Tax on shifted profits

Provisions on shifted profits have been in force since 1 January 2022. They were intended to replace the previous regulations limiting the costs that could be incurred for the benefit of a related party (Article 15e of the CIT Act).

According to the Ministry of Finance, these new regulations already need to be amended and will therefore be modified from 2023.

In order to consider an expense as a shifted profit, the following conditions must be met:

1/ Related party conditions

• A given expense must have been incurred for the benefit of a related party within the meaning of the transfer pricing legislation. In the legislation in force from 2023, it is further clarified that only payments to foreign entities are subject to the shifted profits tax;
• the income tax actually paid by the related entity for the year in which it received the payment from the Polish taxpayer, in the country where the related entity has its registered office, management, registration or location, is at least 25% lower than the amount of tax  the related entity would have paid if it were a Polish taxpayer, applying the 19% tax base rate. From 2023 onwards, the provision changes so that the specific income/revenue received by the foreign related party in connection with the transaction in question will be taxed at an effective rate lower than 14.25%;
• Related party revenues obtained from the taxpayer and taxpayer-related entities arising from qualified expenses incurred by the taxpayer constitute at least 50% of the related party’s total revenues. From 2023 onwards, it is clarified that 50% of the revenue must come from Polish tax residents who are related parties; and
• a related party must transfer the relevant amount of revenue received from the taxpayer and its related parties to another entity:
  • recognising expenses on this account as tax deductible costs, or deducting these expenses/revenues from income, tax base or tax in any form, or
  • if these revenues comprise profits to be distributed as dividends or other income from sharing in corporate profits.
• With respect to eligible expenses incurred for the benefit of a related party from an EU or EEA Member State, it does not carry out substantial real economic activity in that state.

2/ Polish taxpayer conditions

• The expense must be a deductible expense of the Polish taxpayer;
• The expense must fall within the catalogue of eligible expenses; and
• The sum of eligible expenses incurred for the benefit of related and unrelated entities exceeds 3% of the sum of tax deductible expenses recognised by the taxpayer. From 2023 onwards, not all eligible expenses, but only eligible expenses incurred for the benefit of a related entity will be counted towards the 3% of the sum of tax deductible expenses.

If a given cost meets the definition of shifted profits, the Polish taxpayer is required to treat it as its own additional income and tax it at the 19% tax rate. The due date for the payment of tax on the shifted profits coincides with the due date of the taxpayer’s CIT.

Payments to related parties in countries with preferential taxation will be particularly vulnerable to the new regulations, especially concerning further payments within a capital group or regularly distributed dividends (or distributed profits in some other form), for example, payments to holding companies, companies financing group activities, or “cost centre” companies within capital groups.