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Changes in income taxes as of 1 January 2017

2016-12-02

The Act of 5 September 2016 amending the Personal Income Tax Act and the Corporate Income Tax Act, to be effective as of 1 January 2017, was published in the Journal of Laws No. 1550. The most significant change in the new regulations is a lower CIT rate for certain taxpayers, going down from 19% to 15%. Other amendments in both the CIT Act and the PIT Act are aimed at sealing the tax system by clarifying the regulations which may be prone to interpretation doubts.

  1. New rate of CIT

As we already informed in the July issue of the Newsletter, starting as of 1 January:

- the so called small taxpayers (whose sales revenue together with due VAT did not exceed the equivalent of EUR 1,200,000 in the preceding tax year), and

- taxpayers commencing business activities – in the year of commencement of such activities

will be subject to CIT at the rate of 15%.

However, the legislator has envisaged certain exceptions. The lower CIT rate will not be available to taxpayers established as a result of transformation processes set forth in the statutory law in the year of commencement of the activities and in the subsequent year. Such taxpayers will be able to apply the lower CIT rate as of the 3rd tax year of the conducted activities, provided that they will meet the conditions for being qualified as small taxpayers.  

  1. Revenue earned on the Polish territory – statutory definition

Article 3 of the CIT Act – providing for a limited and unlimited liability to tax – has been extended with further paragraphs including an example catalogue of income (revenue) earned on the Polish territory. And so, starting as of 1 January 2017, income earned on the Polish territory by taxpayers who have no registered office or place of management on the Polish territory is deemed to be in particular the following income: from any type of activities conducted on the Polish territory, including through a permanent establishment, from real estate located on the Polish territory or from rights to such real estate, from the transfer of ownership title to shares in a company in which real estate located on the Polish territory or rights to such real estate account for at least 50% of the value of its assets, from securities and derivative financial instruments admitted to public trading on the Polish territory, and finally from receivables specified in Article 21.1 and Article 22.1 of the CIT Act – among others, royalties, interest or income from share in profits of legal persons. The nature of this change is to clarify the regulations and to confirm an obligation to tax certain income earned by non-residents on the Polish territory.

  1. In-kind contribution to a company

As of 1 January 2017, there is also a change in the principles for determination of revenue in the case of making an in-kind contribution to a company. As regards CIT, the provision is applicable to an in-kind contribution other than an enterprise or an organised part thereof, while in the case of PIT, it applies to an in-kind contribution in any form. So the revenue will be the value of the contribution specified in the articles of association (or other document of similar nature). If, however, such value is lower than the market value of the contribution or no market value of the contribution is specified in the articles of association (or other document of a similar nature), the revenue will be understood as the market value of that contribution specified on the date of transfer of ownership title to the subject matter of the in-kind contribution. The market value should be specified in accordance with, respectively, Article 19.3 of the PIT Act and Article 14.2 of the CIT Act.

In the case of a partner, where such partner is a natural person, of a limited joint-stock partnership having its registered office or place of management on the Polish territory or an unincorporated company/partnership having its registered office or place of management in other country (if, in accordance with the provisions of the tax law of such other country, it is treated as a legal person and liable to tax in that country), the above provision will be applicable only to an in-kind contribution constituting things or rights.

The new regulations also indicate a moment when revenue is obtained. It is the date on which the ownership title to the subject matter of the contribution is transferred onto a company – in the event that the company or the increase do not have to be entered to the appropriate register in accordance with the prevailing law.

Just to remind: according to the regulations effective at the moment, in the case of taking up shares in exchange for an in-kind contribution, the revenue is the nominal value of the shares in the company taken up in exchange for that contribution.

What is important, the manner in which tax deductible expenses for the entity making an in-kind contribution are determined will not change.

The regulations come into force as of 1 January 2017, provided that if the ownership title to the subject matter of an in-kind contribution was transferred onto a company/partnership or co-operative in a tax year commenced before 1 January 2017 and the revenue on that account arose in a tax year commenced after 31 December 2016, the respective revenue should be specified in accordance with the regulations effective by the end of 2016.

  1. Tax anti-avoidance rule

In the case of mergers or divisions of companies or exchange of shares, the tax revenue does not arise if certain conditions laid down in the statutory law are met. However, as of 1 January 2017 those regulations will not apply if the main objective, or one of the main objectives, of merger of companies, division of companies or exchange of shares is tax avoidance or evasion. Even more, pursuant to, respectively, Article 24.20 of the PIT Act and Article 10.4a of the CIT Act, if merger of companies, division of companies or exchange of shares is not effected for reasonable economic reasons, it will be possible to presume that the main objective, or one of the main objectives, of such activities is tax avoidance or evasion.

  1. Definition of “beneficial owner”

The glossary of terms in Article 4a of the CIT Act has been expanded to include a definition of “beneficial owner”, according to which it is an entity which receives a receivable concerned for its own benefit and is not an intermediary, representative, trustee or other entity required to transfer the entire receivable or a part thereof to any other entity.

Following a definition of beneficial owner, the provisions in Article 21.3.4 and Article 26.1f of the CIT Act have been amended. The former states directly that royalties and interest paid out are exempt from tax if they are received by their beneficial owner. And the next provision stipulates that a written statement of a company receiving tax exempt royalties or income from share in profits of legal persons should state that the company or its foreign establishment is the beneficial owner of the payments.

The implemented amendments come into force as of 1 January 2017.