13 September 2024

CIT minimum tax – how to calculate a tax base?

Starting in 2024, corporate income taxpayers who report a loss or income less than 2% of the total turnover, are subject to the CIT minimum tax.

CIT minimum tax is an additional tax obligation co-occurring with other CIT laws and cannot be offset. The amount payable for the basic CIT will be reduced by the value of the minimum CIT.

Provisions introducing the minimal income tax were added to the draft “Polish Deal” amendment after public consultation. Regulations came into effect on January 1st, 2022, but were amended and suspended until December 31st, 2023.

The subject of taxation is, in practice, the hypothetical income that the legislator believes taxpayers should earn, calculated according to the 1.5 per cent break-even point and increased by elements that may serve to optimise resulting in an understatement of tax income and, consequently, a reduction in tax liabilities. The minimum income tax rate is 10%.

The provisions on minimum income tax apply both to domestic taxpayers, tax capital groups and foreign taxpayers conducting their activities through a foreign permanent establishment located in the territory of the Republic of Poland. The obligation to pay tax arises if the aforementioned entities:

• incurred a loss from a source of income other than capital gains;
• have reached a profitability threshold not exceeding 2%, calculated as the ratio of income from a source of revenue other than capital gains to income other than capital gains.

CIT minimum tax – calculating the tax base

The minimum tax is 10% of the tax base. The tax base of the minimum tax is to be a sum consisting of the following three elements:

• 1.5% of the value of the company’s turnover (other than from capital gains); plus
• the amount of debt financing costs incurred for the benefit of related parties exceeding 30% of the so-called EBITDA of the taxpayer; plus
• the amount of costs of services (e.g. consultancy, market research, advertising, royalty or other) or intangible rights incurred in favor of related parties – when exceeding the value of 3 million PLN plus 5% of the EBITDA.

Regulations allow taxpayers to opt for a simplified calculation of the minimum tax. In this case, the tax base is an amount corresponding to 3% of turnover (other than from capital gains).

Taxpayers are also entitled to deduct the minimum income tax in the following 3 tax years immediately following the year in which the minimum income tax was paid.

 

Example calculation of tax amount

Assumptions:

• Turnover: 10m PLN
• Tax cost: 10.5m PLN
• Tax loss: 0.5m PLN
• Depreciation costs: 1.2m PLN
• Debt financing to related parties: 0.9m PLN
• Debt financing to non-related parties: 0.8m PLN
• Costs of services to related parties: 0.6m PLN
• Other: 7m PLN

Applying this to the 3 points of minimal CIT equation:

1. 10,000,000 PLN income * 1.5% =  150,000 PLN
2.     -0.5 million PLN (tax loss)
   + 1.2 million PLN (depreciation and amortisation)
   + 0.9 million PLN (cost of debt financing to related parties)
   + 0.8 million PLN (cost of debt financing to non-related parties)
   = 2,400,000 * 30% = 720,000 PLN.The tax base is the excess of debt financing cost over the ratio calculated above: 900,000 – 720,000 = 180,000 PLN.
   The tax base is the excess of costs over the calculated limit of 3 million PLN plus EBITDA *5%
3. 3,000,000 + (2,400,000 * 5%) = 3,120,000 PLN.

(as the value of the costs was PLN 600,000 – it is within the limit – we do not add the additional value from point 3. to the CIT base of the minimum).

Final equation:

(150,000 + 180,000) * 10% = 33,000 PLN tax to be paid.

 

Payers and non-payers

Obliged to pay:

• Limited liability companies
• Joint stock companies
• Simple joint stock companies
• Limited partnerships
• Limited joint-stock partnerships
• General partnerships
• Companies in sectors with low profitability or periodic losses (e.g., hospitality, transportation, real estate, etc.)

Exempt:

• New taxpayers (starting business, 3 years);
• Financial companies;
• Taxpayers with a decline in revenues (30% lower than the previous year);
• Taxpayers with a simple organizational structure;
• Taxpayers in a specific situations(operating aircraft and sea vessels; engaged in regulated price transactions;in bankruptcy, liquidation, or under restructuring);
• Capital groups, companies in municipal activities,Factoring institutions.