Business Taxation in Poland (CIT)

The tax base is the achieved income. Income from capital gains and income from other sources of revenue should be taxed separately. As a rule, income from a revenue source is the surplus of the sum of revenues earned from that revenue source over the costs of earning such revenues, achieved in the tax year. If the costs of obtaining revenue exceed the sum of revenue, the difference is a loss from a revenue source. In practice, the taxable income is calculated by adjusting the profit reported for accounting purposes. The relevant adjustments are necessary due to differences between the tax and accounting treatment of numerous revenue and cost items. As a result, the taxable base is usually higher than the gross accounting profit. Important details of the calculation of the taxable income are described in the following paragraphs.

The tax-deductible cost is defined as any expense item that was incurred in order to generate taxable revenue, or to protect a source of revenue. However, there is a long list of exceptions, i.e. expenses that cannot be included into the tax-deductible costs despite the underlying purpose of generating revenue. The list starts with investments in fixed or intangible assets (capital expenditure). They cannot be included into tax-deductible costs directly; instead the acquired assets can be depreciated for tax purposes. Furthermore, once those assets are sold, a taxpayer can include their initial value net of depreciation in the tax-deductible costs.

Non-deductible costs (other than capital expenditure) include, among others, the following items:

• Accounting accruals (subject to exceptions);
• The proportional part of depreciation made for passenger cars whose cost exceed:
  • 225,000.00 PLN - in the case of a passenger car being an electric vehicle, and
  • 150,000.00 PLN - in the case of other passenger cars;
• Donations;
• Entertainment expenses;
• Income taxes paid in Poland or abroad;
• Penalty interest on tax arrears;
• Contractual penalties resulting from supply of defective goods or services;
• Expenses related to non-taxable revenue, or not related to any revenue;
• Interest and certain costs associated with debt financing.

Interest paid on a debt is generally deducted from income by the debtor at the time it is paid. At the same time, such interest is included in the creditor's taxable income.

However, interest on a loan taken out to finance an investment in tangible or intangible assets shall not be deductible if it has been paid or accrued by the date on which the tangible or intangible asset has been commissioned for use. Instead, such interest increases the initial value of fixed or intangible assets, which is subsequently depreciated for tax purposes.

Moreover, the CIT Act provides for thin capitalization restrictions related to interest paid on loans and credits.

Taxpayers are obliged to exclude from tax deductible costs the costs of debt financing (including, inter alia, interest) in the part in which the excess of the costs of debt financing exceeds:

1. the amount of 3,000,000.00 PLN or
2. 30% of the so-called tax EBITDA calculated according to the formula specified in the Tax Act.

The term "excess of the costs of debt financing" shall be understood as the amount by which the costs of debt financing incurred by a taxpayer and deductible in a tax year exceed the taxable revenue of interest nature obtained by the taxpayer in that tax year.

In addition, debt financing costs are excluded from tax deductible costs to the extent to which they are allocated to capital transactions, in particular to the acquisition or subscription of shares, acquisition of a totality of rights and obligations in a company which is not a legal entity, making additional contributions, increasing share capital or repurchase of own shares aiming to their redemption.

Thin capitalization restrictions apply to interest on loans and credits drawn from foreign as well as from Polish tax residents.

Polish CIT residents are taxed on their worldwide income. A company has resident status if it has its registered office or its management board residing in Poland. Accordingly, Polish subsidiaries of foreign companies are considered residents and are taxed in Poland.

A non-resident company is subject to CIT exclusively on income generated in Poland. Furthermore, double tax treaties concluded by Poland provides for further limitations related to taxation of non-residents. Under these treaties, Poland can tax a non-resident’s business profits only to such an extent that these profits are attributable to the non-resident’s ‘permanent establishment’ located in Poland. A permanent establishment is defined as a fixed place of doing business and the most typical example of such an establishment is a branch office.

It should be noted that Poland has concluded double tax treaties with more than 80 countries including nearly all the developed ones. Therefore, non-resident businesses, if doing business in Poland, are nearly always covered by a tax treaty between Poland and their respective home countries.

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Apart from subsidiaries, a foreign company can establish a Polish branch. A branch office is allowed to run business activities exclusively within the scope of activity of its foreign owner.

A branch office nearly always has permanent establishment (PE) status in Poland. Once a branch is established, the foreign company pays corporate income tax at the standard rate of 9% or 19% on the basis of income attributable to the operations of the Polish branch. For this purpose, as well as for accounting purposes, a branch is obliged to keep accounting books that should include all the data necessary to establish the taxable base. In those few cases in which a branch can demonstrate, on the basis of a Double Tax Treaty, that its business presence in Poland does not equal to a permanent establishment, its profits are not subject to Polish corporate income tax.

Business activity conducted by natural persons either individually or through partnerships is subject to personal income tax. Partnerships are so called transparent entities – they are not themselves subject to taxation, only partners are individual taxpayers.

An individual's business income can be taxed according to three methods: progressive, flat-rate and lump sum tax.

Progressive scale looks like the following:

• Tax base up to 120,000.00 PLN – 17% minus amount reducing the taxation by
  5,100.00 PLN
• Tax base above 120,000.00 PLN – 15,300.00 PLN + 32% on surplus exceeding 120,000.00 PLN

The tax base constitutes revenue less real costs of business activity. There are several types of costs which are not deductible. Generally, for an expense to be a deductible expense, it must be incurred to earn income or to preserve a source of income. This method allows for several reliefs, such as child deductions (for detailed information on the available deductions please have a look at the section on personal income taxation (PIT).

Taxpayers conducting business activity may tax their income with 19% flat rate income tax. The taxable base is also income less expenses, however, it is not possible to apply most tax allowances and deductions, including joint taxation with a spouse or child.

In certain cases – rental income, certain professions and types of activity, the revenue and not the income constitutes tax base and the imposed tax is a lump sum (between
(2% – 17% on the revenue). In case of this taxation method no tax deductible costs are taken into account.

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As mentioned above, capital expenditure is not directly deductible. Instead the relevant fixed and intangible assets are depreciated and depreciation write-offs are included in the tax-deductible costs.

Below you find the proper depreciation rates for selected fixed assets:

• Industrial buildings: 2,5% per annum;
• General machinery: 10% per annum
• Computers: 30% per annum
• Road vehicles: 20% per annum
• It should also be noted that in numerous cases an accelerated depreciation is available. For example, so-called ‘second-hand’ road vehicles (including, among others, passenger cars) can be depreciated at 40% annual rate.

Polish law provides for favorable depreciation rules related to intangible assets. Generally, the depreciation rate for such assets is 20% per annum. However, there are very important exceptions where the applicable rate is much higher:

Istnieją jednak bardzo ważne wyjątki, w przypadku których stosowana stawka jest znacznie wyższa:

• Copyrights: 50% per annum;
• Software licenses: 50% per annum;
• Research & development expenditure: 100% per annum;

Where the annual deductible expenses from a source of income exceed the taxable income from that source, the taxpayer shall declare a loss from the source of income.

By the amount of a loss from a source of revenue incurred in a tax year, a taxpayer may:

1. reduce the income obtained from this source in the following consecutive five tax years, but the amount of the reduction in any of these years may not exceed 50% of the amount of the loss brought forward, or
2. reduce the income earned from that source once in one of the following consecutive five tax years by an amount not exceeding 5,000,000.00 PLN, the tax credit not used stays subject to settlement in the remaining years of the five-year period, but the amount of the reduction in any one of those years may not exceed 50% of the amount of this loss.

Interest and royalties originating in Poland are treated as taxed at CIT rate of 20% when paid to foreign residents. The entity liable to pay the tax is the entity paying the interest or royalties.

Dividends originating in Poland (received from Polish residents) are excluded from comprehensive income. Instead, they are subject to 19% tax, which is withheld and remitted to the tax office by the payer of the dividend.

A dividend payment may be exempt from taxation if, among others, the following conditions are met:

1. the company disbursing the revenue from a share in the profits of legal persons is a company which is an income tax payer with its registered office or management board in Poland;
2. the company which receives revenue from a share in the profits of legal persons is a company which:
   • is subject to income tax on its total income in Poland or in another Member State of the European Union or in another country of the European Economic Area, regardless of where it is earned;
   • holds directly not less than 10% of shares in the capital of the company which pays out revenue from participation in the profits of legal persons, continuously for a period of two years, including when the period of two years of continuous holding of shares expires after the date of obtaining such revenue;
   • does not enjoy exemption from income tax on its entire income, regardless of the source from which it is earned.

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Interest, royalty income and dividends originating from abroad are treated as normal income and taxed at the standard corporate income tax rate (exceptions for dividends are discussed below). Income tax paid on such income in other countries may be offset proportionally to Polish corporate income tax liabilities. In addition, the applicable double tax treaty may provide for a different method of avoiding double taxation (see subheading "Avoidance of double taxation" below).

Under an operating lease, the total amount of rental payments is a tax-deductible cost for the lessee and taxable revenue for the lessor. Furthermore, the lessor is entitled to depreciate the leased object for tax purposes (provided that the leased object is a fixed or intangible asset).

Under a financial lease, the capital element of lease payments is tax-neutral for corporate income tax purposes. Therefore, only the interest element is a tax-deductible cost for the lessee and taxable revenue for the lessor.

An agreement is classified as a financial lease if the following conditions are jointly met:

• A lease agreement has been concluded for a fixed period of time;
• The total amount of the lease payments is equal to or higher than the initial value of the leased asset;
• The lease agreement includes a provision that the lessee is entitled to depreciate the leased asset for corporate income tax purposes; consequently, the lessor is not entitled to depreciate the leased asset.

Corporate income is taxed at a rate of 9%, or 19%, depending on the amount and classes of income earned by the taxpayer. The tax base is determined on the basis of accounting books, but may differ from the accounting result of the company due to differences in accounting and tax regulations regarding the determination of revenues and costs, in particular many so-called non-deductible costs.

Entities having their office or management in Poland are subject to taxation with respect to their global income irrespective of where it was generated (unlimited tax liability). Other entities are subject to taxation in Poland only with regard to income generated in Poland (limited tax liability).

Income from a source of revenue is the surplus of the sum of revenues obtained from that source of revenue over the costs of obtaining them, achieved in the tax year. If the costs of obtaining income exceed the sum of income, the difference is a loss from this source of income.

Considering an establishment in Poland and the preferred form thereof, an investor must take into account the tax burdens on profits earned in Poland.

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Definition

Dividends are defined as income from shares and income from other corporate rights participating in profits, such as:

• Income from remitting the shares;
• Value of the assets received upon liquidation of the company;
• Income of the company allocated for increase of the share capital;
• Payments in cash received by the shareholders upon merger, acquisition or division of the company;
• Undistributed profits in case of transformation of a company into a partnership;
• Income from debt-claims is not considered as dividends;
• Dividends subject to withholding tax in Poland are only those paid by a company having its office and thus residency in Poland. Taxation of dividends distributed by a non-resident company solely because the corporate profits from which the distributions are made originated in Poland is in principle excluded. Income earned from activity conducted in Poland directly by a non-resident company (not via a subsidiary company) constitutes business profits, not dividends.

Tax rate on income from dividends earned from a company headquartered in Poland amounts to 19%. However, provisions concerning non-residents must be interpreted and applied together with double tax treaties (DTT). Most DTTs entered into by Poland provide for a lower tax rate applicable to dividends, subject to meeting certain terms and conditions.

The tax is withheld by the company upon payment of the dividends. The company sends its shareholders and the Polish tax office information about the amount of dividends paid and tax withheld.

A dividend payment may be exempt from taxation under the Polish CIT Act if, among other things, the following conditions are met:

1. the disburser of the revenue from participation in the profits of legal persons is a company which is an income tax payer with its registered office or management board in Poland;
2. the company which receives revenue from a share in the profits of legal persons is a company which:
• is subject to income tax on all its income in Poland or in another Member State of the European Union or in another country of the European Economic Area, regardless of where it is earned;
• holds directly not less than 10% of shares in the capital of the company which pays out revenue from participation in the profits of legal persons, continuously for a period of two years, including when the period of two years of continuous holding of shares expires after the date of obtaining such revenue;
• does not enjoy exemption from income tax on its entire income, regardless of the source on which it is earned.

The favorable taxation at source is usually conditioned on the legal status of the recipient (usually it has to be a company) and a determined amount of shareholding (for instance 10% in USA-Poland and Germany-Poland DTT).

Many DTTs restrict application of their favorable provisions to the beneficial owners of dividends. Therefore, in principle, the dividend must be received directly by their owner, without an intermediary, in order to apply the exemption or a lower tax rate.

The provisions of the DTT do not apply in case the recipient of dividend carries on business in the source country through a permanent establishment, and the shareholding is effectively connected with the permanent establishment. In such a case dividends are taxable as part of the profits of the permanent establishment in Poland.

The preferential DTT provisions apply only if the tax residence of the dividend recipient is confirmed by a certificate of tax residence. The certificate is a document issued by the tax authority stating that the recipient of the dividend is resident and subject to unlimited tax liability in the relevant country.

In case any of the conditions are not met, dividends are taxed with 19% rate.

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Tax on dividends is levied in the country of origin and the dividend is then taxed in the country of residence as income to the recipient. To eliminate double taxation, the DTT provides for either exemption or credit as the method used by the country of residence.

State of tax residence of the recipient of the dividend:

• Allows such dividend to be exempt from taxation - the exemption method, or
• Allows a credit against income tax for the amount of tax paid in the country of origin - the credit method.

In cases of some DTTs (for instance the USA-Poland DTT) it is also possible to credit the so called underlying tax – corporate income tax paid in Poland on the income from which the dividend is earned, subject to limits provided by the law of residence state.

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