Year: 2022
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Year: 2022

Taxation of dividends paid by a Polish company to non-Polish individuals. Warsaw, September 6, 2022

According to Polish tax law, there is a general rule that a flat-rate tax of 19% is charged on income paid in the form of dividends.  If a dividend is paid by a Polish company, it withholds tax on that dividend.

The company then transfers the tax withheld to a relevant tax office.  Failure to do so (e.g., failure to withhold tax and/or transfer the correct amount of tax to a tax office) may constitute a violation of fiscal criminal law and may be subject to fiscal criminal liability.  Fiscal criminal liability is borne by specific individuals responsible for the correct tax settlement, not the company itself.

The above standard tax rate (i.e., 19%) may be reduced depending on how this matter is regulated by a double taxation avoidance agreement concluded between Poland and the country of the dividend recipient.

The application for the reduced tax rate resulting from the double taxation agreement is possible providing that the place of residence of the dividend recipient is properly documented with a certificate of his tax residence.  Therefore, one should make sure that the certificate of tax residence meets the conditions set out by the law in order not to be exposed to the aforementioned criminal liability.

For example, according to the OECD Model Tax Convention (a model for countries concluding bilateral tax conventions), dividends paid by a company established in Poland to a resident of a foreign country may be taxed in Poland.  However, the tax charged may not exceed 15% of the gross amount of the dividend.  If the Polish company does not receive a tax residence certificate from the shareholder (i.e., the dividend recipient) or the certificate does not meet certain formal conditions, then the Polish company will not be entitled to apply the reduced tax rate resulting from the relevant double taxation agreement.

Moreover, the fact that the dividend paid (by a Polish company to a resident of another country) will be taxed in Poland does not mean that such a dividend cannot be taxed in that other country, as well. The provisions of most double taxation agreements explicitly stipulate that dividends may be taxed in both countries. On the other hand, if the dividend could be exempt from taxation in that other country (as long as the internal regulations of that other country allow such exemption), it will not result in the dividend not being taxed in Poland.

In other words, foreign rules will not apply in Poland.  A Polish company paying dividends will have to apply Polish tax regulations and will not be able to apply tax regulations of another country.  On the other hand, the recipient of the dividend (i.e., a foreign tax resident) will most likely have to make his tax settlements according to the tax regulations of his/her country of tax residence, taking into account the tax paid (withheld) in Poland.

Therefore, it should be examined if another country has the analogous rules as Poland with regard to dividends received by Polish residents from abroad.  According to Polish regulations, if a Polish tax resident receives a dividend from abroad, his/her income is taxed with 19% Polish tax on dividends.  However, from this calculated amount, he can deduct (provided certain conditions are met) the tax paid abroad (e.g., withheld by a foreign company) but still no more than 19%.  Any difference created in this way is subject to payment to a Polish tax office.  The shareholder (Polish resident) shows both the income and the amounts of Polish and foreign taxes in his annual tax return.

It is worth pointing out that the above general principles may be subject to certain modifications depending, inter alia, on the rules on which a Polish company is taxed. Other circumstances concerning the foreign resident’s relation with Poland or the nature of his ties with Poland may also be relevant.

Bernard Łukomski
attorney-at-law
tax advisor
phone +48 608 093 541

The Polish Deal 2.0: Amendment of corporate income tax

A draft amendment to the CIT Law has recently been published, which is a modification of the regulations which became effective in January 2022. Below we present the most important aspects of the planned changes to the Polish Deal.

Modification and postponement of the entry into force of the minimum income tax rules

The proposed amendments provide that the minimum income tax rules will be suspended for one year (i.e. from 1 January 2022 to 31 December 2022). They would consequently only start to be applied from 2023. In addition, the legislator foresees changes in the construction of the tax itself, in particular:

  1. The profitability index will be increased from 1% to 2% and at the same time the methodology for its calculation will be changed. The following will not be taken into account:
  • Tax deductible costs being the payment under a fixed asset lease agreement
  • Revenues being the value of trade receivables sold to entities in the factoring industry, and
  • Excise duty
  • The calculation of the minimum income tax will change. Currently, the levy is 10% of an amount equivalent to 4% of the value of income other than capital gains and passive expenses (concerning i.e. debt financing and intangible services). The draft does not change the tax rate which is still 10%; however, there will be two alternative methods from which the taxpayer can choose the more favourable one. The basis, depending on the taxpayer’s preference, will be either 4% of the value of revenues or 2% of revenues plus passive costs.
  • Among others, municipal companies, medical entities, small taxpayers, entities in bankruptcy or liquidation and those whose profitability in one of the last 3 tax years was above 2% will not be subject to minimum CIT at all.

Amendment of the regulations on controlled foreign entities/company (CFC)

The modifications to the CFC are based on 3 pillars:

  • Eliminating double or multiple taxation of CFC when cascading dividends in holding structures
  • Clarification of the rationale for the high profitability of a foreign entity relative to the assets held in case of potential disposal of assets during the year
  • Clarification of the definition of a subsidiary.

Amendments to the rules on taxation of flipped income

The aim of the proposed solutions is to eliminate the doubts raised by the business community by i.e.:

  • To include in the scope of the tax on flipped income only costs that are deductible
  • Clarification that the related entity for which the costs are incurred does not have its registered office or central administration in the territory of the Republic of Poland
  • Clarification of the condition concerning 50% of the revenue generated by a related entity and the condition concerning the transfer of revenue to another entity (at least 10%)
  • Simplification of the condition relating to preferential taxation in the country of residence, management, registration or location of the related party.

Changes to withholding tax (WHT)

The new rules aim to ease the WHT mechanism in force from 1 January 2019 by:

  • Exclusion of the application of certain obligations of broadly understood payers with regard to withholding tax on interest and discount on treasury securities (treasury bills and treasury bonds) by extending the material scope of the non-resident taxpayer exemption from income tax to include also treasury bills and bonds offered in the domestic market
  • In addition, the validity of a declaration by the board of directors that, in the exercise of due diligence, the payer was not aware of circumstances preventing the application of a lower withholding tax rate or tax exemption (provided for in an international double tax treaty) is to be extended.

Amendment of the rules on debt financing costs

As regards tax treatment of debt financing costs, the Ministry intends to eliminate interpretation doubts reported by taxpayers. This includes a clear indication that the amount of PLN 3 million or 30% of EBITDA – whichever is higher – will be excluded from tax costs. In addition, the provisions on debt financing costs will not apply:

  • Where the financier of the equity transaction is a bank or cooperative savings and credit union established in an EU or EEA country
  • In the case of debt financing granted to acquire or take up shares or all rights and obligations in entities unrelated to the taxpayer.

Modifications to the Polish holding company (PSH)

The changes are also to apply to holding companies – a new institution, effective from 2022:

  • The right to exempt 100%, and not as at present 95%, of the dividend income received from subsidiaries. In parallel, the holding company will be able to take advantage of the dividend exemption under EU Directive 2011/96/EU (Parent Subsidiary Directive) – this is not currently possible
  • It will be possible to benefit from both types of preferences
  • Introduction of a new definition of domestic subsidiary and foreign subsidiary

The aim of all these changes is to allow more entities than before to benefit from holding exemptions.

Amendments to the rules on flat-rate taxation of company profits

Changes are also envisaged in the provisions on flat-rate corporate income, commonly known as Estonian CIT. The legislator plans to:

  • Introduce modifications to the way income from non-business expenses is determined when assets (e.g. cars) are used for business and other non-business purposes
  • Clarify the condition for extinguishing a tax liability for a preliminary adjustment, i.e. a temporary difference between tax and accounting results, Once the changes have been implemented, it will be clear that the obligation will lapse in full after at least one full flat tax period, i.e. four tax years
  • Modify the deadline for payment of the tax due on the income from the transformation (unambiguous indication that if the tax on the income from the transformation is paid in full, the taxpayer is obliged to pay the tax by the deadline for submission of the CIT-8 return for the tax year preceding the first year of flat-rate taxation)
  • Modify the deadline for the payment of a flat rate on distributed profit income and income from profit to cover losses (also applies to advances on anticipated dividends) and a flat rate on distributed net profit income.

Amendment of the rule on the procedure for the refund of tax on income from buildings

From June 2022, commercial property owners will pay building revenue tax again. This is a result of the abolition of the epidemic status from 16 May 2022.

The procedure for refunding tax on income from buildings will be changed. The legislator plans to specify that the tax will be refunded without the need for a decision when the amount of the refund is not in doubt.

Amendment of the rules on the documentation obligation in respect of “haven transactions”

The amendments are to address the rules on direct and indirect haven transactions:

  1. Elimination of presumption of residency of beneficial owner in tax haven
  2. New reporting limits for indirect tax haven transactions:
  3. PLN 2,500,000 – goods
  4. PLN 2,500,000 – financial
  5. PLN 500,000 – other (“basic threshold”)
  6. Further emphasis on the role of the statement as “sufficient to verify the documentation obligation”

Having regard to the above regulations, which are planned to be introduced by the Ministry of Finance, it should be unequivocally stated that taxpayers will have to face further radical changes, which will significantly affect business operations. For further information, please contact Bernard.

“Blame game” ends as no-fault divorce comes into force

In a move which will benefit many Britons and their children, new landmark divorce reforms were introduced in the UK on 6th April 2022. Aimed at reducing conflict between separating couples, the reforms have introduced the no-fault divorce to remove unnecessary conflict and to ease stress on couples and children.

As part of a wider action to improve the family justice system, the new Act has introduced a new minimum wait of 20 weeks between application and conditional order of divorce. This will offer time to reflect, and potentially turn back, or where reconciliation is not possible to agree important arrangements for the future.

We also see the simplification of the language of divorce to make it more understandable. This includes replacing the terms ‘decree nisi’, ‘decree absolute’ and ‘petitioner’, with ‘conditional order’, ‘final order’ and ‘applicant’.

Following the implementation of the Act the government has also committed to look into further the law around financial settlements after a divorce, such as the dividing of assets or maintenance payments.

The no-fault divorce is the biggest shake up in UK divorce law for more than 50 years, and ends completely the need for separating couples to apportion blame for the breakdown of their marriage, helping them to instead focus on key practical decisions involving children or their finances and look to the future.

Prior to this, one spouse was forced to make accusations about the other’s conduct, such as adultery or ‘unreasonable behaviour’, or face years of separation before a divorce could be granted, regardless of whether the couple had made a mutual decision to separate.

A spouse, or a couple jointly, can now apply for divorce by stating their marriage has broken down irretrievably. It removes unnecessary finger-pointing and ill feeling at a time where emotions are already running high, and spares children from witnessing their parents mudslinging.

Importantly, it stops one partner from vengefully contesting a divorce and keeping their spouse in an unhappy marriage. In some cases, domestic abusers can use their ability to challenge the process to further harm their victims or to trap them in the relationship. The reforms will put an end to this behaviour.

On this website, we have written various posts about divorce that you may find of interest. Please click on this link – Divorce posts.

Polski Ład (Polish Deal). Taxation of the general partner of a limited joint-stock partnership (S.K.A.) – basic aspects. Warsaw, January 24, 2022

If you are looking for a remedy or solution to Polski Ład , you may wish to consider a limited joint-stock partnership (S.K.A.).

A limited joint-stock partnership can be a very effective form of running a business post the introduction of the Polish Deal.

The advantages to the general partner in relation to the taxation of a limited joint-stock partnership are presented below:

– income tax in the amount of approximately 17.3%, if S.K.A. is a “small taxpayer” (for other companies, the taxation of the general partner will be 19%);

– profit paid to the general partner is not subject to the obligation to pay social security contributions;

– the profit paid to the general partner is not subject to the obligation to pay the health insurance premium (it is a derivative of the lack of obligation to pay social security contributions);

– the profit paid to the general partner is not subject to taxation, the so-called solidarity levy (4%);

– the possible payment of the management fee to the general partner (resulting directly from the partnership agreement).

In order to take advantage of the deduction of income tax (CIT) paid by S.K.A. from the general partner’s tax (PIT), the profit of such a company should be paid within five years (counting from the end of the tax year following the year in which the company’s profit was achieved).

For further information about this topic, please contact Bernard.

Bernard Łukomski
Attorney-at-law
Tax advisor
Tel: 608 093 541