The tax base is the overall income, which is the difference between aggregated taxable revenue and aggregated tax-deductible cost. Subject to a number of exemptions, the tax base includes all sources of income. Consequently, there is no special treatment for income such as capital gains or interest. 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 accounting profit. Important details of the calculation of the taxable income are described in the following paragraphs.
Tax-deductible costs and capital expenditure
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 the above assets are sold, a taxpayer can include into the tax-deductible costs their initial value net of depreciation.
Non-deductible costs (other than capital expenditure) include, among other things, the following items:
- Accounting provisions (subject to exceptions);
- Proportionate part of depreciation write-offs made on cars costing in excess of 20,000.00 EUR;
- 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 thin capitalisation.
Interest paid on debt is generally tax deductible for the debtor when paid. At the same moment such interest shall be included into the taxable revenue of the creditor.
However, interest on a loan drawn to finance investments on fixed and intangible assets is not deductible if paid or accrued within the investment period. Instead, such interest increases the initial value of fixed or intangible assets, which is subsequently depreciated for tax purposes.
Furthermore, CIT law prescribes thin capitalisation restrictions related to interest paid on loans drawn from qualified lenders. Qualified lenders are:
- A direct shareholder (or direct shareholders) with at least 25% of the shares in the borrower’s share capital; or
- A sister company, provided that the same entity (or individual) holds at least 25% of the shares in the borrower’s share capital and 25% in the lender’s share capital.
Thin capitalisation restrictions can be applied if a loan or credit is drawn from qualified lenders and a Polish corporate income taxpayer shows the 3:1 debt-to-equity ratio as defined in the CIT law. Thin capitalisation restrictions apply to interest on loans and credits drawn from foreign as well as from Polish tax residents.
Taxation of residents
Polish CIT residents are subject to tax on their world-wide income. A company has a resident status if it is registered in Poland, or its management is located in Poland. Therefore Polish subsidiaries of foreign companies are regarded as residents and taxed based on general rules.
Taxation of non-residents
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 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 business and the most typical example of such 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 dealing in Poland, are nearly always covered by a tax treaty between Poland and their respective home countries.
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 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 amount 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.
Income from business activity of a natural person exceeding a tax free amount (3,091.00 PLN) can be taxed in accordance with three methods: progressive, flat rate and lump sum.
Currently progressive scale is the following:
- Tax base up to 85,528.00 PLN – 18%
- Tax base above 85,528.00 LN – 32%
The tax base constitutes revenue less actual costs of business activity. There are several types of costs which are not deductible; in general for the expense to constitute a taxable cost it must be incurred with the purpose of obtaining income or with the purpose of preserving the source of income. This method allows for several deductions, such as deduction on children, and joint taxation with a spouse or child (see personal taxation for details on deductions).
Taxpayers conducting a business activity may tax their income with 19% flat rate tax. The tax base is also revenue less costs; however, most of deductions and joint taxation with a spouse or child is not possible.
In certain cases – rental income, certain professions and types of activity revenue – not income – constitutes tax base and the imposed tax is a lump sum (3% – 20% of revenue). In case of this taxation method no tax deductible costs may be taken into account.
Tax depreciation of fixed assets
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 are shown 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.
Tax depreciation of intangible assets
Polish law provides for favourable 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:
- Copyrights: 50% per annum;
- Software licenses: 50% per annum;
- Research & development expenditure: 100% per annum;
- Provisions and accruals.
Generally, provisions are not deductible for corporate income tax purposes. However, provisions made for unpaid receivables can be tax deductible provided that a number of conditions are met.
Starting from 01 January, 2007 accruals are not tax-deductible. Therefore, the accrued amounts can be set off against the taxable income only when paid or booked as liabilities based on the appropriate document (e.g. an invoice).
Where the aggregated annual tax-deductible cost exceeds the taxable revenue, a taxpayer shall report a tax loss that can be carried forward over five consecutive years. However, only 50% of such a loss can be deducted against income reported in any one particular year of the above 5-year period. Therefore, the whole process of the loss carry-forward takes at least 2 years.
Interest, royalties, capital gains and dividends sourced in Poland.
Interest, royalties and capital gains sourced in Poland are treated as regular income and taxed at the standard 19% CIT rate.
Dividends sourced in Poland (received from Polish residents) are excluded from the overall income. Instead, they are subject to 19% tax, which is withheld and remitted to the tax office by the payer of dividends. In the past the above tax was recoverable for all corporate taxpayers. That is, any corporate entity which received dividend from a Polish company was allowed to deduct the above 19% tax against its general CIT imposed on the overall income. If the general CIT was less than the tax on dividend, the deduction could be made in the following years. While amending the CIT Law for 2007, the Parliament decided to replace the deduction with the ‘participation exemption’ based on the relevant EU directive. Nevertheless, the above deduction scheme was upheld based on the transitional rules which apply to dividends paid up to the end of 2007.
Simultaneously, the participation exemption was introduced with the effect from 01 January, 2007. Based on the relevant provisions, domestic dividends are free from the 19% tax provided that the Polish beneficiary holds at least 15% share in the paying company for at least two years.
Interest, royalties, capital gains and dividends sourced abroad
Interest, royalties capital gains and dividends sourced abroad are treated as regular income and taxed at the standard corporate income tax rate (exceptions related to dividends are discussed below). Income tax paid on such income in other countries can be credited proportionately against Polish CIT liabilities. Furthermore, the applicable double tax treaty can provide other method of double taxation avoidance (please see below the subtitle ‘Avoidance of double taxation’).
With respect to dividends from foreign sources, the CIT Law also provides for ‘underlying tax credit’, which is related to the corporate income tax paid by a foreign subsidiary under a foreign tax jurisdiction. Such underlying tax credit can be applied subject to conditions specified in the CIT Law. These conditions include the existence of the Double Tax Treaty between Poland and the subsidiary’s country of residence as well as the 75% shareholding of the Polish holding company in the foreign subsidiary. The underlying tax credit does not apply, if a foreign subsidiary is based in the EU, Iceland, Liechtenstein, Norway or Switzerland. This is due to the fact that dividends received from such subsidiaries can be subject to even more favourable treatment which is described in the next paragraph.
Dividends received from subsidiaries having their residences in the EU countries as well as in Iceland, Liechtenstein, Norway and Switzerland are CIT-exempt (‘participation exemption’) provided that the Polish recipient holds at least 15% of the shares in the paying company for at least two years (with respect to the Swiss subsidiaries, the minimum shareholding is 25%).
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 met jointly:
- 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.
Taxation of Corporate Income
Income of corporate (legal) persons is taxed with a 19% flat rate. The tax base is determined based on accounting books, it may however, differ from the bookkeeping result of the company due to differences in accounting and tax regulations on determining revenue and costs, in particular many so called non-taxable costs.
Entities having their seat 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).
The income is considered to be the surplus of total revenues over tax deductible costs incurred in a tax year. If tax deductible costs exceed the amount of revenues, the difference constitutes a loss.
Considering establishment in Poland and the preferred form thereof, one must take into account the tax burdens on profits derived from Poland. In case of establishment in form of a company – body corporate – the issue includes taxation of income from the shares in the company’s capital transferred in form of dividends.
Taxation of Dividends
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 seat 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 derived 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 derived from a company seated 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 either for exemption or a lower tax rate applicable to dividends, subject to 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.
Conditions for application of a DTT
The favourable 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 favourable 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 regulations of DTTs apply only if the tax residence of the recipient of dividends is confirmed with a certificate of fiscal residence. The certificate is a document issued by the tax authority, stating that the recipient of dividends is seated and subject to unlimited tax liability in a relevant country.
In case any of the conditions are not met, dividends are taxed with 19% rate.
Eliminating double taxation
The tax on dividends is withheld in the source country and subsequently they are taxed in the residence country as income of the recipient. In order to eliminate this double taxation, DTTs provide either for an exemption or a credit as a method applied by the residence country.
State of fiscal residence of dividend’s recipient either:
- Exempts such dividend from taxation – exemption method, usually with progression i.e. influencing the tax rate applicable to taxable income, or
- Allows for deduction from income tax an amount of tax paid in the source country – credit method, limited to the appropriate proportion of tax due in the residence state
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 derived, subject to limits provided by the law of residence state.
Exemption available in the EU
Income from shares and income from other corporate rights participating in profits transferred from a company seated in Poland to a company seated in Poland or in another European Union country is exempt from taxation.
The exemption is subject to several conditions. Generally, the beneficial owner of dividends must have a direct shareholding of at least 10% in the capital of its subsidiary incessantly for at least two years.