Tax on shifted profits - changes as of January 2023

Change in conditions for tax on shifted profits to apply

It should be noted that according to Article 24aa(3) of the CIT Act, the catalogue of costs representing shifted profits includes the following costs:

• advisory services, market research, advertising services, management and control, data processing, insurance, guarantees and warranties and services of a similar nature;
• all kinds of fees and charges for exercising a right or the right to use intellectual property rights (so-called royalties);
• transfer of the risk of insolvency of a debtor;
• debt financing related to obtaining and using the funds (including interest, fees, commissions, premiums, the interest portion of the lease instalment, fines and late payment charges);
• fees and remuneration for the transfer of functions, assets or risks (so-called exit fees).

As of 1 January 2023, the conditions for recognising whether payments made by a Polish entity will constitute shifted profits subject to taxation in Poland have changed. Thus, tax on shifted profits is due if payments made by a Polish entity to a related party not having its registered office or management within the territory of Poland meet all of the following conditions:

• under the provisions of the tax law in force in the country of the related party's registered office, board of management, registration or location, the income (revenue) generated by the related party from one of the above titles, is subject to taxation at a tax rate lower than 14.25 %, or is exempt or excluded from such taxation (the calculation of the rate is done in the way indicated in the Act),
•  this entity generates, from the services listed above, from the taxpayer or from other companies related to this taxpayer, at least 50% of the total revenue as defined in accordance with the provisions on income tax or accounting regulations,
• the entity transfers, in any form, at least 10% of such revenues to another entity:

• by including expenses as tax expenses in relation to that transfer, or by deducting such expenses or revenues from income, tax base or tax in any form,

or

• in the form of dividends or other revenue from a share in the profits of legal persons,

• the total of the costs from the services listed above incurred by the taxpayer in the tax year to related parties, which were included in the tax year as tax expenses of that taxpayer, shall amount to at least 3% of the taxpayer's total tax expenses for that year.

Exclusions from tax provisions on shifted profits

It is worth mentioning that the provisions on the tax on shifted profits do not apply if the aforementioned costs were incurred for the benefit of a related party subject to taxation in respect of all its income in an EU or European Economic Area country, with the proviso that the entity concerned has to carry out substantial real economic activity in that country. The prerequisites for determining whether the related party's activities are of a substantial and real nature are indicated in the Act.

Rate of tax on shifted profits and tax base

If the conditions for taxation of the expenses incurred on the shifted profits are met, the entity paying such dues acts as a taxpayer and is obliged to pay a 19% tax on the shifted profits (i.e. the costs of the mentioned services paid by the entity). The total amount of the shifted profits in the tax year is regarded as the tax base.

For a capital group, the tax base is the total amount of the shifted profits in a tax year of the companies forming the group, but it is the capital group that is the taxpayer of the shifted profits. Under previous regulations, it was each company forming the capital group that was the taxpayer.

Tax on shifted profits - settlement deadline

The tax on shifted profits shall be calculated for the tax year in a tax return and it shall be paid to the account of the tax office within the deadline for submitting the annual tax return. The shifted profits shall not be combined with other income (revenue) of the taxpayer.

For the first time, tax on shifted profits is to be settled in the CIT return for 2022.

If any of the conditions for tax collection is not proven to be met, the Polish taxpayer may be liable to pay the tax.

Tax on shifted profits - new obligation to provide documentation

According to the amendment, in force since 1 January 2023, the burden of proof that at least one of the conditions for the tax on shifted profits has not been met shall lie with the taxpayer who has recognised the expenses for the above-mentioned services as tax costs.

In practice, this means that a taxpayer incurring such costs will need to obtain a range of information from the related party regarding the related party's income/tax rules, cash flows or revenue structure.

To sum up, as a result of the above amendment to the regulations, the burden to prove that an expense does not meet the definition of shifted profits shall, in principle, lie with all taxpayers making payments for the aforementioned services to foreign related parties as from 1 January 2023.

WHT tax at source vs. tax on shifted profits

The amendment clarifies withholding as well. According to the provisions, the reduction by the withholding tax cannot exceed the amount of tax on shifted profits. If withholding tax is reduced after calculating the tax on shifted profits, the taxpayer shall add the amount of the undue reduction of tax on shifted profits in the annual tax return.

How can we help?

Determining whether the expenses incurred for the services listed above will indeed qualify for tax on shifted costs is going to be a tremendous challenge for taxpayers making group settlements on these expenses.

In this respect, we are ready:

• to analyse the costs which may meet the definition of "shifted profits"
• to verify the ratio of such expenses to total tax costs in a given year
• to analyse the conditions at the level of the recipient of the dues, together with an analysis of the source documentation
• to analyse the status of the receiver of the dues as conducting a substantial real economic activity in the country of its residency (EU/EEA).