Tax on shifted income was introduced to counteract tax avoidance by transferring income through intermediary entities and low-tax jurisdictions. It mainly applies to Polish companies and non-residents operating through a foreign permanent establishment in Poland and distributing income abroad. The tax is levied on so-called passive expenses, as defined in the law. It amounts to 19% of the tax base and is reduced by the amount of withholding tax collected on the distribution of passive payments.
What is worth remembering about this tax?
- covers payments of a passive nature to the extent that they have been included in deductible expenses in Poland (including through depreciation allowances)
- there is a safe harbor – no analysis is required and no taxation is imposed if the sum of passive expenses is less than 3% of the taxpayer’s total tax-deductible expenses in a given year
- if the prerequisites for taxation are fulfilled by a Polish entity, the conditions for a related party should also be analyzed (low taxation / main source of income / transfer of receivables)
- taxpayers subject to this tax must document the lack of fulfillment of the individual prerequisites for tax on shifted income by its foreign-related parties
- the shifted income does not merge with others, and therefore loss from other sources cannot be offset against it; also companies in a tax loss position may be burdened with this tax
- distributions to EU and EEA entities that conduct actual substantial business activities in the country of their tax residence are exempt from taxation
- there has been a change in tax construction between 2022 and 2023, so the tax for 2022 should be analyzed separately from 2023 and onwards
Watch our synthetic video on tax on shifted income:
Algorithm for proceeding with tax determination
How do you determine whether and how far to analyze taxation on shifted income? We will suggest a few steps.
1. Determine the catalog and the amount of passive costs incurred towards foreign-related parties by a Polish entity and included in the tax costs of the year.
2. Check whether you exceed the 3% safe harbor threshold. If not – you do not need to analyze further. You are not subject to tax this year.
3. If you exceed the safe harbor threshold, check whether the foreign entity meets the general or specific prerequisites for taxation.
4. If you are paying passive expenses to EU or EEA tax residents, check whether these entities are engaged in actual substantial economic activity before examining the general or specific prerequisites. If yes, they are not taxable and you can skip the next steps.
5. If the prerequisites are met – calculate and pay the tax, and file the appropriate return. If not – prepare the relevant documentation for evidence and control purposes.
Complicated? See how we can help:
-we isolate categories of passive costs and calculate their amount in the context of the safe harbor threshold
-we analyze the fulfillment of definitions and thresholds
-we support in the calculation of the tax rate of foreign entities
-we prepare and analyze templates of documentation allowing to exclude particular prerequisites of taxation
-we help to prepare the relevant procedures to be implemented in the company to improve the process of monitoring and calculation of taxable income for the future
-we advise in special cases arising in economic reality
-we prepare applications for tax risk management instruments to cover your tax position also for the future
General prerequisites for taxation
These include:
- determining whether the entity is subject to a low tax rate (currently lower than 14.25%), or an exemption or exclusion from taxation, taking into account special tax regimes, rates, allowances and exemptions
- determining whether the shifted income is the foreign entity’s main source of income on the basis of tax and accounting records
- determining whether intermediary entities that transfer at least 10% of their revenues to other entities are involved in the process and including them in the analysis
Specific prerequisites for taxation
The specific prerequisites relate to passive costs:
- incurred for the benefit of entities from tax havens or from countries with which Poland has neither a tax avoidance agreement nor a tax information exchange agreement
- incurred through entities that are not subject to tax under general premises, but transfer payments to entities meeting those premises
For any further information, learn more on this blog or contact us directly. Our goal is to make your business easier.
