Minimum CIT as a new linear tax (Polish Deal)

After several months of work in the Sejm and Senate committee, the provisions contained in the Polish Deal Act (including minimum CIT) will finally enter into force on January 1st, 2022.

During the work in the Senate, several dozen rectifications were proposed, and even vacatio legis, an amendment postponing the entry into force of the provisions until the beginning of 2023, was passed. However, ultimately the Government was in favor of keeping the original date of publication of the act and sent it for the President’s signature.

Among the provisions regulating several different spheres of state finance and the tax system, there is also the so-called minimum CIT for entrepreneurs, which is dependent on losses and revenues obtained in a given tax year.

Minimum corporate income tax (CIT)

The minimum CIT is 10% of the tax base, which is calculated on the basis of the taxpayer’s income and costs incurred. The minimum CIT will apply to companies that have achieved a loss or share of income in revenues not exceeding 1% (in a given tax year).

In order to show the actual amount of tax at the rate of 10% that a given company will be obliged to pay (i.e. to calculate the tax base), it is necessary to look at the components specified in the regulations that should be taken into account depending on the context in which the given company is located. The tax base may include:

• 4% of the value of revenues (total) from a source of income other than capital gains;
• costs of debt financing incurred for related entities, exceeding 30% of the so-called tax EBITDA (similar to art. 15 c, but without the exempt amount of 3 million PLN) – NKUP on which we pay minimum tax;
• purchase costs from related entities or tax havens, of certain services or intangible rights (previously Art. 15) in the part exceeding 3 million PLN + 5% of the so-called tax EBITDA;
• deferred income tax, which increases gross profit or decreases net loss (disclosure of intangible assets).

Following the original intention of the legislator, the regulations introducing a minimum CIT for companies are aimed at a more effective fight against companies avoiding taxation in the country and deriving income tax abroad. However, the legislators did not take into account the clear legislative distinction between companies using this type of practice and other entities that may have recorded a worse financial result as a result of circumstances other than the practice of profiting abroad.

Although in the announcements of the Ministry of Finance the new regulations were to be a response to the practices of tax avoidance by international corporations – the new financial obligation will in practice cover all companies that meet the statutory requirements. Even the smallest ones that didn’t have the practical possibility of using tax avoidance methods, such as margin amount manipulations or trademark transferring.

Minimum CIT – statutory qualification conditions

The companies that will be excluded from the new financial obligation should:

• achieved revenues in the tax year by 30% lower than in the previous year;
• belong to the following sectors: financial services, mining, energy, maritime and air transport;
• also the new enterprises will be excluded.

Unfortunately, the Polish legislator did not decide to include conditions that would be able to exclude, for example, entities with low (based on absolute numbers) turnover per year. As a result, the Polish Deal will introduce a new form of a flat tax, which will apply to Polish enterprises in a very restrictive manner.

Minimum CIT and intangible services

An additional aspect worth mentioning in the context of the Polish Deal amendment and the minimum amount of corporate income tax is the repeal of Art. 15e of the CIT Law.

The removed article regarded the limitation of tax-deductible costs incurred for the benefit of related entities or entities based in tax havens and the exclusion of intangible services from tax-deductible costs, such as:

• advisory services,
• market research,
• advertising services,
• management and control,
• data processing,
• insurance,
• guarantees and sureties as well as benefits of a similar nature.

The mathematical formula contained in the amendment to the CIT Act, and used to calculate the tax base for the minimum CIT, contained a reference to the incurred costs for the benefit of related entities of the costs of purchasing certain services or intangible rights, exceeding the value of 5% of the so-called tax EBITDA plus PLN 3 million.

In other words, entities that, before the amendment, could exclude the incurred costs for intangible services, will in the future have to include in the tax base the surplus of expenses for these services obtained from related entities.

Silver lining? Estonian CIT

It is worth remembering that the beginning of 2022 will introduce the provisions of the Polish Deal and the minimum CIT, as well as the abolishment of some conditions limiting the possibility of using the flat-rate form of tax (Estonian CIT). We have written this form here.

Firstly, Estonian CIT will be available also for limited partnerships and limited joint-stock partnerships, and not only limited companies as before.

Secondly, the provision setting a revenue limit (100 million PLN per year) will be repealed. The requirement to incur expenses or investment outlays directly on employee salaries will also disappear.

In light of the provisions of the Polish Deal, the transition to this form of CIT seems to be an attractive option for entrepreneurs. The Ministry of Finance announced the publication of tax explanations regarding the Estonian CIT – in December. The explanations should shed some light on the issues and dispel several doubts that have arisen since the regulations entered into force on January 1st, 2021.