At the end of August 2018, the Ministry of Finance announced future significant changes in the most important tax acts. These changes are to enter into force at the beginning of 2019. We wrote about some of these here last week. Now we present further changes proposed by the Ministry of Finance, as published in the draft act of 24 August 2018 amending the Personal Income Tax Act, the Corporate Income Tax Act, the Tax Ordinance and other acts, which might be particularly important for taxpayers conducting business activity.
Changes in collection of withholding tax
Generally, the amendment will not change the rules for collection of withholding tax for taxpayers who make payments up to PLN 2,000,000 to a single taxpayer in a given tax year. The only difference proposed in the draft will consist of the obligation to exercise due diligence.
If the amount payable to a taxpayer exceeds PLN 2,000,000 in one tax year, the remitter of withholding tax will have to comply with an additional new obligation, i.e. submission of a statement. Compliance with the new obligations will determine whether the taxpayer can benefit from a lower withholding tax rate or exemption from withholding tax.
The remitter will have to meet additional formal criteria by submitting a declaration to the tax authorities stating that the remitter:
- Holds the documents required by the regulations confirming the legitimacy of the applied tax rate, tax exemption or waiver of withholding
- Has carried out a verification of the payee which did not find circumstances precluding application of the tax rate, exemption or waiver of withholding.
If the remitter fails to meet the new formal obligations (in particular does not submit a declaration to the authorities), it will not be able to apply preferential tax rates or exemptions, but will have to collect the withholding tax at the maximum rates as per national PIT or CIT regulations. A payee who is a foreign taxpayer wishing to take advantage of preferential taxation under a tax treaty or EU law (directives) will have to apply for a refund. The tax authority will have 6 months to consider the application for a refund.
(Limited) use of copies of residence certificates
The draft amendment would enable limited use of copies of residence certificates (instead of having to present the original paper version each time), allowing the taxpayer to use a copy or scan of the residency certificate in certain situations.
According to the draft amendment, taxpayers not domiciled in Poland will be able to document their tax residence using a copy of a residency certificate for purposes of withholding tax on consultancy, accounting, market research, legal services, advertising, management and control, data processing, employee recruitment and staff acquisition, guarantees and sureties, and similar payments. However, this will be permissible only when the information presented in the certificate does not raise any doubts. The use of copies of residency certificates is also to be limited to a certain amount, i.e. where a taxpayer receives payments from the same entity for such services of up to PLN 10,000 in a tax year.
Reduced income tax rate
The draft amendment proposes to cut the reduced CIT rate to 9%, from the current 15%. The 9% rate will only be available to CIT payers with the following legal status:
- Small taxpayers (i.e. whose income in a given tax year does not exceed the equivalent of EUR 1,200,000), if the share of their net income in tax income did not exceed 33% in the previous tax year
- Taxpayers commencing business activity (excluding taxpayers created through certain restructuring activities).
The reduced CIT rate will not apply to the tax base obtained from cash capital.
Notwithstanding the above, all taxpayers will be able to benefit from a preferential 5% corporate income tax rate with respect to qualified income derived from intellectual property rights (IP Box).
Reporting tax schemes
The amendment will also introduce the obligation to report tax schemes creating tax benefits for the taxpayer (beneficiary).
A tax benefit will basically mean any tax saving, e.g. no tax liability, reduction of tax amount, creation or increase of a tax loss, or creation of a tax overpayment.
“Promoters”—entities advising clients, developing, offering or preparing available tax schemes, as well as implementing or managing the implementation of tax schemes (in particular advocates, legal advisers and tax advisers)—will be obliged to report the existence of such schemes to the head of the National Revenue Administration (KAS). Obligated promoters will have 30 days to provide the head of KAS with information about the tax scheme, counting from the time it is made available to the client or from the beginning of implementation or preparation for implementation. The promoter will also have to inform the client accordingly. The promoter should also indicate the client’s details, but only with the client’s consent. But promoters bound to professional secrecy will instead have to inform the taxpayer (beneficiary) that the taxpayer has an obligation to report the scheme within 30 days.
As specified in the amending act, tax schemes with attributes defined as “hallmarks” (general or particular) will be subject to reporting. A hallmark will be, for example, that the promoter and the beneficiary maintain confidentiality towards third parties. It is worth noting that this characteristic is a typical feature of substantially all advice given by advisers to their clients.
The notification obligation will cover tax schemes implemented on or after 25 June 2018, i.e. before entry into force of the planned amendment.
The largest advisory entities, i.e. with revenues exceeding PLN 8 million, will be obliged to implement internal procedures to prevent failure to report tax schemes, under threat of a fine of up to PLN 10 million.
Financing of activities
According to the draft amendment, the payment of surcharges by shareholders and retained profits in a company will allow the company to recognise hypothetical interest in its tax-deductible costs equivalent to the interest it would have paid to borrow such funds externally. The costs will include hypothetical interest resulting from the product of (1a) a shareholder’s surcharge or (1b) the profit transferred to the company’s reserve capital or supplementary capital and (2) the National Bank of Poland reference rate (currently 1.5%) plus 1 additional percentage point.
Such hypothetical interest cannot exceed PLN 250,000 in a given tax year. The hypothetical interest could be included in tax costs in the given tax year and two subsequent consecutive years, provided that the company does not reimburse the surcharges or make payments from the reserve capital or supplementary capital during that period.
Use of company cars
The draft amendment introduces limitations on tax-deductible costs related to the use of company cars entered in the fixed assets register.
It will only be possible to deduct 50% of costs related to the use of cars used for both business and private purposes. These costs will be deductible without limitation only if the vehicle is used solely for business purposes. Therefore, the same rules as for VAT will apply. For income-tax purposes, it will be necessary to keep records of the vehicle’s mileage (the same as for VAT purposes). The absence of such records will imply (with some exceptions) that the taxpayer uses the car for mixed purposes and can only deduct 50% of the car-related expenses as tax-deductible costs.
If the vehicle is not entered in the fixed assets register, only 20% of expenses related to its use may be included in tax-deductible costs.
At the same time, the draft amendment raises the limit of tax-deductible costs for car depreciation and vehicle insurance (AC) to PLN 150,000 instead of the current EUR 20,000 per year.
Joanna Prokurat, Joanna Goryca, Tax practice, Wardyński & Partners