In 2018, a division into two sources of income was introduced into Polish tax regulations (CIT): “capital gains” and “other income.” This results in the need to qualify the tax revenues earned to a specific source, and then to divide and allocate costs. The main reason for the introduction of the division into revenue sources was to prevent taxpayers from offsetting losses in one area of the taxpayer’s activity (e.g. operations) with income from another source (e.g. capital gains like dividends, sale of shares in other companies).

Capital gains

The division of income into “capital gains” and “other income” sources has the effect that it is not permissible to shift expenses and income between such sources. Particularly important is the fact that losses in the source of capital gains will not reduce the tax from other areas of the taxpayer’s business, and vice versa.

The source of income from capital gains should include income:

  • from participation in profits of legal entities, including but not limited to dividends, income from redemption of participation, etc.,
  • obtained following transformation, merger or division of entities,
  • obtained following liquidation of a company that is not a legal entity, withdrawal of a shareholder from such a company or reduction of a capital share in such a company,
  • from making an in-kind contribution to a legal entity or company that is a CIT taxpayer,
  • other than those indicated in the preceding paragraphs, income from participation (shares) in a legal person or company that is a CIT taxpayer,
  • income from the disposal of all rights and obligations in a company that is not a legal entity,
  • income from the disposal of all rights and obligations in a company that is not a legal entity,
  • income:
    • from author’s or related property rights, licenses, from know-how,
    • from securities and derivative financial instruments,
    • from participation in investment funds or mutual investment institutions, including from their rental, lease or other contract of similar nature, as well as income from their disposal,
    • from the exchange of virtual currency for a means of payment, goods, services or property right other than virtual currency, or from the settlement of other obligations with virtual currency.

The above list is general in nature. The provisions of the CIT Law contain a more precise listing. Particularly important is the fact that the obligation to allocate income to the source of capital gains applies to almost every CIT taxpayer, regardless of his business profile. This must be remembered especially by those taxpayers who deal with other types of activities on a daily basis, and the benefits indicated in the above list are of an additional nature.

Excluded entities

For some taxpayers, operating in the financial industry (insurers, banks, other financial institutions), the revenues in the catalog above are classified as ordinary activities, i.e. they are not treated as capital gains.

With regard to entities classified as financial institutions, the tax regulations refer to the “Banking Law”, which in turn refer to the Regulation of the European Parliament and of the Council (EU) No. 575/2013 of 26.06.2013 on prudential requirements for credit institutions and investment firms.

According to the EU regulation, “financial institution” means an undertaking other than an institution and other than a holding company operating exclusively in the industrial sector, the principal activity of which is the acquisition of holdings or the performance of one or more of the activities listed in points 2-12 and 15 of Annex I to Directive 2013/36/EU; the term includes investment firms, financial holding companies, mixed-activity financial holding companies, investment holding companies, payment institutions within the meaning of Directive (EU) 2015/2366 of the European Parliament and of the Council, and asset management companies, but does not include insurance holding companies and mixed-activity insurance holding companies.

Consequently, insurers, banks, as well as other financial institutions will only include in the source of income “capital gains”:

  • dividends and income received by participants in investment funds or mutual institutions of that fund or institution, where the statute provides for the payment of such income without repurchasing units or redeeming investment certificates,
  • the equivalent of the profit of a legal person and a limited joint-stock partnership or a foreign company that, while not being a legal person, is treated as a legal person and is taxed in its country of residence on all its income, allocated to increase its share capital, the equivalent of the balance sheet surplus of a cooperative allocated to increase its share fund, and the equivalent of amounts transferred to that capital (fund) from other capitals (funds) of such legal person or company.

Other income

All other income not included in the capital gains category increases other income (source “other income”).

When analyzing the catalog of income from capital gains, it is worth noting, for example, that we will not find in it income from the granting of a loan, unless it is a so-called participation loan, i.e. one where the payment of interest or the amount of interest is contingent on the company making a profit or profit of a certain amount.

Similarly, interest on bank deposits does not qualify as capital gains. They are not considered a derivative financial instrument. Therefore, interest on bank deposits should be included in income from other sources.

Exchange rate differences that relate to capital gains income as well as expenses that are tax expenses of such income should be qualified to the capital gains source. Similarly, exchange rate differences that relate to income from other sources of income should be qualified to the source from which the income and expenses are derived. Exchange rate differences on currency trading thus represent income or loss from trading in these currencies – and thus from the company’s core business.

In the case of income from the sale of receivables, the legislator is expressly limited to the sale of receivables previously acquired and receivables arising from benefits, which are themselves classified in the source of capital gains.

Tax rate

On income allocated in the source “capital gains”, the taxpayer pays tax at the basic rate of 19%. In this regard, a reduced rate of 9% is not available, even if the taxpayer meets the definition of a “small” taxpayer.

Separation of a separate source forced the legislator to introduce a number of other changes, as a consequence of which the tax settlement must be made with respect to the source where the income is obtained.
Taxpayers may not offset a loss from one source with income from another source. The distinction between sources of income should already be made during the year, when determining advance payments for income tax.

Allocation of costs

The consequence of dividing revenue into two sources is that costs must be allocated to the appropriate source of revenue.
When a taxpayer receives income from capital gains and income from other sources of income, he should make the appropriate direct allocation of costs, and when this is not possible and in view of indirect costs, these costs are determined in such a ratio as the income from these sources earned in the tax year remains in the total amount of income. In practice, this results in the need for a more detailed description of the costs incurred, their verification and analysis.

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