The most taxing issues

For international investors active in Poland, 2023 was a year marked by issues related to withholding tax (WHT). A change of tack by the Polish tax authorities made it difficult to obtain a WHT refund or positive opinions on withholding tax. Finally, on September 28th, a draft law providing official clarifications on the withholding tax was published. The draft refers to the criteria for the ‘beneficial owner’, which includes the condition of genuine economic activity being conducted by the recipient of the payment. The draft indicates a broad approach to the definition of ‘beneficial owner’ and lists a number of prerequisites to be met by the recipients of payments. These include: owning a property, proper management, decision-making in its country of tax residency, an existing office of an operational size, staff with qualifications and competencies appropriate for the business, and bearing the costs of its own activities, including staff costs.

However, there is a lack of precision or at least guidance when it comes to how the above criteria should be understood. In addition, the Ministry of Finance has stated that even if the above prerequisites are met, the tax authorities may still apply the criterion of artificial transaction as the basis for refusing to grant either exemption from the withholding tax or a lower treaty rate.

The draft also identifies circumstances that in practice lead to withholding tax discrimination for certain categories of entities or even entire industries – such as international investment. According to the draft, a tax remitter will not qualify for a reduced withholding tax rate or exemption if, among others: (i) the payment recipient earns a small margin, (ii) the payment recipient receives income mainly of a passive nature, including financial payments from related parties, or there is a short time lapse between the receipt of funds and their subsequent payment, (iii) the received payments are transferred to a subsequent recipient that would not be able to benefit from a preference or exemption from the withholding tax, or the payment recipient does not reinvest the funds received, (iv) there is no effective taxation of the received funds in the country of recipient’s tax residency, (v) the payment recipient shows significant related-party transactions in its financial statements, or (vi) the payment recipient is based in a country with an extensive network of double taxation treaties.

The draft also rejects in principle the ‘look-through approach’, i.e. the possibility of applying withholding tax preferences from the beneficial owner of the payment to the intermediary entity receiving the payment from Poland. One positive feature of the draft is that it removes the prospect of imposing the criterion for an effective taxation of dividends paid abroad, although even this is not entirely clear. The Ministry of Finance acknowledges that the exemption of distributed profits from the income tax in the country of tax residency of the dividend recipient is not a reason to deny the right to exemption from the withholding tax. However, the dividend recipient cannot be entirely exempt from corporate income tax. In its current version, the draft is unspecific on this point. Moreover, despite previous meetings with business representatives and advisors, the Ministry of Finance still does not take into account the nature of businesses in specific industries or within international groups.

Tax on shifted profits

Another important issue in 2023 has been the calculation of the new tax on shifted profits. This tax applies to cross-border payments of a passive nature made to related parties based outside Poland. Taxpayers meeting certain criteria must pay a 19 pct tax levied on the sum of such qualifying payments as: fees for intangible services, royalties, costs related to the transfer of debtor insolvency risk and debt financing, and fees for the transfer of functions, assets or risks. Payments to EU/EEA resident taxpayers are excluded from the tax on shifted profits, provided that these taxpayers conduct genuine economic activity. Tax on shifted profits may be reduced by withholding tax remitted upon payments included in the shifted profits tax base. Tax on shifted profits is declared in the CIT/PD – appendix to the annual CIT-8 return. Shifted profits tax liability exists when the following criteria occur jointly:

• A relatively low level of taxation imposed in the related party’s recipient country – a tax rate of lower than 14.25 pct
• A high level of passive income – if the qualifying payments exceed 50 pct of the gross revenue
• Related party transfers at least 10 pct of the revenue of a passive nature to another entity and such revenue is treated by this related party as tax-deductible costs / to reduce its tax base / as tax payable or constituting distributable profits (e.g. through dividends)
• Qualifying payments treated as tax-deductible exceeding (from 2023) 3 pct of the taxpayer’s tax-deductible costs reported

Minimum corporate income tax

From January 1st 2024, the minimum corporate income tax provisions will once again take effect. The 10 pct minimum tax will apply to companies with Polish tax residency and domestic tax capital groups that during the tax year: (i) suffered losses from a source of income other than capital gains, or (ii) achieved less than 2 pct of profit as a proportion of non-capital gains income from a source of income other than capital gains to the respective profit.

The tax regulations provide special rules for determining such losses for minimum tax purposes, which means that an accounting loss does not necessarily result in minimum taxation. Importantly, tax simulations from a few years ago may no longer correspond to the rules that came into force on January 1st 2023. Under the amendment, the calculation of the loss and profitability level has been modified. The catalogue of entities excluded from minimum taxation has also been expanded. Taxpayers with a tax year other than the calendar year will start to apply the minimum tax provisions from the tax year beginning after December 31st 2023. The tax base, in a nutshell, will be 1.5 pct of the income from so-called operating activities, with numerous exclusions and deductions. In order to apply these, it is important, among other measures, to correctly identify the related parties and transactions with them. The minimum tax could burden companies in industries with low profitability or temporary losses, i.e. real estate, construction, transport, manufacturing, processing, wholesale and retail. Whether a loss or profit of less than 2 pct is in line with the arm’s length principle has so far been irrelevant.

Mandatory electronic invoices

From July 2024, all the invoices in B2B transactions between VAT-registered taxpayers in Poland will be sent and received exclusively through The National System of e-Invoices (KSeF). The system will also cover foreign entities with a fixed establishment in Poland. According to the current version of the provisions, B2C invoices will be entirely excluded from KSeF, with no possibility to use the system voluntarily. KSeF implementation is a complex and time-consuming process. It includes not only the technical aspects, but also the necessity to introduce very significant changes to processes, internal procedures, agreements and regulations. Our practical experience in implementing KSeF has shown that difficulties are typically caused, for example, by the lack of an option to upload invoice attachments to the KSeF as well as difficulties arising from the process of posting invoices due to waiting for their validation by the KSeF.

About Justyna Bauta-Szostak

Justyna is an expert in the field of corporate income tax and international tax, specialising in advising real estate companies and corporate restructuring. She manages projects related to investment in real estate in Poland and other CEE countries, advising clients at all stages – from the initial decision-making and choosing the optimal legal form for the investment, through ongoing advice related to the specifics of the development sector, to exiting the investment. She has worked on projects related to: the establishment of investment platforms for office real estate, commercial real estate, rental apartments, warehouses and student residences, the preparation and introduction of real estate companies for listing on the Warsaw Stock Exchange, and real estate transactions – both in the form of the sale of shares in real estate companies and the sale of real estate itself.