations on shifted profits, new Polish holding company rules).
Temporary regulations, regulations suspended or abandoned by New Deal 3.0 and regulations which may be further suspended in future years, will NOT be examined in exams in June and December 2023.
Hereafter the New Deal 1.0, New Deal 2.0 and New Deal 3.0 will be collectively referred to as the New Deal(s).
Therefore, the following items which were introduced by the New Deals are excluded from June and December 2023 exams:
In CIT:
In PIT / ZUS:
This article will now provide a brief overview of the PIT, ZUS and HSC elements of the New Deal legislation which are examinable in TX-POL exams in June and December 2023.
It is important to note that despite the New Deal amendments, ZUS contributions in relation to business activity are still payable on declared income. However, a major change was introduced with respect to HSC.
The HSC is paid by every taxpayer, which is why the new method of calculating it, and thus determining the amount, is one of the major changes introduced by the New Deal.
From 2022, HSC is determined on actual income where taxation is calculated on the basis of a tax scale or flat tax, or on declared income in the case of lump sum revenue taxation.
It should be noted that the income and costs obtained during a period of suspension of business activity should be excluded from the base of the HSC, and the changes which took place in the spring 2022 concerned the introduction of the right to include the residual difference in the calculation of HSC and depreciation write-offs which took place before 2022 in the case of the sale of a fixed asset.
Progressive taxation
Thus, persons conducting individual business activity who elect for the progressive method of taxation would pay HSC as 9% of actual income earned during the year. It must be noted though that the contributions under the new system are settled starting from February 2022, so the contribution for January 2022 is settled according to the 'old' rules based on the average salary. Nevertheless, the contributions thereafter are accounted for based on actual income.
Linear taxation of income
The same principles apply to individuals conducting business activity who use the linear taxation of income (19% tax on income), however in this case a reduced contribution rate of 4.9% applies, instead of 9%.
Lump sum taxation of revenues (ryczałt ewidencjonowany)
A different set of rules applies to entrepreneurs who are taxed according to the lump sum taxation of revenues method. In this case the HSC is paid based on declared income which cannot be lower than a given percentage of the average salary. This percentage changes depending on the actual revenues earned by the entrepreneur, thus the system partially ties the HSC to actual earnings.
The HSC base flat rate thresholds and basis % are as follows:
For example, a person earning PLN 400,000 of revenues in 2022, taxed according to the lump sum taxation of revenues would pay HSC as 9% of average salary (announced by Statistical Office) multiplied by 180%.
In addition, specific rules apply to IT business where rights to intellectual property are transferred as part of services.
Another very important change introduced by the New Deals was the elimination (and later, after amendments, the restriction) of deductibility of HSC from PIT payable.
In the past HSC calculated at 7.75% of the basis was deductible for PIT purposes. This has changed to the following rules:
The new rules for determining HSC are not the only novelty which taxpayers need to know about in tax year 2022. Entrepreneurs taxing their activities on general terms, ie with the progressive method, will benefit from a higher tax-free amount of PLN 30,000.
In addition, the second tax threshold was raised from PLN 85,528 to PLN 120,000.
Moreover, the tax rate in the first tax bracket was reduced from 17% to 12%.
Another tax area which has been subject to major changes under the New Deal is the flat rate tax on registered income. From 2022, flat rates for certain professions have been reduced, eg the IT industry, which may apply a new rate of 12%. In addition, another flat rate of 14% was introduced for architects. In addition, the issues related to the taxation of private rental income have been regulated, because the flat rate will be the only available form of taxation for this type of income.
From 2022, new rules for joint settlements with a spouse have been introduced. On their basis, joint settlement (if there is community of property) is possible already in the year of marriage, regardless of whether the wedding took place during the year.
In addition, the legislator introduced a new relief for families with four or more children, which exempts income up to the limit of PLN 85,528 from tax.
The New Deals introduced a number of new tax reliefs and clarified existing ones, eg rehabilitation relief, which entrepreneurs can use in the annual settlement for 2022. These reliefs concern for example, conquering new markets, creating new products, supporting sport and culture or raising financial capital.
One interesting relief available for persons operating in an international environment is relocation relief. It applies to Polish citizens (or Polish card holders) moving to Poland from abroad (becoming tax resident in Poland), if the person has not been tax resident in Poland for at least three years. In this case the individual is entitled to a yearly exemption from tax of PLN 85,528 for four years (ie exempting PLN 342,112 from tax over this period).
This article will now provide a brief overview of the CIT elements of the New Deal legislation which are examinable in TX-POL exams in June and December 2023.
One of the most significant New Deal changes relevant to TX-POL exams in June and December 2023 is the introduction of the WHT pay and refund mechanism for dividends, interest and royalties paid to related parties. This had been drafted into legislation several years ago, however had been suspended. This mechanism came into force from the start of 2022.
The basic principle of WHT in the case of dividend, interest and royalty payments, is that Poland applies taxation at source (ie part of the payment should be remitted to the tax office) at the domestic WHT rates of 19% for dividends and 20% for interest and royalties. These rates can be decreased by a respective Double Tax Treaty (DTT) or entirely eliminated based on the EU Directive exemption.
Thus, if a Polish company makes a dividend payment for example to its German parent company, it usually does not pay WHT (assuming the EU Directive exemption conditions are met).
Introduction of the pay and refund system modifies this mechanism, making the selected passive cross border payments (ie dividends, interest and royalties paid to related parties) subject to a special WHT compliance mechanism.
Under this mechanism, if a Polish company makes a dividend, interest or royalty payment to a related party recipient and total payments of this kind in the given year to this recipient exceed PLN 2,000,000, then in principle the Polish company should remit the applicable WHT to the tax office, using the domestic WHT rate of 19% for dividends and 20% for interest and royalties.
It is then possible to claim a refund of the WHT paid in whole or in part if the DTT or EU Directive conditions are met to apply a lower rate or exemption.
This universal rule has two exceptions, allowing Polish companies to apply the reduced DTT rates or exemptions upfront, without payment and refund. These exceptions are:
It should be noted that payments made to non-related parties are not subject to the pay and refund mechanism (though of course still may be subject to WHT at given DTT or domestic rate if exemptions do not apply).
For several years the rules on financing cost limitation (provided in article 15c of the CIT Act) state that the financing costs of a taxpayer should be limited and the limitation cap should be calculated as 30% of the taxpayer’s EBITDA (adjusted by the safe haven rule discussed further below) with the applicable safe haven of PLN 3,000,000.
In the past due to ambiguity of the legislative language one approach and way to read these provisions was to state that the allowed interest cap is the higher of the two figures. Thus, we compare PLN 3,000,000 and 30% of EBITDA and arrive at the cap for deductible interest costs.
However, an alternative interpretation of this law provision (shared by the courts) was to state that the 30% EBITDA limit should be calculated on top of the PLN 3,000,000 safe haven amount.
The amendments brought forth by the New Deal clarified this issue, with law provisions now clearly indicating that only the former rule (the higher of the two figures) is the correct one.
Due to the ambiguity in the regulation, in previous TX-POL exams, the marking guide awarded equal credit for the alternative treatment. Since the matter has now been clarified only the application of the correct rule, ie the higher-of-the-two-figures rule, will be considered as correct and earn marks.
Prior to 2022, CIT also provided for an EBITDA-based limitation of deductibility of costs of intangible services purchased from related parties. The services subject to limitation comprised consulting services, market research, advertising services, management and audit, data processing, insurance, guarantees and sureties, and performances of a similar nature; all kinds of fees and charges for the use or right to use the rights or values such as copyright or related property rights, licenses, trademarks, guarantees and know-how.
These rules have been completely eliminated by the New Deal. Thus purchase of the above enumerated services from a related party is not subject to the special cost deductibility limitations (of course, standard rules of relation of cost to income and transfer pricing still apply).
Written by a member of the TX-POL examining team
The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The authors and ACCA expressly disclaim all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.
Reference
(1). It should be noted that primarily any changes to PIT regulations should apply only from the beginning of the next calendar year. However, it is possible to introduce changes mid-year provided the amendments do not put new obligations on taxpayers.