The Polish Act on Compensatory Taxation of Constituent Entities of International and Domestic Groups (the “Act”) has been in force since the new year.
As we have indicated in previous materials, the Act implements the provisions of the so-called GLoBE Directive, i.e. m.in. regulations on the minimum 15% global equalization tax, the so-called Pillar 2, into the Polish legal system. The aim is to limit competition in terms of CIT rates by establishing a global minimum level of taxation.
Importantly, the mechanism is based on the assessment of the level of taxation of a given capital group in a given tax jurisdiction, and the limit of application of the regulations is effective taxation (ETR) – calculated according to statutory principles – at the level of at least 15%.
The calculation of the effective tax rate for a given country requires the determination of two elements, i.e. (a) the sum of the adjusted taxes of the eligible constituent entities from a given country (jurisdiction) and (b) the qualified net income of these constituent entities and is expressed by the formula:
Effective tax rate = adjusted qualified taxes of the constituent entities in the jurisdiction / qualified net income of the constituent units in the jurisdiction.
Depending on the situation, taxation can be assigned to:
- the (ultimate) parent company in a given capital group – the so-income inclusion rule (IIR);
- subsidiaries – the so-called equalization tax on under-taxed profit rule (UTPR).
At the same time, Poland has also introduced the so-called qualified domestic minimum top-up tax (QDMTT). Its payment by an entity in Poland excludes the application of the above-mentioned mechanisms to it.
Note: Both international and domestic groups will be subject to taxation, provided that the criteria described below are met.
As a general rule, taxation applies to international groups or domestic groups that have achieved a minimum level of revenues of EUR 750 million in at least two of the last four tax years.
The above mechanisms are intended to prevent the so-called tax erosion at the level of individual tax jurisdictions.
However, just like the Act implementing the EU Directive, it has provided for a number of exemptions or restrictions that mean that either a given business entity is not subject to the fiscal and reporting obligations under this Act at all (as in the case of subjective exemptions) or is not subject to it until certain conditions/thresholds are not met.
In principle, the above-mentioned tax will apply to the largest business entities. However, the act also contains a number of other legal solutions that either exclude or limit the application of the global equalization tax. We are talking about the so-called “safe harbours” introduced.
With regard to the subject of taxation, the key is the occurrence of a low level of taxation (<15% ETR) and a consistently low-taxed entity. In the case of a global top-up tax, these are generally low-taxed constituent entities in which the taxpayer (parent company) has a certain share.
On the other hand, in the case of the national top-up tax, the taxpayers are the individual constituent units (mostly “at the bottom” of the holding structure). Thus, the taxpayers themselves may be low-taxed entities.
Below is a list of subjective exemptions and the so-called safe harbours included in the Act.
1. Subjective exemptions
The global equalisation tax will not apply to taxpayers who, as members of an international or domestic capital group, have not exceeded the threshold of EUR 750 million at least twice in the last four audited years.
Where an international group or a domestic group has existed for less than 4 tax years, this condition is deemed to be fulfilled if the international group or domestic group has generated minimum group income in at least 2 tax years of the previous period of operation of such a group.
In addition, the legislator also excluded m.in:
- government entities;
- international organizations;
- non-profit organizations;
- pension funds;
- investment funds that are the ultimate parent companies;
- entities investing in real estate, if they are the ultimate parent undertakings;
- undertakings in which at least 95% of the nominal value of their shares or rights of a similar nature, and in the case of shares or rights without nominal value – the issue value of such shares, belong to the undertakings referred to in points 1 to 6, with the exception of entities providing pension services.
2. Safe harbors
The Act in question introduces two types of safe harbours: permanent and transitional.
2.1. Permanent
2.1.1 De minimis
Global or national top-up tax is not calculated for constituent units located in a jurisdiction if the following conditions are met jointly for the tax year:
- the average three-year eligible revenue of all constituent entities located in that jurisdiction is less than EUR 10 million;
- the average three-year jurisdictional qualified income of all constituent entities located in that jurisdiction is less than EUR 1 million or the average jurisdictional qualified loss of all such entities has been incurred.
If, in the first or second year preceding the tax year (or both), no constituent entity located in a particular jurisdiction has generated qualified revenue or qualified income (loss), that tax year(s) shall be excluded from the calculation of the average three-year qualified income or the average three-year qualified income (loss).
2.1.2. QDMTT
If a Polish parent company is required to settle the minimum tax and its subsidiaries in other jurisdictions settle QDMTT, the Polish entity does not take them into account under the IIR rule (applicable between countries that have implemented Pillar 2).
This is the case if the following conditions are met jointly:
- all units or constituent units located in that jurisdiction for which a global top-up tax payer would calculate the effective tax rate are subject to qualified domestic top-up tax and the tax is payable in full;
- This jurisdiction has been designated as a jurisdiction that meets the safe harbor requirements for qualified domestic equalization tax.
2.1.3. Low relevance
Eligible entities in the group achieving the so-called low materiality may, for the purposes of calculating the profit surplus, assume that:
- eligible income is determined in an amount equal to the revenues of this entity, to be disclosed in the information on the group of entities;
- eligible revenue is determined in an amount equal to the revenues of this entity, to be disclosed in the information on the group of entities;
- Adjusted eligible taxes are determined in the amount of income tax to be disclosed in the information on the group of entities.
At the same time, the legislator also specifies that a component entity achieving financial results of low significance is understood as a component entity with its permanent establishments, with respect to which the following conditions are met jointly:
- that entity is not included in the consolidated statements prepared by the ultimate parent undertaking solely because of their small size or immateriality;
- the said report is subject to external audit in accordance with the regulations applicable in the jurisdiction of the entity preparing the report;
- in the case of an entity whose total revenues within the meaning of the CBCR regulations exceed EUR 50 million, the accounts of that entity used to prepare information about the group of entities are kept in accordance with an acceptable accounting standard or an approved accounting standard.
2.2. Transitional
In addition to the permanent regulations introducing the so-called safe harbor institutions, the act also introduces transitional safe harbors due for the 2024-2026 settlement periods.
2.2.1. Routine profit
The global top-up tax is not calculated if the surplus profit (income of the group in the audited jurisdiction) is not more than zero, where:
- qualified net income is determined at an amount equal to the pre-tax profit for that group in that country and
- equal to or lower than the amount of the property and personal substrate (i.e. fixed assets and labour costs).
2.2.2. De minimis
The exemption may be applied if the income of a given group in a given country does not exceed EUR 1 million or if its income in a given country does not exceed EUR 10 million.
2.2.3. Effective tax rate
On the other hand, Article 148(3) of the Act stipulates that the global top-up tax is not to be calculated in a situation where the simplified, effective tax rate is not less than:
- 15% in 2024;
- 16% in 2025;
- 17% in 2026
2.2.4. Initial lifetime of the group
Constituent entities of an international group located in the territory of the Republic of Poland do not calculate the domestic and global equalization tax in a period not longer than the first 5 tax years, if for a given year:
- the constituent entities of that group are located in no more than six jurisdictions, counted jointly with the jurisdiction in which the ultimate parent of that group is located, and
- the sum of the net carrying amount of property, plant and equipment of all constituent entities of this group does not exceed EUR 50 million, excluding the constituent entities located in the jurisdiction in which the constituent entities of this group show the highest total value of property, plant and equipment in the tax year for which the provisions of the Act apply to this group for the first time.
The possibility of using this exemption is related to the need to report to the relevant Head of the Tax Office.
3. Obligations of individuals
In particular, the units will be required to do the following:
- calculating the effective tax rate (ETR);
- submission of information on compensatory taxation for the tax year;
- filing tax returns and paying tax.
In practice, this means that specific calculations must be prepared – both for the purpose of inclusion in group reports and for the payment of the “domestic” tax.
3.1. Calculation of ETR
As a rule, all taxpayers will be required to calculate the effective tax rate (ETR) for constituent entities in which they hold a specific ownership interest (in principle consolidating).
Only in the second step, if the ETR is below 15%, will the taxpayer parent companies calculate the global top-up tax for the low-taxed constituents in which they hold the relevant participations.
A similar scheme occurs in the context of the national equalization tax. Unlike the global tax, taxpayers of the domestic equalization tax will calculate this tax not for the entities in which they have a participation, but “for themselves”, taking into account the principle of jurisdictional consolidation and specific rules of tax allocation/allocation.
3.2. Submission of information
It applies to the group’s constituent units located in Polish, who are obliged to submit to the competent head of the tax office, according to the established template, information on compensatory taxation for the tax year, by the end of the 15th month following the end of that tax year
A constituent unit is understood as:
- an entity that is part of an international group or a national group, or
- permanent establishment of the headquarters, which is part of an international group.
Taking the above into account, this obligation will apply to the entity, regardless of whether or not it meets the conditions for qualifying for exemptions under safe harbors.
3.3. Giving evidence
Applies to taxpayers:
- global equalisation tax;
- national top-up tax;
- tax on under-taxed profits
– who are obliged to submit to the competent head of the tax office, according to the established templates, the amount of tax due, by the end of the 18th month following the end of the tax year and pay the tax resulting from this return to the account of the relevant tax office within this period.
Taking the above into account, this obligation will apply to entities that meet the criterion of taxpayers, i.e. those who do not use safe harbours.
