Table of contents. About PAIiIZ. About MDDP. Tax system in Poland. Corporate Income Tax (CIT) Payroll taxes. Value Added Tax (VAT) Transfer Pricing

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2 Table of contents About PAIiIZ About MDDP Tax system in Poland Corporate Income Tax (CIT) Payroll taxes Value Added Tax (VAT) Transfer Pricing Excise and customs duty Foreign exchange limitation Starting business in Poland Witholding taxes under Poland s tax treaties (table)

3 About PAIiIZ Polish Information and Foreign Investment Agency S.A. (PAIiIZ) was established in 2003, as a result of a merger between the Polish Agency for Foreign Investment and the Polish Information Agency. PAIiIZ s activities include: increasing the inflow of foreign direct investments to Poland; encouraging foreign companies to invest in Poland; assistance in the selection of attractive investment locations; advisory services at each stage of the investment process; assistance in the interpretation of legal procedures and regulations; providing full access to the economic information; creating a positive image of Poland in the world and the promotion of Polish products and services through the organization of conferences, seminars and exhibitions, publishing books on economic topics, organization of publicity campaigns and cooperation with the media. Our Agency s task is to present to different companies interested in investing in the region the favorable factors of conducting business activity in Poland. PAIiIZ offers foreign investors quick access to information and assistance throughout the whole investment process. The Agency also supports Polish entrepreneurs abroad and promotes the export of Polish products and services on foreign markets. 4

4 About MDDP MDDP offers professional advisory services to foreign and local investors planning to do business in Poland. We provide comprehensive support at every stage of project implementation. We combine international experience with in-depth knowledge of the legislation and real-life practice on the Polish market. Our clients include leading international corporations, major Polish companies from all industries, and individual customers. We have advised half of the top ten Fortune Global 500 companies. The quality of our services is appreciated by both our clients and the industry. More and more rankings, both in Poland and abroad, have named MDDP as the leading advisory firm on the Polish market. MDDP is also one of the leading Polish companies providing comprehensive advisory services. We offer our clients a full range of specialised services: MDDP Tax Advisory consists of a team of more than 70 experts in the area of VAT, customs and excise tax, income tax, transfer pricing, international taxation and tax and court proceedings. MDDP Law Firm offers the multi-layered legal support necessary for conducting business securely and effectively. The firm specialises in conducting litigation with the State Treasury in pursuit of compensation for unlawful actions by public authorities. MDDP Business Consulting offers a wide range of services, from developing and implementing strategies, to process optimisation, to supporting cost cutting solutions at the operational level. It supports clients in implementing projects at the strategic and operational levels. MDDP Finance & Accounting Solutions is a team of experts with many years of experience, offering comprehensive solutions in the areas of financial management, accounting policy and IFRS implementation. MDDP Outsourcing provides accounting and payroll outsourcing services. It offers clients comprehensive support for all accounting processes. MDDP Audit offers auditing services in the area of financial and managerial reporting and accounting. MDDP Business Academy conducts professional trainings and seminars on taxes, finance, accounting, and business administration control systems. 5

5 Tax system in Poland Overview of the Polish tax authorities There are two tiers of tax authorities: public government (CIT, PIT, VAT, excise tax, tax on civil law transactions); local government (property tax, motor vehicle tax). The tax administration is a two-instance system, whereby decisions made by a first-instance body may be appealed to a second-instance body. The Finance Minister is also a tax authority, responsible for issuing tax law interpretations (general and individual) and concluding advance pricing agreements. Competent tax offices for large taxpayers Poland has twenty tax offices that specialise in offering support for large taxpayers, in particular: entities that generated a revenue of at least EUR 5 million in the last tax year; entities that are managed, directly or indirectly, by a non-resident (foreign entity) or a non-resident that holds at least 5 per cent of the votes at the general meeting of shareholders; entities that, as residents, were directly or indirectly involved in managing or controlling companies located abroad or which hold a share in their capital; entities that, as residents, are also directly or indirectly involved in managing or controlling a Polish or foreign entity and which hold a share in its capital; tax capital groups, banks, insurance companies; branches or representative offices of foreign companies. Dealings with tax authorities The official language of Poland is Polish. This means that any foreign-language documents (applications, appeals, complaints) filed with tax authorities must be translated into Polish. As a rule, any communication with the tax authorities must be in writing. If a specific deadline is assigned to an action (filing an application or appeal, submitting documents 6

6 requested by the authority), in order for the deadline to be met, the filing must be made in person or posted at a Polish post office no later than on that date. A letter sent to a tax office by courier or international mail should be posted sufficiently early for it to be received by the tax authority before the deadline elapses. Tax proceedings in Poland The amount of tax due is determined by a tax return (prepared by the taxpayer itself) or by a decision issued by a tax authority. The deadline for the payment of tax is set forth by the applicable laws. If a taxpayer disagrees with the decision of a first-instance body, it may appeal against that decision. As a rule, filing an appeal suspends the enforcement of a decision, but does not suspend the accrual of late payment interest. If a decision issued by a second-instance body is unfavourable for the taxpayer, the taxpayer may appeal against that decision to an independent administrative court. Proceedings before an administrative court consist of two instances. Tax rulings Minister of Finance issues official tax rulings which contain interpretation of tax laws. Minister of Finance issues general (addressed to all taxpayers) and individual tax rulings (addressed to a specific entity). A tax ruling may be requested by anyone who wishes to confirm tax consequences of particular transactions. Tax ruling may be also obtained by potential shareholders, foreign investors or foreign entities considering starting business activity in Poland. Tax rulings may be issued for events that took place or events that will take place. The main difference between such rulings is the scope of protection available to the addressee of such ruling. In case of future events, protection applies to all consequences, i.e. taxpayer who acted in line with the tax ruling will not be required to pay tax. In case of transactions that already took place, the taxpayer who has obtained tax ruling will be required to pay solely interests on tax arrears. 7

7 If taxpayers obtains unfavourable tax ruling it is possible to apply to an administrative court. A request for tax ruling is subject to a PLN 40 fee for each tax case described in application. Signing returns via authorised representatives Tax returns may be signed not only by taxpayers (remitters) but also by their authorised representatives. Granting a power of attorney relieves the taxpayer from the obligation to sign a return. The authorisation to sign a return must be granted by all the persons obliged to sign the return. The power of attorney, which must be sent in to the tax office, must be granted separately for each type of return. Online tax returns Any business may file tax returns online. An electronic signature is required in order to file online tax returns. 8

8 Corporate Income Tax (CIT) Overview The 19-per cent corporate income tax is the only levied on profits. As a rule, the provisions of EU directives have been implemented into the Polish taxation system. CIT rate: 19% Withholding tax (WHT): dividends 19% interest 20% licence fees 20% intangible services 20% Branch profit tax N/A Corporate income tax payers include: limited liability companies, joint-stock companies and other legal entities, corporations in formation, organisational units without legal personality except for companies without legal personality, companies without legal personality with offices or management boards in another state, if, pursuant to the tax laws of that state, they are treated as legal entities and are subject to taxation in that state on their total income regardless of where it is earned, tax capital groups. Partnerships are not subject to CIT. Income earned by partnerships is allocated to the partners and subject to CIT at the partners level, together with their other earnings. 9

9 Taxpayers with offices or management boards in Poland are subject to CIT in Poland on their total income. Taxpayers who do not have offices or management boards in Poland are subject to CIT only on income earned in Poland. Comparison of taxation on different types of activity (branch/company): Branch Company Tax 19% 19% Profit distribution No tax on branch profit distribution. 19% WHT with the option of an exemption or lower rate. Rules of taxation It is important to accurately allocate revenues and costs to the branch's activity, which in practice may cause problems due to the absence of detailed provisions. The company is a separate taxpayer subject to CIT in accordance with general principles. Separate accounting Yes Yes Other comments Possibility of deducting the CIT paid in Poland in the home country of the foreign company. Some treaties provide for an exemption on income taxed in Poland. Possibility of deducting WHT paid in Poland. In the case of a parent company with its registered office in the European Union, it is typically possible to apply participation exemption. The taxable base is the difference between revenue and the costs incurred to earning it; if the difference is negative, the taxpayer declares a tax loss. In certain cases, revenue may be subject to taxation. Tax loss may be deducted from income during five subsequent tax years ( loss carry-forward system ); the deduction in a single year cannot exceed 50 per cent of the value of the loss; the following losses are not taken into account: losses of businesses subject to transformation, merger, acquisition or de-merger - in the event of a transformation of the legal form, a merger or a de-merger, with the exception of a transformation of a corporation into another corporation. 10

10 Profit distribution Dividends distributed by corporations with offices in Poland are subject to 19% WHT, collected by the company making the disbursement. Dividends disbursed to a Polish company is not subject to CIT at the shareholder level. Tax treaties stipulate a lower WHT rate for dividends (5%, 10% and 15%) if certain conditions are met. WHT exemptions apply to dividends disbursed to companies with their registered office in Poland or another EU/EEA state or in Switzerland, if the shareholder has continuously and directly held at least 10 per cent (25 per cent for shareholders with offices in Switzerland) of the shares in the company disbursing the dividends for at least two years. The two-year requirement does not need to be met at the time of the dividend disbursement. The company disbursing and the company collecting the dividend must be subject to CIT on its total income in Poland or in an EU/EEA state or in Switzerland. In order to take advantage of the WHT exemption or apply the lower rate set out in the treaty, the company disbursing the dividend must have the shareholder s tax residency certificate, and a statement of the recipient that it is not applying a CIT exemption to its total income, regardless of source. The definition of dividend also applies to income earned, among other things, on a mandatory or automatic redemption of shares or a company liquidation. Tax on foreign earnings Income earned by a Polish taxpayer from sources located abroad is subject to 19-per cent CIT together with income earned in Poland, unless the tax treaty states otherwise. The tax paid abroad may be deducted from Polish CIT, but the deduction cannot exceed the amount of CIT due under Polish legislation. Dividends obtained from foreign sources may be exempt from CIT in Poland if they are disbursed by companies with offices in an EU or EEA state or in Switzerland, and the Polish company has held at least 10 per cent (or 25 per cent for companies with their registered office in Switzerland) of the shares in the company disbursing the dividends for two years. The two-year requirement does not need to be met at the time of the dividend disbursement. The company disbursing and the company collecting the dividend must be subject to CIT on its total income in Poland and in the 11

11 EU/EEA state or in Switzerland. Income on the liquidation of foreign legal entities is not eligible for exemption. Dividends obtained from companies with offices in a state with which Poland has concluded a tax treaty (other than EU/EEA states or Switzerland) are subject to 19- per cent CIT. However, WHT paid abroad and, if other conditions are met, foreign CIT paid by a foreign subsidiary, can be deducted from Polish CIT (underlying tax credit). The deduction cannot exceed the CIT amount due under Polish law. Capital gains Earnings from the sale of shares and other securities are subject to 19-per cent CIT in accordance with general principles. Tax loss in this respect is accounted for in accordance with general principles. As a rule, tax treaties state that sales of shares/securities by foreign entities may be subject to taxation in the country where the seller has its registered office. Exceptions may apply if the sale concerns shares in a company whose assets comprise primarily properties located in Poland. In such a case, the profits may also be subject to taxation in Poland. The so-called property clause is found in agreements concluded by Poland, among others with Austria, Belgium, Denmark, Germany and Sweden. As a rule, a sale of shares/securities is subject to 1-per cent tax on civil law transactions on the value of the instruments sold, unless it is conducted through a brokerage house or subject to VAT. The purchaser is taxpayer. Real estate Earnings from the sale of real estate are subject to 19-per cent CIT in accordance with general principles. Restructuring efforts Poland has implemented the directive on a common system of taxation applicable to mergers, de-mergers, and transfers of assets and exchanges of shares concerning companies of different Member States. Mergers, de-mergers and exchanges of shares concerning companies with offices in the EU may be CIT-neutral, provided that certain requirements are met. 12

12 Furthermore, restructuring is often conducted using partnerships or closed-end investment funds, because of its effect of consolidating performance and reducing or eliminating CIT. Withholding tax (WHT) WHT applies to income disbursed in Poland on shares in the profits of legal entities, interest, licence fees and remuneration for intangible services. As a rule, the rate of WHT on dividends is 19 per cent, but tax treaties may stipulate a lower rate (5, 10 or 15 per cent). WHT exemptions apply to dividends disbursed by Polish corporations to companies with offices in other EU/EEA states or in Switzerland, if the shareholder has continuously and directly held at least 10 per cent (25 per cent for shareholders with offices in Switzerland) of the shares in the company disbursing the dividends for at least two years. The two-year requirement does not need to be met at the time of the dividend disbursement. The company disbursing and the company collecting the dividend must be subject to CIT on their total income in Poland and in the EU/EEA state or in Switzerland. In order to take advantage of the WHT exemption or apply a lower rate, the company disbursing the dividend must have the shareholder s tax residency certificate, and a statement by the recipient that it is not using a CIT exemption on its total income, regardless of source. Interest and licence fees are subject to 20-per cent WHT in Poland, but tax treaties may stipulate a lower rate (5, 10 or 15 per cent). Some tax treaties also stipulate a 0-per cent rate on interest (e.g. those with Sweden, the United States or France). As of 1 July 2013 (during the transitional period from 1 July 2009 to 30 June 2013, the maximum rate of 5 per cent applies), interest and licence fees will be exempt from WHT in Poland if they are disbursed by a corporation with its registered office in Poland to a company with its registered office in an EU/EEA state other than Poland or in Switzerland, and if: the company disbursing the interest/licence fees holds a minimum of 25 per cent of the shares in the capital of the company collecting the interest/licence fees, or the company collecting the interest/licence fees holds a minimum of 25 per cent of the shares in the capital of the company disbursing the interest/licence fees, or 13

13 the company subject to taxation on its total income in an EU/EEA state holds at least 25 per cent of the shares in the capital of the disbursing company and in the capital of the company collecting the interest/licence fees; and a minimum 25-per cent share has been held directly and continuously for at least two years - this requirement does not need to be met at the time of the disbursement of the above fees/interest. The application of the above rules depends on whether the Polish company has the recipient s tax residency certificate and a statement that the recipient or the company referred to in c) is subject to CIT on its total income in its country of residence, regardless of where the income is earned, and is not taking advantage of an exemption from CIT on its total income regardless of source. Payments for intangible services, such as advisory services, advertising, data processing, etc. are subject to 20-per cent WHT unless otherwise stated by a tax treaty concluded between Poland and the recipient s country of residence, and the entity disbursing the remuneration has the recipient s tax residency certificate. As a rule, treaties concluded by Poland do not provide for the possibility of collecting WHT on payments for intangible services, however there are some exemptions. Tax-deductible costs and depreciation Tax-deductible costs are costs incurred to earn or maintain or secure a source of revenue that are not excluded by statute from the tax-deductible cost category. Taxpayers must document the costs incurred. Tax costs also include expenditures for discontinued investments. The legislation contains a list of more than 60 items that are not regarded as costs for tax purposes. These include: accrued but unpaid interest, business entertainment costs, administrative penalties and interest on overdue statutory payments, as a rule provisions established in accordance with accounting principles, car wear and tear allowances or car insurance premiums in the portion of the car value that exceeds the equivalent of EUR 20,000. Expenditures for the purchase of fixed assets and intangible assets do not constitute costs, but depreciation write-offs made in accordance with applicable laws. 14

14 Interest as a rule, the tax cost at the time of payment (cash method) - other than for accounting purposes where the rule is to allocate interest to costs at the time of accrual (accrual method). Exceptions include interest accrued until the date of handover of an asset for use. Exchange rate differences may be accounted for at the time they are incurred (tax method) or on the accrual ban s (accounting method). If the accounting method is selected, it applies for at least three tax years. Exceptions include exchange rate differences accrued until the date of handover of an asset for use. Depreciation As a rule, depreciation write-offs are based on the cost of acquisition or manufacturing of the depreciated asset. The legislation stipulates the following depreciation methods: linear method (as a rule); reducing balance depreciation method (possible for some assets: boilers and power generation machinery, basic and specialised machinery, devices and equipment, technical devices, movables and equipment and vehicles other than cars); one-off depreciation (for assets under PLN 3,500); custom rates (available for used or improved fixed assets, for example: a non-residential building in use for more than five years may be depreciated over forty years minus the full number of years elapsed from the date of its initial handover for use until the date of entering it in the fixed asset and intangible asset register kept by the taxpayer, but the depreciation period cannot be shorter than ten years). For assets depreciated using the linear method, the rate may be decreased in a given tax year. In the case of a transformation, de-merger, merger, in-kind contribution including a business or its organised part, purchaser of fixed assets and intangible assets must carry on using the depreciation methods applied by the seller. The following items are not subject to depreciation: land and the right of perpetual usufruct of land; expenditures incurred to purchase them are a tax cost at the time of their paid disposal (sale). 15

15 Depreciation rates and periods for tax purposes may differ from depreciation for accounting purposes. Examples of depreciation rates and methods for selected assets: Linear method Reducing balance method Type of fixed asset Depreciation period Annual depreciation rate (%) Depreciation period Annual depreciation rate (%) Car - PLN 50, months 20% ( PLN) n/a Truck - PLN 100, months 20% ( PLN) 30 months 40% (PLN 40,000 in the first year) Computer - PLN 5,000 3 years 30% (1.500 PLN) 18 months 60% (PLN 3,000 in the first year) Construction equipment - PLN 1,000, months 20% ( PLN) 30 months 40% (PLN 400,000 in the first year) Office building - PLN 10,000, years 2,5% ( PLN) n/a Leases Income from leases is subject to 19-per cent CIT in accordance with general principles. Tax laws set out in detail two types of leases: operating leases and financial leases. Leased objects may include fixed assets, intangible assets and land. Lease settlement for tax purposes may be different than for accounting purposes. For both types of leases, upon contract termination, ownership may be transferred to the beneficiary. Since it is possible to enter the entire lease payment under tax costs, operating leases may be more favourable in terms of tax. 16

16 Major differences between operating leases and financial leases Lease payments Operating leases Lease payments, in their entirety, are a cost for the beneficiary and revenue for the financing party. Financial leases Lease payments are a cost for the beneficiary and revenue for the financing party only in the interest portion. Depreciation The financing party. The beneficiary. Term At least 40 per cent of the statutory depreciation period (or at least 10 years for real properties). Fixed term - no minimum or maximum. Thin capitalisation As a rule, interest on loans constitutes a cost at the time of payment. However, interest on loans extended to the company by certain affiliates is not a tax cost if the following requirements are met (thin capitalisation rules): the loan is extended by: shareholder(s) holding at least 25 per cent of the shares in the company receiving the loans, or by a sister company (i.e. a company in which at least 25 per cent of the shares are held by a company holding also at least 25 per cent of the shares in the company receiving the loan), and the debt of the company receiving the loan towards the shareholders holding at least 25 per cent of the shares in its capital and entities holding at least 25 per cent of the shares in those shareholders (and towards the sister company if the loan was extended by a sister company) exceeds three times the value of share capital of the lender. Interest on the portion of the loan that exceeds three times the value of the share tax of the lender (debt to equity ratio - 3:1) is not treated as a cost.interest constitutes a tax cost in the portion not exceeding that threshold. The value of debt is calculated as on the date of payment of interest. For the purpose of thin capitalisation, a loan is also understood as, among other things, bonds and deposits; also, the value of the share capital is calculated in accordance with special rules. 17

17 As a rule, loan agreements are subject to 2-per cent tax on civil law transactions. Examples of civil law transaction tax exemptions for loans loans extended to a corporation by its shareholders loans extended by foreign companies conducting lending activity loans that are eligible for VAT exemptions (as financial intermediation services) Tax capital groups It is possible to consolidate for tax purposes within a tax capital group. However, due to the stringent requirements of the applicable laws, capital groups are not a popular means of consolidation for tax purposes in Poland. Some of the requirements for establishing a capital group are as follows: having a registered office (for companies that belong to a group in Poland); average capital of each group company of PLN 1,000,000 (approximately EUR 250,000; assuming that 1 EUR = 4 PLN); minimum share in subsidiaries by the parent company - 95 per cent; group companies do not take advantage of income tax exemptions under other acts; minimum share of income in the revenue of the tax group - 3 per cent; specific requirements regarding the form and wording of the agreement; minimum term of the agreement - 3 years; no option to expand the agreement to include other companies (and other restrictions). Partnerships Conducting business via partnerships may be an alternative to tax groups. Income earned by partnerships is allocated to the partners and subject to CIT at the partners level, together with their other earnings. There are no additional administrative requirements such as those applicable to tax capital groups. 18

18 Tax exemptions and credits Legislation provides for a number of CIT exemptions, both subjective and objective. For instance, investment funds, pension funds, public service organisations, church organisations and special economic zone companies are exempt from CIT upon meeting appropriate requirements. Furthermore, CIT does not apply to agricultural business, with the exception of income from special departments of agricultural production. Funds The income of Polish investment funds is CIT exempt. The same applies to funds investing in real estate. Moreover, foreign investment funds may also be exempt from CIT if they meet the requirements set forth in the CIT act. Special Economic Zones (SEZs) Companies operating in SEZs may typically be CIT exempt. The rate of exemption depends on the region/province, and currently ranges from 30 per cent to 50 per cent of: investment costs incurred during the completion of an investment in the SEZ, or the sum of two-year employment costs for newly-created jobs. A CIT exemption is available if the taxpayer: obtains a business permit for activity in the SEZ; incurs eligible expenses after the date of obtaining the permit; incurs eligible expenses for a new investment; does not transfer the ownership of the assets subject to capital expenditures during three or five years (depending on whether the taxpayer is a large, medium-sized or small enterprise) from the date of entry in the register of fixed assets and intangible assets; will conduct business for no less than three or five years (depending on whether the taxpayer is a large, medium-sized or small enterprise). As a rule, SEZ business permits are issued for manufacturing activity. However, in most SEZs, it is also possible to provide the following services: accounting, other than tax returns, bookkeeping, call centres, IT services, technical surveys and analyses, research services. 19

19 The exemption applies solely to the company s activity within the SEZ. Companies operating in SEZs may also take advantage of property tax exemptions. Returns/filing requirements As a rule, the tax year covers twelve consecutive months, but in the course of business, taxpayers may modify the tax year pattern adopted. Returns/CIT withholdings Monthly No requirement to file returns. CIT advances must be paid by the 20th of month following the month for which is calculated. In certain case it is possible to choose simplified advance payments. Annual Annual tax return CIT-8 is filed by the end of the third month after the end of each tax year. The CIT set forth in the annual return must also be paid by the above deadline. Due to their nature, intangible services must be documented in detail. Tax authorities pay special attention to this matter; an agreement on the provision of such services itself is not sufficient proof in this regard. Other tax-deductible costs must also be documented. Property tax Property tax rates depend on property type and location. Tax is paid annually. Tax rates are determined by district authorities, and in 2012, they cannot exceed: Property type Land Tax rate PLN 0.84/sq. m Residential buildings PLN 0.70/sq. m. Buildings designated for the conduct of business PLN 21,94.m2/sq. m. Structures 2 per cent of the property value (entered as the basis for depreciation) 20

20 Payroll taxes Personal Income Tax (PIT) Unlimited tax obligation in Poland Individuals with their place of residence in Poland are taxed on their total income, regardless of where the income is earned (unlimited tax obligation in Poland). Individuals who do not have a place of residence in Poland are taxed solely on income earned in Poland (limited tax obligation in Poland). An individual with a place of residence in the Republic of Poland is a person who: is physically present in the Republic of Poland for more than 183 days during a taxable year, or has a centre of personal or economic interests in the Republic of Poland (centre of vital interests). The above rules are applied taking into account the provisions of relevant tax treaties. Therefore, even if, in the light of Poland s national legislation, a person passes the residence test for Poland, the appropriate criteria contained in an international treaty must be applied to determine what country is that person s actual place of residence for tax purposes. Sources of revenue subject to PIT: a labour-based relationship and an employment relationship, including a cooperative employment relationship, retirement or disability pension; personal services; non-agricultural business activity; special departments of agricultural production; lease, sublease, tenancy, subtenancy and other similar agreements; monetary capital and property rights; paid disposal of, among other things, real property or parts thereof and real property interests, movables; other sources. The Personal Income Tax Act does not apply to revenue subject to the provisions on tax on inheritance and donations, actions that cannot be the subject of a legally binding agreement, or revenue subject to tonnage tax. 21