New, lower corporate income tax—but not for everyone
A new tax rate for income of legal persons will enter into force on 1 January 2017. It will not apply to all taxpayers, however, but will depend on the amount of income. The same amending act introduces several other significant changes, particularly affecting the practice of corporate reorganisations (e.g. exchange of shares or in-kind contributions).
Support for smaller taxpayers
Currently Poland’s Corporate Income Tax Act provides one tax rate of 19% for all corporate taxpayers of whatever type or character. The Parliament has decided, however, that from the beginning of 2017 the CIT Act will include an additional new tax rate of 15%.
But the new, lower tax rate will be available only to a specific group of taxpayers, i.e. small taxpayers and those beginning their activity. A small taxpayer is one whose sales revenue (including VAT) did not exceed the PLN equivalent of EUR 1.2 million in the preceding tax year.
The new tax rate will not be available to taxpayers artificially attempting to restructure their activity to meet the requirements of the amended act. The 15% rate will not apply during the tax year when the taxpayer began its activity, or the following year, in the case of a taxpayer which was created:
- As a result of a conversion, merger or division of taxpayers, except for conversion of one company into another company
- As a result of conversion of a business operated by an individual in his own name or by a partnership that is not a legal person
- By legal persons, natural persons or organisational units without legal personality who contributed to the taxpayer’s capital an enterprise previously operated by them, an organised part of such enterprise, or assets of such enterprise with a combined value exceeding the equivalent of EUR 10,000 (calculated at the average exchange rate announced by the National Bank of Poland on the first business day of October preceding the tax year in which such assets were contributed, rounded to the nearest PLN 1,000), or
- By legal persons, natural persons or organisational units without legal personality making an in-kind contribution toward the taxpayer’s capital of assets obtained by them as a result of liquidation of other taxpayers in which they held shares.
According to the justification for the bill, this provision is designed to discourage taxpayers from conducting restructuring (such as changing the legal form of their activity or artificially altering its dimensions) to take advantage of the 15% tax rate.
Aim of amendment
According to the justification for the bill, the main goal of the amendment is to support small firms paying corporate income tax. The reduction in the tax rate should help taxpayers for whom difficulties raising capital for investment or distorted conditions of competition are a barrier to the existence or growth of their enterprise. These changes are thus designed to create conditions for growth and raise the internal and external competitiveness of small firms. Consequently, the lower CIT rate for small taxpayers is supposed to improve the competitiveness of small taxpayers versus other taxpayers, which generally have broader possibilities for raising funds for growth and investments.
The drafters also indicated that capital groups would be excluded from use of the 15% CIT rate because a characteristic feature of such groups is operation on a large scale.
Unequal treatment of PIT and CIT taxpayers?
A doubt arises whether introduction of the reduced 15% rate of CIT exposes lawmakers to a charge of unequal treatment of PIT and CIT payers.
But the drafters take the view that PIT and CIT have a different character. Natural persons operating individual businesses have the option to select the optimal form of taxation, i.e. under general rules, flat rate, lump sum, or tax table. CIT payers do not have such a choice.
Moreover, an essential element of taxation of legal persons, which does not occur in PIT, is two levels of taxation. First the corporate taxpayer is taxed, and then distributions of profit are taxed when received by shareholders.
Consequently, the drafters take the view that it is unjustified to make a direct comparison of these two groups of taxpayers.
Other changes introduced by the amending act
Apart from introducing a new tax rate, the amendment supplements the existing definitions and introduces new definitions in order to eliminate doubts in interpretation that could result in avoidance of taxation of certain income.
In particular, the act clarifies the existing catalogue in the Personal Income Tax Act of income of a taxpayer who is subject to limited tax liability in Poland which is regarded as income earned in Poland, and introduces a similar catalogue to the Corporate Income Tax Act. Under these provisions, the following are deemed to be income earned in Poland in the case of taxpayers who are not subject to income tax in Poland on their worldwide income:
- Income from securities or derivative financial instruments which are not securities, admitted to public trading in Poland through a regulated market, including income from sale of such securities or instruments and exercise of rights under such securities or instruments
- Income from transfer of ownership of shares in a company, the totality of rights and obligations in a partnership which is not a legal person, or participation units in an investment fund or joint investment institution, in which real estate in Poland or rights to such real estate constitute at least 50% of the value of the assets
- Income from settled receivables, including those offered for sale, paid out or set off, by natural persons, legal persons or organisational units without legal personality with their place of residence, registered office or management in Poland, regardless of the place of conclusion of the agreement or performance.
Moreover, from 1 January 2017 the possibility of applying preferential conditions for taxation of transactions involving the exchange of shares will be limited. Under the amending act, such conditions may not be enjoyed by taxpayers if the main purpose or one of the main purposes of the exchange of shares is to avoid taxation.
The amendment also brings changes in determination of revenue on taking up shares in a company in exchange for an in-kind contribution. From the beginning of next year such revenue will be deemed to be the value of the contribution specified in the company’s statute or articles of association, and not, as is now the case, the nominal value of the shares taken up in exchange for the contribution. But if the stated value of the contribution is lower than its market value, or its value is not stated in the statute, articles of association or other documents of a similar character, the market value of the contribution as of the date of transfer of the in-kind contribution will be deemed to be revenue.
Together with these changes, the amending act also clarifies the provisions for determining revenue-earning costs in the event of sale of shares in an acquiring or newly established company, adopting the concept of “obliteration” of the rights incorporated in the shares.
The conditions for applying an exemption from taxation at the source, including for interest and licence fees obtained by the recipient, will be clarified by a reference to the actual owner of the receivables paid.
Summary
Adoption of an additional tax rate in the CIT Act which can be used only by certain taxpayers is not typical for the Polish tax system, but it is not that unusual in light of the tax laws of other EU member states. Small and/or new companies can enjoy a reduced rate of corporate income tax for example in France, Lithuania or Spain, and Poland is another country to follow this approach. But in all of those other countries, the difference between the main rate and the preferential rate is at least 10 percentage points. This raises the question whether reducing the tax rate for small companies from 19% do 15% will provide realistic and adequate support for this group of enterprises in Poland.
The other changes provided for in the amending act may have a significant impact on reorganisation processes carried out by taxpayers. This applies in particular to the tax neutrality of exchanges of shares and changes in the rules for taxation of in-kind contributions to companies.
Mateusz Jopek, Tax Practice, Wardyński & Partners
