Taxing shifted profits – how to tackle the new challenge in Poland

The new tax on shifted profits has been implemented via the Polish CIT Act from January 1 2022. Since this tax is settled on annual basis, the upcoming deadline for the annual CIT return would be also the first date in which taxpayers will face the new challenge.

As a rule, the statutory deadline for tax payment falls three months before the end of the tax year. However the Ministry of Finance has recently adopted a regulation on extending the deadline for taxpayers, whose tax year ended between December 1 2022 to February 28 2023, from March 31 to June 30 2023. Thus, the prolonged deadline applies to taxpayers making the tax year the same as the calendar year.

In the case of taxpayers with an assumed tax year different than the calendar year, the tax on shifted profits is, as a rule, due within three months from the lapse of the first tax year commenced after December 31 2021.

What is also important, due to different interpretations of the initial wording, is the regulations on the tax on shifted profits have been amended as of January 1 2023. Nevertheless, in the transitional rules, the Ministry of Finance decided that taxpayers should follow the initial wording with respect to tax settlement for 2022.

The tax on shifted profits was introduced to combat tax evasion exercised through cross-border payments of a ‘passive’ nature, made to related parties in jurisdictions with low effective tax rates. Importantly, the tax on shifted profits applies only to payments made to recipients seated outside of the EU or EEA. Payments to taxpayers from the EU/EEA are excluded from the new tax, provided that they carry out genuine and tangible business activity.

In this view, Polish taxpayers should particularly examine their potential obligations in view of payments made to related parties in countries such as the USA, UK, Russia, China, Switzerland or Canada.

Regarding the tax on shifted profits, there are several criteria which must be jointly met by Polish taxpayers to be subject to this tax. Based on the provisions applicable for 2022, these include:

• A relatively low level of taxation imposed in the recipient country: the effective tax rate of the contractor in its seat country must be lower than 14.25%;

• A high level of passive income: qualifying payments must exceed 50% of the gross revenues reported by the recipient; and

• Qualifying payments treated as tax deductible must exceed 3% of the gross tax deductible costs reported by the taxpayer (excluding debt financing costs).

Once the above circumstances apply, taxpayers must determine the tax base comprised by the sum of qualifying payments cited in the Polish CIT Act, which generally include:

• Intangible service fees;

• Royalties;

• Costs related to transfer of debtor’s insolvency risk;

• Debt financing costs; and

• Consideration for transfer of functions, assets or risks (exit fees).

The sum of shifted profits may not be combined with any other income reported by the taxpayers and thus, the tax base may not be decreased with any losses from other sources. The applicable shifted profits tax rate is 19%.

Lastly, the tax on shifted profits may be decreased by (i) the withholding tax remitted upon payments of interest, royalties or intangible services, and (ii) the ‘hypothetical’ tax asset related to debt financing costs, treated as non-tax deductible in a given tax year, due to earning-stripping rules.

The tax on shifted profits is declared in the CIT/PD, which is an attachment to the annual CIT-8 return.

Considering the complexity of the regulation, numerous interpretive doubts, and the lack of existing practice from the tax authorities, it is essential for multinational capital groups exercising intra-group settlements to carefully analyse the potential impact of the discussed regulation.

Additionally, verifying potential obligations in this respect requires obtaining detailed information from the group and a time-consuming analysis of the tax position of foreign entities. Therefore, the adopted extension of deadline for the annual CIT settlement in Poland may secure the sufficient time for Polish taxpayers to perform a proper analysis and determine the potential impact of the tax on shifted profits.