The regulations on the tax on shifted income came into effect as early as 2022, with the new version effective from the beginning of 2023.
The construction and calculation of the tax on shifted income are not straightforward. There are also doubts about the interpretation of some of the prerequisites triggering the tax.
Perhaps it is in response to the doubts raised on this subject that the Ministry of Finance has published a draft clarification of the tax on shifted income and invited interested parties to its consultation, in which we are actively participating.
What is the purpose of the shifted income legislation?
As the Ministry of Finance points out, the primary purpose of introducing this tax was to prevent tax avoidance through the transfer of income with the help of intermediary entities and jurisdictions with low tax rates.
Who is affected by the regulations?
The provisions on tax on shifted income mainly apply to Polish companies (including tax capital groups) and foreign entities operating in Poland through a foreign permanent establishment (being taxpayers).
What is shifted income?
To determine whether the provisions on shifted income apply, certain types of transactions carried out between such entities and foreign affiliates (including internal transactions between the parent company and the foreign permanent establishment) are analyzed.
For this purpose, the passive costs incurred by Polish taxpayers, as indicated in the law, which are recognized as deductible costs in Poland (including through depreciation and amortization), are examined. These are costs such as, among others, remuneration for certain intangible services, license fees, interest, etc.
If a Polish entity incurs such costs and – at the same time – other prerequisites indicated in the regulations are met allowing to conclude that they were incurred for the benefit of an intermediary entity, which transfers them further – then such costs are considered so-called shifted income.
What prerequisites should be examined?
First, the value of passive costs incurred by the taxpayer (from 2023 onward to related parties) must exceed 3% of all deductible expenses. If the 3% threshold is not exceeded, then a so-called safe harbor is in place – and therefore the Polish taxpayer is not required to make further analysis and calculations.
If the 3% threshold is exceeded, further prerequisites must be examined, relating to the individual foreign related parties to whom the expenses are incurred. These include:
- the condition of low taxation of a particular related party’s income,
- generating the majority of revenue (≥50%) from passive payments from Polish related parties,
- transferring a significant portion of the payment (≥10%) to another entity.
Importantly, even if such an entity does not fulfill the aforementioned prerequisites, you should make sure that it does not transfer payments to other related parties that already meet such conditions.
What are the exemptions from tax?
If the payments are made to a related party that is taxed on all of its income in an EU or EEA country and conducts substantial real economic activity, the provisions on shifted income do not apply. It should be noted, however, that the prerequisites for identifying substantial real economic activity are not precise and may cause doubts.
What is the tax rate? Can a loss be accounted for?
The tax is 19% of the tax base (i.e., the amount of passive payments to related parties considered to be shifted income) and is reduced by the amount of withholding tax withheld from the payments of passive payments.
It is worth noting here that the shifted income is not combined with other income, so the taxpayer is liable to pay tax on the shifted income even if he makes a loss on his business.
What is worth doing?
As of 2023, the Polish taxpayer bears the burden of proof that the prerequisites indicated in the regulations for shifted income (including those for foreign entities) are not met.
Therefore, it is worthwhile to carefully analyze accounts with related parties and make sure that the provisions on shifted income will definitely not apply. The results of such an analysis should be well documented so that they can be presented to the tax authorities if necessary.
If you have doubts whether or to what extent the issue of tax on shifted income applies to your business – feel free to contact us. We will be happy to share our knowledge and experience on the subject.
Ewa Banaszak
Head of Tax Coordination
ewa.banaszak@tpa-group.pl
Małgorzata Dankowska
Partner, Tax Advisor
malgorzata.dankowska@tpa-group.pl
