Significant Changes to Laws on Personal Income Tax
In August, the assumptions of a bill that is expected to introduce significant changes to laws on personal income tax, corporate income tax and other laws related to the tax system were published on the website of the Prime Minister’s Office. The changes are aimed at tidying up the legislation, eliminating interpretation doubts and tightening the tax system.
“The proposed solutions respond to the existing needs to put the tax legislation in order, eliminate doubts and discrepancies in interpretation and to seal the tax system. They implement the programmatic findings of the current government on building a simple, friendly and understandable tax system.”
Restructuring as a key area of change
One of the main issues addressed in the bill is restructuring, which has been highly controversial in recent years. In 2023, new forms of restructuring, such as horizontal mergers and demergers by spin-off, were introduced into the Commercial Companies Code. The aim of these changes was to make restructuring processes faster and cheaper for companies.
Despite the positive changes to company law, the failure to adapt tax legislation to the new forms of restructuring has caused numerous problems. Tax authorities, citing the literal wording of the legislation, consider horizontal mergers to be tax-neutral, which contradicts the legal doctrine that emphasises the need for their neutrality.
The published assumptions of the bill announce the clarification of tax regulations with regard to new forms of restructuring. The planned changes are intended to be favourable to taxpayers, particularly with regard to the determination of income and costs when merging companies without issuing shares, as well as other restructuring activities, such as company transformations, share value reductions or share exchanges. The bill also aims to tidy up and clarify the existing provisions.
Key changes to the taxation of horizontal mergers and demergers by spin-off
The most important change announced is the exclusion of the application of Article 12(1)(8d) of the Corporate Income Tax Act in the case of horizontal mergers. Currently, this provision makes the tax neutrality of a merger conditional on the issue of shares to the shareholders of the target company, which is not possible in the case of mergers without the issue of shares. In addition, it is planned to equate demergers by spin-off with in-kind contributions to the company, which is intended to ensure tax neutrality for both the company being divided and the company issuing shares.
The bill introduces a number of significant changes to the tax law, divided into several key categories. Among these are changes beneficial to taxpayers:
Tax exemptions for non-governmental organisations
The new legislation would modify tax exemptions for non-governmental organisations operating under the Act on Public Benefit Activity and Volunteerism. All income of these organisations that is intended for public activities, except for economic activities, will be covered by the tax exemption.
- Thermal modernisation allowances
A tax relief will be introduced for expenditures incurred by local government units on thermal modernisation projects, known as “umbrella projects”. This relief is intended to support local initiatives to improve energy efficiency. - Solidarity levy
Changes will also include the rules for calculating the solidarity levy. Taxpayers will be able to deduct the income constituting the basis for calculating this contribution from losses from previous years, which is a significant simplification. - Taxation of foreign controlled companies (CFC)
The bill would clarify and modify the provisions on taxation of foreign controlled companies (CFCs). These changes are aimed at eliminating interpretation doubts and improving the clarity of the regulations. - Corporate reorganisations
In the area of company reorganisations, it is planned to clarify the rules for determining revenues and costs when merging companies without issuing shares. The new laws are intended to facilitate the restructuring process and provide greater tax certainty.
New regulations to seal the tax system
The bill, which aims to tighten the tax system, introduces a number of changes aimed at increasing the efficiency of tax collection and reducing fraud. Here are the key areas that will be covered by the new regulations:
- Taxation of family foundations
As part of the new rules, it is envisaged to tighten up the taxation regulations for family foundations. The changes aim to prevent tax avoidance by individuals who use foundations to manage assets. - Employment requirement under IP Box relief
The IP Box relief, hitherto popular with companies benefiting from preferential taxation of intellectual property income, will be subject to a new employment requirement. This is intended to ensure that only companies actually carrying out operational activities benefit from the relief, and not entities created solely for tax optimisation purposes. - Broadening the solidarity levy base
The changes will also include a broadening of the basis for calculating the solidarity levy. The new provisions assume that income taxed according to the principles of the IP Box relief and benefits received by beneficiaries of family foundations will be included in the basis of this contribution. This solution is aimed at increasing the solidarity levy revenue and placing a fairer tax burden on high-income earners. - Company restructurings under the magnifying glass
The bill includes changes regarding restructuring activities, including company conversions, share value reductions and share exchanges. The new regulations aim to ensure that these processes are not used for tax avoidance, as well as to increase the transparency and clarity of the applicable rules. - Taxation of general partners in limited partnerships and limited joint-stock partnerships
The new legislation will introduce changes regarding the deduction of flat-rate income tax from the income of a general partner in limited partnerships and limited joint-stock partnerships. The purpose of these changes is to ensure that general partners pay the tax due in a manner more appropriate to the income they receive, in order to counteract excessive tax optimisation.
New technical changes to the tax legislation
As part of the latest bill, a number of technical changes are included to clarify and structure the existing tax legislation. The new regulations aim to eliminate ambiguities and improve the application of the law in practice.
Transfer pricing
One of the areas that will be covered by the new regulations is transfer pricing. The planned changes aim to clarify the regulations, which will allow for a better understanding and application of the rules on related-party transactions. This will enable companies to avoid potential disputes with tax authorities and improve compliance with existing regulations.
Lump sum on company income
Another important element of the changes is the introduction of regulations clarifying the rules for lump-sum taxation on corporate income. The new regulations aim to streamline the use of this form of taxation, which should make it easier for companies to use lump-sum taxation and reduce the risk of errors in tax settlements.
Grant programmes financed from European funds
The draft bill also provides a solution to interpretation problems related to grant programmes financed by European funds. The clarification of the definition of ‘funds’ covered by the tax exemption is intended to eliminate doubts and ensure a more uniform application of the provisions in this regard.
It is eagerly awaited that a full bill clarifying these and other assumptions will be published. According to the announcement, this bill is expected to be presented later this year.
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This article is part of the Newsletter No. 3 | 2024.