It should be reminded that with the upcoming annual settlement, the so-called tax on shifted profits must be settled.
What are “shifted profits”?
It should be recalled that shifted profits are, in principle, defined costs incurred directly or indirectly for the benefit of a foreign related entity due to:
- advisory, market research, advertising, management and control services, data processing, insurance, guarantees and sureties and similar services;
- all kinds of fees and charges for the use or the right to use the rights or values referred to in Article 16b sec.1 points 4-7 of the Polish CIT Act (licenses, etc.);
- transfer of the risk of the debtor’s insolvency on loans other than those granted by banks and credit unions, including liabilities arising from derivative financial instruments and similar benefits;
- debt financing costs related to obtaining and using funds, in particular interest, fees, commissions, bonuses, the interest part of the lease instalment, penalties and fees for late payment of liabilities and costs of securing liabilities, including costs of derivative financial instruments;
- fees and fees for the transfer of functions, assets or risks (restructuring)
– if the conditions set out in the Polish CIT Act are met.
“General” rules for tax settlement
In practice, the tax will be due if the above costs (“eligible”) constitute more than 3% of the total tax costs (the so-called “safe harbour”).
Therefore, it is worth checking whether the level of 3% of eligible costs in tax costs is exceeded.
Note: For calculation purposes, we exclude costs from EU/EEA entities if: (1) the entity is taxed on all of its income in an EU or EEA country, and (2) the entity has a genuine economic activity in that country, and (3) the actual economic activity is substantial.
Further, three conditions should be met: the effective tax rate of the recipient, the share in the income and the condition of their distribution.
Therefore, it is to be verified whether the income tax actually paid by the related entity is lower than 14.25%.
Under the current regulations, the tax rate is determined by appropriately reducing the nominal income tax rate with respect to income from eligible costs by deductions from the tax base or tax related to this income or tax refunds, except for costs related to this income. If the recipient is subject to a partial exemption or partial exclusion from income tax, the rate is determined by reducing the nominal income tax rate by the percentage of the exemption or exclusion from taxation to which he is entitled.
It should also be checked whether at least 50% of the recipient’s revenues are receivables from services specified in Article 24aa sec. 3 of the Polish CIT Act, received from the Polish taxpayer (or Polish affiliates).
If the 50% revenue level is met, we look at what the recipient has done with these receivables – whether: (1) they are tax-deductible, deducted from income, tax base or tax, or (2) whether they are paid in the form of dividends or other income from participation in the profits of legal persons for the year in which they received the receivable.
Only when these conditions are met together does the tax obligation arises.
Burden of proof and practice
Please note: for the first time, the 2023 tax return is subject to the rule that the burden of proof to prove that the conditions for taxation have not been met rests with the Polish entity.
Therefore, it is worth analysing such settlements in order to determine whether the transactions or events may result in taxation. It is also important to collect the appropriate documentation.
“Special” rules for tax settlement
From the settlement for 2023, a regulation is in force, according to which a tax obligation arises (and therefore we do not examine the above-mentioned 3 premises at all) if eligible costs are incurred for the benefit of a related entity that has its registered office, management board or place of registration or location in the territory or in the country:
- which is a ‘tax haven’ or
- with which Poland has not ratified an international agreement, in particular a double tax treaty, constituting the basis for obtaining tax information from the tax authorities of that country, or
- with which the European Union has not ratified an international agreement constituting the basis for obtaining tax information from the tax authorities of that country, unless the entity is a controlled foreign entity (CFC) within the meaning of the CIT Act, where the tax on eligible costs was settled in Poland.
Similarly, there is a regulation according to which:
- the tax obligation arises if the eligible costs are incurred for the benefit of a related partnership, which then transfers them to an entity that meets the above-mentioned conditions for taxation – to the extent to which the transfer was made;
- the tax obligation arises if eligible costs are incurred for the benefit of a related entity that does not meet the above-mentioned conditions for taxation, but still transfers them to an entity that meets them – to the extent that the transfer was made. If there are several transfers, the last entity is looked at.
