Taxation in Poland

Tax system - overall information

The legal grounds for imposing tax obligations are stipulated in the Constitution of the Republic of Poland effective since 17 October 1997. Pursuant to Article 217, the following shall take place solely by way of the Act:

1. imposing:

- taxes,
- other public levies,

2. defining:

- subjects of taxation,
- objects of taxation,
- tax rates,
- the categories of subjects exempt from taxation
- rules of granting tax reliefs and tax remissions

The Polish tax system includes eleven tax titles subject to special substantive tax law. The notion of tax was defined in Article 6 of the Act of 29 August 1997- Tax Ordinance as a public, free, compulsory and non-returnable levy towards the State Treasury, voivodeship, poviat, or municipality by virtue of the Tax Act. The provisions of the Tax Ordinance are also applicable to fees and liabilities other than taxes which are payable to the state budget and the budgets of local government units and which are established or specified by the authorized tax bodies, as well as the fees specified in the provisions on taxes and local fees.

The basic tax division is as follows:

1. direct taxes, i.e.:

- personal income tax,
- corporate income tax,
- inheritance and donation tax,
- tax on civil law actions,
- agricultural tax,
- forest tax,
- real estate tax
- vehicle tax,
- tax on dogs,

2. indirect taxes:

- tax,
- gambling tax.

source: www.mf.gov.pl

Taxes in Poland - detailed information

PIT -  Personal Income Tax

As a rule, natural persons in Poland are subject to income tax calculated in compliance with a progressive tax scale, differentiating following income thresholds, i.e., 18%and 32%.

However, there are exceptions to this rule. Under certain conditions natural persons conducting business activity can tax their income with a flat 19% tax rate or according to provisions regulating lump-sum taxation included in a separate tax act.
Flat tax rates are also envisaged in case of certain incomes in a form of capital gains and lump-sum taxation is applicable to certain incomes obtained by non-residents and other privileged groups of taxpayers.

Subject of taxation

Natural persons subject to personal income tax (PIT) are considered to be taxpayers with reference to their income, including income from participation in partnerships, i.e.:

- a partnership in the meaning of the Polish Civil Code,
- a registered partnership,
- a professional partnership,
- a limited partnership,
- a limited joint-stock partnership.

Income from participation in the above-mentioned partnerships, as well as income from joint ownership, joint enterprise, joint possession or joint use of things or property rights are taxed separately by each taxpayer, in proportion to his share in the partnership. The PIT Act is also applicable to natural persons being shareholders in the companies having legal personality, i.e., limited liability companies or joint stock companies, with reference to income from the participation in the companies’ profit.

Object of taxation

Personal income tax is levied on all kinds of income, except for income exempt from taxation under provisions of the PIT Act and income on which collection of taxes has been abandoned under provisions of the Tax Ordinance Act.

According to the PIT Act provisions, income can be derived from several specific. Such an assignment of an income to a source results in application of a specific method of its taxation.

An income from a given source of revenue is defined as the excess of total revenue from that source over its tax deductible costs, generated in a given tax year. If a taxpayer receives incomes from more than one source, subject to certain exceptions, a sum of the incomes from all sources is subject to taxation. The said exceptions refer to the following:

- revenue (income), which is subject to lump-sum taxation,
- income which is subject to flat-rate tax.

The aforementioned kinds of income are not accumulated with income earned by taxpayers from other sources (taxed pursuant to the tax scale). Furthermore, the income subject to the flat-rate tax is disclosed in separate tax returns: on income from capital gains and income from business activity respectively.

Provisions of the PIT Act do not apply to the following:

- revenues from agricultural activities (except for revenue from so-called „special branches of agricultural production”) and from forestry,
- revenues falling under the provisions of the Act on Inheritance and Donation Tax,
- revenues resulting from activities which cannot be subject to legally effective contract (e.g. theft or drug dealing); it should be stressed that it does not refer to actions made without observing of legal standards provided by law (e.g. sale of real estate made in other form than a notary deed),
- ship owner’s revenues taxed with a tonnage tax,
- revenues resulting from division of a property co-owned by spouses due to the cessation or limitation of their property co-owned as well as revenues from equalizing the properties following either cessation of division of marital property or death of a spouse,
- allowances for satisfying family’s needs within framework of property co-owned by spouses.

Scope of tax liability (unlimited and limited tax liability)

A “global” nature of the personal income tax means inter alia that this tax is imposed on income of all natural persons provided that they gain income from the sources located in Poland. A scope of tax liability of these persons decides whether income from the sources located abroad is subject to taxation in Poland as well.

Taxpayers are subject to unlimited tax liability in Poland if they have place of residence in Poland i.e.

- stay on the territory of Poland longer than 183 days during a tax year or
- have a centre of personal or economic interests here (centre of vital interests).

If a person has a residence in another country, a collision between tax jurisdictions shall be settled and consequently determination of the country where the person is a tax resident shall be done according to the regulations of an appropriate double tax treaty. Only then it is possible to determine the tax status of such a person in Poland.

Taxpayers with unlimited tax liability in Poland (Polish tax residents) are subject to taxation on their world-wide income. Natural persons without a place of residence for tax purposes, thereby with a limited tax liability, in Poland are subject to taxation in Poland only with respect to the Polish-sourced income.

Sources of revenue

There are following sources of revenue:

1. service relationship and employment relationship (including co-operative employment relationship), retirement or disability pensions,
2. activity carried on personally,
3. non-agricultural business activity,
4. special branches of agricultural production,
5. lease, sublease, tenancy, subtenancy and other contracts of a similar character,
6. capital gains and property rights,
7. transfer against payment of e.g. immovable property, parts thereof and shares in immovable property and of movable property,
8. other sources.

Objective tax exemptions

There are certain exemptions envisaged regarding object of taxation. These exemptions in particular refer to the following:

- revenue from certain indemnities and revenue resulting from insurance of property and persons,
- the value of certain benefits resulting from the employment relationship, provided by employers to employees (e.g. the value of non-alcoholic beverages and meals provided for employees during working hours in accordance with the provisions on work safety and hygiene, including the value of vouchers and coupons etc. which entitle to obtain meals and beverages),
- revenue from daily allowances (e.g. for the period of domestic and foreign business trips, received by both employees and non-employees and by persons who perform acts connected with their social and civic duties),
- revenue of a donative nature, received from the State budget or territorial self-government units, from governmental agencies or from governments of foreign states, international organisations or international financial institutions, under governmental programmes,
- revenue received as a result of an entity’s liquidation up to the value of the contribution to a partnership or of the cost of purchase or taking up of shares (stock) in a limited liability company (joint stock company) and revenue resulting from the refund of additional payments to the capital of limited liability or joint stock companies,
- prizes (up to the specified limit), in particular in: gambling casinos, games on machines and contests organised and broadcast by mass media.

Tax deductible costs

The tax deductible costs are all costs incurred with the purpose of generating revenue, retaining or protecting sources of revenue, except for the costs which are explicitly listed in the PIT Act as not deductible.

The costs are divided into direct and other costs.

As a rule, direct costs are deductible in the tax year in which the related revenue was earned. Other costs are deductible on the date they were incurred.

If tax deductible costs were incurred in foreign currencies, these should be converted into PLN at the average exchange rates announced by the National Bank of Poland valid for the last working day preceding the day the costs were incurred.

The exchange rate differences shall respectively increase the revenues as foreign exchange gains or increase the tax deductible costs as foreign exchange losses.

Tax base and calculation of the tax pursuant to the scale

Generally, income calculated as the excess of revenue over tax deductible costs constitutes the tax base for PIT purposes.

The income may be then reduced by the taxpayer by:

- the amount of obligatory social security premiums paid during the tax year in Poland or in another EU country,
- the expenses incurred for the use of Internet,
- the expenses incurred for the purpose of the public utility, for religious purposes and the expenses incurred for the purpose of rehabilitation of disabled persons,
- the expenses borne by the taxpayer with regard to the purchase of new technologies.

As a rule, the taxpayers who carry out business activity are obliged to calculate their income on the basis of accounting books. If it is not possible to calculate income on the basis of accounting books kept by the taxpayer, the income should be assessed.

Tax computed pursuant to the scale

The income is subject, as a rule, to income tax calculated in compliance with the following progressive scale, using tax rates amounting to, i.e., 18% and 32% depending on income thresholds. When calculating the income, the so-called tax-free amount is taken into account (in 2010 – PLN 3.091,00).

The tax calculated in compliance with the tax scale may be reduced by the part of the obligatory health insurance premiums paid in Poland or in another EU country. The taxpayers may reduce their tax by the payments made to the account of public utility organizations. However the reduction of the tax cannot exceed the amount of 1% of the tax as shown in the annual tax return.

Lump-sum taxation of certain kinds of revenue (income)

In certain cases, this is a revenue (and not an income) which is subject to taxation; in such cases, no tax deductible costs may be taken into account. The tax is imposed then in a lump-sum form. As a rule, the revenues, which are subject to the lump-sum tax, are not revealed in the annual tax statements submitted to the tax office by taxpayers.

Flat-rate tax

Taxpayers running business activity may tax their income with 19% flat tax.

Income is considered to be a tax base for calculating the 19% tax from business activity. This means that the institution of a flat-rate tax does not deprive taxpayers of the right to deduct tax deductible costs from the earned revenue.

A decision on a flat-rate taxation method deprives the taxpayer of the possibility to take advantage from the majority of the tax allowances and deductions. However, the taxpayer who has chosen this method of taxation is entitled to deduct the following:

- from the income – the loss incurred in the previous tax years (incurred as a result of conducting business activity),
- from the income – the amount of the retirement, disability, sickness and accident obligatory insurance premiums paid by the taxpayer,
- from the tax – the amount of obligatory health insurance premiums paid in the tax year.

The 19% flat-rate tax applies also to certain incomes from money capitals.

The settlement of certain incomes in the form of capital gains taxed with a flat rate tax is not subject to advance payments during the year. The taxpayer who earns the income from the above-mentioned sources is obliged to make a settlement once a year up to April 30 of the following year – in the tax settlements submitted independently from the annual tax settlement regarding income subject to taxation according to the general rules (e.g. income from employment relationship).

Collection of tax

During a tax year the taxpayers are obliged, as a rule to make monthly advance tax payments (by the 20th day of the following month for the preceding month) and, after the end of a given tax year, pay the tax due in a final amount (i.e., not later than April 30 of the following year). This rule does not apply to the lump-sum tax, calculated and collected with reference to certain categories of revenue earned during the tax year and not accumulated with income earned from other sources after the end of the given year.

The so-called “small entrepreneurs” and the taxpayers who launch their business activity may pay tax advances quarterly.

As a rule, a PIT taxpayer is obliged to calculate and transfer by his own both tax advance payments and the tax. There are some exceptions to this rule, according to which, with respect to certain categories of revenue, the monthly tax advance payments or the tax itself are collected by tax remitters. First and foremost, the remitters calculate and collect the tax advance payments with reference to income from service relationship, employment relationship and similar relationships, retirement and disability pensions, and social security allowances. Furthermore, tax remitters calculate and collect the lump-sum taxes in most cases.

The taxpayers who receive income from business activity, lease and tenancy, employment relationship received from abroad, retirement and disability pensions received from abroad and other income with respect to which the remitters are not obliged to calculate the advance payments for income tax, are obliged to calculate and pay tax advances without summons during the year.

A self-calculation of tax applies also in case of establishing the income tax due for the entire tax year, provided that the remitter of tax has not been designated to calculate the tax. When submitting annual tax statements, taxpayers who keep accounting books are obliged to attach the financial statements which should include at least the balance sheet and the profit and loss account.

The taxpayers who decided to apply a flat-rate tax (19%) to their income from business activity, are subject to the general rules concerning submission of the annual tax statements. However, for the purposes of calculating the tax, these taxpayers are not entitled to aggregate their income subject to the flat-rate tax with the income subject to taxation according to the general rules.

Furthermore, the PIT Act provides for a simplified form of calculation and payment of tax advances i.e. in the amount of 1/12 of the tax amount shown in the tax return submitted to the tax office in the tax year preceding a given tax year or in the tax year preceding a given tax year by two years.

The so-called “small entrepreneurs” who launch their business activities may benefit from the so-called tax credit. This is a relief consisting in deferral of payment regarding tax on income generated in the first tax year. The taxpayer is also relieved from filing tax returns for that year. The tax due with reference to such income should be paid by the taxpayers in installments within the next 5 consecutive years.

*Glossary

The institution of tax accumulation, i.e., summing up of tax bases of two or more entities which as a rule act separately, with certain exceptions provided by law, is permitted in case of income of spouses and persons who bring up alone minor children.

The revenues (incomes) subject to lump-sum taxation are not taken into account in the annual tax return. In particular, it concerns: revenues from royalty payments received by persons with limited tax liability in Poland, dividends and other revenues from participation in profits of legal persons, interest on funds accumulated in a given form of saving, holding or investment, and incomes subject to net taxation in a lump-sum form (from liquidation of a business activity).

A 19% flat-rate tax has been introduced with reference to certain kinds of incomes. This form of taxation applies to the following incomes:

1. from non-agricultural business activity, if it is not taxed in another form,
2. from the transfer against payment of securities and financial derivatives and from execution of the rights resulting from these derivatives,
3. from the transfer against payment of shares in companies having legal personality,
4. from taking up the shares in the companies having legal personality or contributions in co-operatives in exchange for a contribution in kind in a form other than an enterprise or an organised part thereof.

It should be noted that the above list is not exhaustive due to the fact that the sources of revenues include also “other sources”, which are considered inter alia to be: cash allowances from social insurance, scholarships, alimonies (except for children’s maintenance), as well as revenue not covered by the sources revealed by a taxpayer.

There are some exceptions to the general rule of recognizing tax deductible costs. With respect to certain categories of revenue earned by persons with unlimited tax liability in Poland the lump-sum tax deductible costs apply. In certain cases, however, a taxpayer has an option to resign from lump-sum tax deductible costs, if actual tax deductible costs were higher than the lump sum costs applicable. The lump-sum tax deductible costs apply among others to the following revenues:

- from employment relationship and related relationships,
- from performing services on the basis of a mandatory contract or a specific work contract, received only from entities carrying out business activities or owners (possessors, managers, administrators) of an immovable property, in which premises are rented,
- received by members of management boards, supervisory boards, commissions and other decision-making bodies of legal persons, regardless of mode of appointment,
- received under the agreements on managing of enterprises, management agreements or agreements of a similar nature (including those concluded in the framework of non-agricultural business activity conducted by the taxpayer),
- from making use of copyrights by authors, and similar rights by artists-performers, or from exercising of those rights by them,
- payment for the transfer of ownership of the following property rights: invention, topography of integrated circuits, utility design, industrial design, trademark or design patent,
- from the royalties for transfer of the rights to use invention, topography of integrated circuits, utility design, industrial design, trademark or design pattern, received during the first year the licence lasts from the first entity that concluded the licence agreement,
- from the following activities performed personally: artistic, literary, scientific, coaching, educational and journalist, as well as revenue from practising sports, sport grants awarded by virtue of separate provisions of law and revenue earned by referees for controlling sport games.

However in case of the liquidation of a business activity, the income from the liquidation is not calculated according to the general rules. It is calculated by application of a percentage rate resulting from the share of income in the revenue during the period of last three months preceding the month during which the liquidation took place, to the amount determined based on purchase prices of remaining, on the day of liquidation, stock and tangible assets not being fixed assets.

The income is also assessed if, as a result of relations between taxpayers as specified in the PIT Act, the conditions agreed on by them or imposed by one of them substantially differ from those which would have been agreed between independent entities and, as a result thereof, one of these entities does not disclose any income or discloses income smaller than might be expected, if such relations did not exist.

The lump-sum taxation is applicable inter alia to the following revenues:

- earned by persons with limited tax liability in Poland from membership in management boards, supervisory boards, commissions and other decision-making bodies of legal persons – in the amount of 20% of the earned revenue,
- earned by persons with limited tax liability in Poland from advisory services, accounting services, market research services, legal services, advertising, management and control, data processing, employee recruitment and head-hunting services, guarantees and services of similar nature – in the amount of 20% of the revenue,
- from interest on loans, except for granting loans within the scope of one’s business activity and from interest or discounts on securities – in the amount of 19% of the earned revenue,
- from dividends and other revenue from participation in profits of legal persons – in the amount of 19% of the earned revenue,
- from interest and other revenue from funds accumulated in the taxpayer’s account or in other forms of saving, holding or investing, run by the entitled entity, except the funds accumulated in connection with the business activity conducted – in the amount of 19% of the earned revenue.

In addition, in certain cases it is income earned by the taxpayer that is subject to taxation, instead of revenue. This happens in the following cases inter alia:

- income from participation in capital funds (such income is subject to 19% tax);
- income of members of the employees’ retirement pension funds earned from transfer of shares deposited on quantity accounts into assets of those funds (such income is subject to 19% tax);

income earned from unrevealed sources of revenue or not justified by the revealed sources (such income is subject to 75% tax).
Choosing this method is not obligatory and it may be applied by both taxpayers conducting business activity independently and those conducting business activity in a form of partnership without legal personality. Nevertheless, it is necessary that these taxpayers fulfil the conditions specified in the PIT Act. One of the conditions is prohibition of earning revenues from performing the services within the framework of business activity for the benefit of a former or present employer of the taxpayer, if the scope of such services corresponds to the activities performed by the taxpayer pursuant to employment relationship in the tax year or in the year preceding the given tax year.

When calculating the tax base, like in the case of calculating the tax base for the purposes of income tax calculated pursuant to the tax scale, the income exempt from the taxation and income from which collection of taxes has been abandoned, are not taken into account. If the tax deductible costs exceed the amount of revenue, the difference constitutes tax loss, which may be deducted from the income earned by the taxpayer within 5 years immediately following the given tax year.

In this case following incomes are in question:

- from the transfer against payment of securities and financial derivatives;
- from the execution of financial derivatives whose price directly or indirectly depends on the price of securities,
- from the transfer against payment of shares in companies having legal personality;
- nominal value of shares in a company having legal personality or contributions in a co-operative in exchange for a contribution in kind in the form other than an enterprise or an organised part thereof.

CIT - Corporate Income Tax

Introduction

The corporate income tax (CIT) is, besides VAT, the most important tax levied on activities of legal persons in Poland. This is a flat-rate tax, generally imposed on income.

Tax rates

The basic corporate income tax rate is 19% of the tax base. In special cases the CIT Act provides for other tax rates.
19% tax rate is also applicable to incomes from dividends and other incomes (revenues) from participation in profits of legal persons having their seat in Poland.

For taxpayers with unlimited tax liability in a EU Member State, an exemption from the withholding tax on dividends paid out by Polish companies is provided (participation exemption). The application of the above-mentioned exemption is possible if the foreign shareholder holds or will hold minimum 10% of shares in the Polish company during the period of at least 2 years.

In case of dividends gained from abroad Polish tax provisions provide for two exemption methods: participation exemption (relating to income generated in EU Member State, another EEA Member State, and Switzerland) and underlying tax credit (regarding states other than EU, EEA Members and Switzerland with which Poland has a valid double tax treaty).

Participation exemption is applied if the Polish company has held at least 10% capital participation in the foreign subsidiary for an uninterrupted period of at least 2 years. However, the required minimum participation of a Polish parent company in a Swiss company is 25%.

The tax actually paid by a foreign company on the part of its profits from which a dividend was paid can be credited– up to some limit against income tax payable by the Polish parent company in Poland (underlying tax credit). To apply the underlying tax credit, the Polish recipient shall hold at least 75% of the capital in the company paying dividends. Notwithstanding the above the Polish recipient of dividends from abroad can also – up to the limit – credit the withholding tax paid abroad against tax payable in Poland.

As of July 1st, 2013, on certain conditions, a total exemption from withholding tax will also refer to interest and royalties transferred from Poland to related companies from the EU. At present, the withholding tax rate in the circumstances in which finally the exemption shall be applicable accounts for 10%, and in the period from July 1st, 2009 until June 30th, 2013 it will account for 5%.

Subject of taxation

The entities subject to the corporate income tax are as follows:

- legal persons (in particular: limited liability companies, joint-stock companies, capital companies in organisation);
- partners being legal persons;
- foreign partnerships, if in the state where their seat is located they are treated as legal persons and are subject to unlimited tax liability there;
- tax capital groups.

Object of taxation

Generally, the corporate income tax is imposed on income, irrespective of the source of revenue from which the income has been earned.
Entities having their seat or management in Poland are subject to taxation with respect to their global income irrespectively of where it was generated (unlimited tax liability). The other entities are subject to taxation in Poland only with regard to income generated in Poland (limited tax liability).

The income is considered to be the surplus of total revenues over tax deductible costs gained in a tax year. If tax deductible costs exceed the amount of revenues, the difference constitutes a loss.

Tax losses incurred in previous tax years may reduce a taxable income of a taxpayer. A loss may be carried forward for 5 years following the year in which it was incurred, however the amount deducted in a given year shall not exceed 50% of the loss value (i.e. the shortest period of a one year loss settlement is 2 years).

A tax year is defined as a calendar year. However, after meeting certain criteria specified in the CIT Act, a taxpayer may decide that the tax year is a period of other 12 consecutive calendar months.

Revenues

The following items (among others) are considered to be revenue:

- money and monetary values received, including also foreign exchange rate differences,
- value of non-monetary benefits and revenues in-kind received,
- value of debts which were redeemed or prescribed,
- value of the paid off debts, which were previously written off as irretrievable or redeemed and recognised as tax deductible costs,
- in case of VAT reduction or refund – input VAT in its part corresponding to the amount previously recognised as a tax deductible cost.

In case of business activity a revenue due even if not yet actually received generally constitutes taxable revenue after exclusion of the value of goods returned as well as rebates and discounts granted.

The date of receiving revenue from business activity shall be deemed the day of:

- releasing a thing, transfer of a property right or provision of a service or a partial provision of a service but not later than the day of
- issuing an invoice or
- receiving the payment.
The list below presents examples of items which are not considered revenues for tax purposes:
- advance payments received or amounts accounted for the future provision of goods and services which are to be performed in the next reporting periods,
- revenue received for establishment or increase of share capital,
- additional payments contributed to a limited liability company,
- loans (credits) received or returned,
- interests relating to receivables accrued but not received including interests on loans granted
- output VAT,
- returned, redeemed or desisted taxes and charges, which constitute revenues of the State Treasury or budgets of territorial self-governments units, if they had not been treated as tax deductible costs before,
- refunded difference in VAT,
- other returned expenses not being recognised as tax deductible costs.
Revenues in foreign currencies shall be expressed in PLN on the basis of the Polish National Bank’s average rate of exchange from the last working day preceding the day of receiving the revenue.

Tax exemptions regarding object of taxation

A catalogue of tax exemptions regarding object of taxation includes inter alia the following items:

- income received by taxpayers from governments of foreign states, international organisations or international financial institutions, deriving from non-returnable aid, including funds from framework projects regarding research, development and introduction of the European Union and from NATO projects,
- income earned from economic activity carried on within a Special Economic Zone on the basis of an appropriate permit.
- grants, subsidies and other gratuitous benefits received in order to cover costs or as costs’ refunds if the costs refer to fixed assets,
- revenues gained abroad, if an adequate double tax treaty so provides.

Tax deductible costs

In order to be recognised as tax deductible cost, an expenditure incurred by a taxpayer should jointly meet the following criteria:

- the expenditure was incurred with purpose of generating income, retaining or protecting sources of income,
- it is not listed in the catalogue of expenditures not being tax-deductible costs.

The revenue earning costs can be classified as direct costs or other costs.

As a rule, direct costs are deductible in the tax year in which the related revenue was earned. Other costs are deductible on the date they were incurred.

Tax deductible costs incurred in foreign currencies, should be converted into PLN on the basis of the average exchange rates of the National Bank of Poland from the last working day preceding the day the costs were incurred.

Since 1st January 2007 the new rules of calculating exchange rate differences are in force. According to the new law the exchange rate differences shall respectively increase revenues as foreign exchange rate gains or increase tax deductible costs as foreign exchange rate losses.

Tax base

Generally, the tax base is considered to be income (defined as the excess of revenues over tax deductible costs), reduced by certain deductions made by the taxpayer during the tax year.

The tax base may be reduced by donations for public utility purposes and for religious purposes. The deduction in total may not exceed 10% of income.

Furthermore it is possible to deduct from the tax base 50% of expenditures for acquisition of new technologies from scientific entities. A new technology is defined as technology knowledge which has been in use for less than 5 years. The deduction does not impact the right to depreciate the acquired technologies.

In order to recognise given income as a tax base, a taxpayer is obliged to keep proper accounting records. If it is not possible to determine income (or loss) on the basis of records kept by a taxpayer, the income (or loss) shall be assessed by tax authorities.

Collection of tax

In the course of the year taxpayers are obliged to transfer to the bank account of a tax office monthly tax advance payments in the amount of the difference between the tax due on the income earned from the beginning of the tax year and total advance payments due in preceding months. Monthly tax advance payments shall be remitted by taxpayers by the 20th day of each month for the preceding month. There is no obligation to submit monthly tax returns.

A final settlement of tax is deemed to be finalised on the day a yearly tax return is submitted by a taxpayer to the tax office and the tax due is paid. This should be done at the end of the third month of the year following the tax year at the latest.

The CIT Act provides for a simplified form of calculation and payment of the tax advance payments. Taxpayers are entitled to make monthly advance payments in the amount of 1/12 of the tax due, as calculated in the yearly tax statement for the year preceding given tax year. If there was no tax due in the said statement, taxpayers are entitled to make monthly advance payments in the amount of 1/12 of the tax due, as shown in the yearly tax statement for the year preceding by two years a given tax year.

The so-called “small entrepreneurs” who launch their business activities may benefit from the so-called tax credit. This is a relief consisting in deferral of tax on income generated in the first tax year. The taxpayer is also relieved from filing a tax return for that year. The tax due with reference to such income shall be paid by taxpayers in installments within the next 5 consecutive years.

*Glossary

One of the cases in question refers only to taxpayers with their limited tax liability in Poland, who earned inter alia the following revenues within the territory of Poland: from interest, copyrights or similar rights, rights to invention designs, trade marks and design patterns, know-how, or from other immaterial services (eg. advisory services, market research services, management and control services, guarantee and assurance services). As a rule, these revenues are subject to 20% tax rate, unless an appropriate double taxation treaty provides otherwise. Taxpayers with limited tax liability in Poland who receive due payments while acting as foreign sea trading companies, as well as those who earn revenues in Poland while acting as foreign air transportation companies, are subject to 10% tax imposed on these revenues, unless an appropriate double taxation treaty provides otherwise. It should be noted that application of the tax rate resulting from the appropriate double taxation treaty or non-collection of the tax according to the provisions of such treaty is permitted, provided that the tax residence of taxpayer is proved by the so-called certificate of tax residence, issued by appropriate tax authorities.

The tax capital group may be formed by a group of capital-related commercial companies having their seats in Poland. An average share capital of the companies may not be lower than PLN 1.000.000. The direct share of a “dominant company” in the capital of „dependent companies” must amount to 95%. The so-called profit index (i.e., the ratio of income to total revenue of the group) should account for at least 3%.

In the case of transformations (including mergers and divisions), except for transformations of commercial companies into another commercial companies, while assessing the taxable income, the losses of taxpayers subject to such transformation, merger, take-over or division are not taken into account; the same applies in the case of privatization of State enterprises.

Additionally, within 10 days following the day the annual financial statements were approved, the taxpayer should submit the financial statements together with the audit opinion and the report of an entity entitled to examine financial statements (if the audit was necessary). The companies should also attach a copy of the resolution of the legal body approving the financial statements.

Tax on Goods and Services (VAT)

VAT was introduced in Poland in 1993. Since 1 May 2004 it has been harmonized with the common system of VAT binding in the Member States of the European Community. VAT is a turnover tax. Its main features are:

- neutrality - the actual burden of tax rests upon final consumer,
- universality - resulting in, on the one hand, charging VAT upon each stage of turnover and, on the other hand, levying VAT upon relatively wide range of goods and services,
- double taxation avoidance rule - which is to prevent from double taxation of the same stage of turnover,
- observation of competitiveness rule - which is to ensure the same taxation rules for all taxpayers in the Member States.

Legal basis

Legal provisions governing VAT issues may be divided into two groups:

1. Community law,
2. National law.

Community law - in particular, Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax.

National law - the act on Value Added Tax of 11 March 2004 r. (Journal of Laws No 54, item 535, with amendments) and over 30 executive decrees, of which the most important is Decree of the Minister of Finance of 24 December 2009 regarding execution of some provisions of the act on Value Added Tax (Journal of Laws No 224, item 1799) and Decree of the Minister of Finance of 28 November 2008 regarding reimbursement of tax to certain groups of taxpayers, issuance of invoices and manner of their storage and a list of goods and services which cannot enjoy tax exemptions (Journal of Laws No 212, item 1337 with changes).

Objective scope of taxation

Of key importance to taxation is objective scope of taxation, which determines chargeable events. Each entity who professionally carries out the below stated activities:

- supply of goods (meant as transfer of the right to dispose of tangible property as owner) effected for consideration,
- supply of services for consideration; supply of services is meant as any transaction which does not constitute a supply of goods,
- export of goods,
- importation of goods,
- intra-Community supply of goods,
- intra-Community acquisition of goods,
is subject to taxation.

Taxable persons

In principle, entities independently conducting economic activity, whatever the purpose or result of that activity, are considered taxable persons. The term “taxable persons” embraces natural and legal persons, organisational units having no legal personality (eg. civil, general partnerships, etc.).

The economic activity for VAT purposes is defined as each activity of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions, even if such activity has been performed only once but in circumstances indicating an intention to continue. The term “economic activity” includes also exploitation of tangible or intangible property for the purpose of obtaining income there from on a constant basis.

Additionally, under certain circumstances entities purchasing services or goods may be considered taxpayers.

Reverse - Charge

A reverse - charge mechanism, the purpose of which is to facilitate VAT collection, generally applies if a certain activity is taxable in Poland but the supplier of goods or services does not have a residence or a permanent establishment for conducting economic activity in Poland.

Intra-Community acquisition of goods

Intra-Community acquisition of goods (IAG) means a transfer of the right to dispose of goods as an owner, in a situation when the goods are transferred to Poland from another Member State. Taxation of IAG is based - as in case of a reverse-charge rule - on the tax (output VAT) calculation and settlement by a purchaser. The tax in question may simultaneously be recognized as input VAT subject to deduction from output VAT.

IAG is subject to taxation at the rates applicable to the domestic supplies of the same goods.

As of 1 December 2008 there is a possibility to apply a so called “procedure of a consignment store”. The basic underlying assumption for the procedure is that transfer of goods by a EU entity not registered in Poland for the VAT purposes to a consignment store located in Poland results in arising of the tax obligation on the IAG not on the part of that supplier but on the part of the Polish taxpayer (the purchaser of goods) registered as a VAT EU taxpayer. It should be pointed out that that the moment of the goods’ delivery (transfer of owner’s rights to these goods) should be the moment of the goods’ collection from the store by the purchaser. The solution simplifies VAT settlement of such transactions both in a case of the goods transferred to a consignment store located in Poland and in case of goods transferred to such a store located on the territory of another EU country. However in Poland the procedure applies only to goods destined for production or to be used in services’ provision (is not applicable in case of trading goods).

Intra-Community supply of goods

Intra-Community supply of goods (ISG) is a transfer of the right to dispose of goods as an owner, if the goods are dispatched from Poland to another Member State. In the normal course of events ISG in Poland is followed by IAG in a Member State to which the goods are dispatched.

ISG is subject to 0% VAT rate. Although invoices issued with relation to ISG do not include VAT, the supplier is entitled to deduct input VAT suffered upon purchases of goods and services associated with ISG.

In case of ISG, a consignment store procedure can also be applied. However a condition sine qua non is that a EU purchaser is a VAT taxpayer obliged to indicate the performed transfer of goods in a EU country being a country of a transfer finalisation or a country of dispatch in the same month in which on the part of the Polish taxpayer a tax obligation on the delivery arose.

Deduction of input VAT

The distinctive feature of VAT is neutrality. A taxpayer is therefore entitled to deduct its input VAT, i.e. VAT incurred upon purchases, from output VAT resulting from its sales. Surplus of output VAT over input VAT constitutes the tax payable to the State Treasury. In turn, surplus of input VAT over output VAT, depending on a taxpayer’s decision, is subject to direct repayment from tax office or decreases output VAT in the next VAT settlement periods.

The Polish VAT law provides for refunds of the surplus of input VAT over output VAT within 60 days of the day of submitting tax return. Under certain circumstances the period may be shortened 25 days. The entities that did not sell in the given settlement period shall receive the refund within up to180 days unless they provide a tax office with an adequate guarantee (in the form e.g. bank guarantee or a bill of exchange endorsed by a bank).

Tax rates

Polish tax law provides for 4 VAT rates. The basic rate is 22%, which is applied to majority of goods and services. Other rates:

- 7% - applies to specific goods and services, e.g. goods related to health protection, groceries, services of hotels, folk art articles,
- 3% - applies to supply of some farm produce; this rate is binding temporarily - until 31 December 2010.

The rate of a special significance is a 0% rate. It is mainly applicable to export, intra-Community supply of goods and international transport services. Taxpayers enjoying 0% rate are not deprived of the right to deduct input VAT suffered upon purchases related to the activities subject to this rate.

Polish tax provisions provide also for some exemptions from VAT. Among the activities subject to such exemptions are financial, educational, health and cultural services. The exemption excludes however deduction of input VAT related to the exempt transactions.

Taxable amount

The taxable amount (tax base), along with VAT rate, determines the value of output VAT. However, the amount of VAT payable to the tax office corresponds to the surplus of output VAT over input VAT.

Taxable amount is turnover, which is the amount due from sales reduced by the amount of tax. The taxable amount should include everything which constitutes the consideration to be obtained for the supplies made including subsidies directly linked to the price of such supplies.

In respect of importation of goods, the taxable amount constitutes the value of goods determined for the customs purposes, increased by customs duties due. If the imported goods are subject to excise tax, the taxable amount is additionally increased by the excise tax.

Tax liability (chargeability of tax)

As a rule, tax liability arises at the moment the goods are delivered and services are performed.

The Polish VAT law provides however for a number of exceptions to the above rule. Tax liability may therefore arise:

- at the moment of issuing invoice, not later however than on the 7th day after the day of delivery of goods or service provision, if the transaction was to be confirmed by invoice,
- at the moment of receipt of payment, including partial one, before delivery of goods or performing the service,
- at the moment of receipt of the payment, in whole or in part, however not later than upon the lapse of the time limit for payment specified in the contract or invoice - in the case of the lease services or transactions of similar nature.

With regard to ISG and IAG, tax liability arises on the 15th day of the month after the month of supply. If however an invoice had been issued before this term, the tax liability arises at the moment of issuing the invoice.

In case of import of services (services purchased by a Polish VAT taxpayer who is obliged to settle VAT with reference to the services) tax liability arises with the moment of provision of the services considering that:

- services for which consecutive payment or settlement dates are agreed are deemed to be provided with the end of each settlement period (e.g. month, quarter of a year),
- on-going services to be rendered in a period exceeding one year are deemed to be provided with the end of each tax year till the moment of cessation of the service rendering.

Place of supply

Provisions defining place of supply are of great importance as regards taxation of international transactions. They directly indicate the country entitled to levy VAT on a given transaction. A given Member State may impose VAT only on those transactions, which according to relevant provisions, are executed on its territory.

In the case of goods dispatched or transported, place of supply is defined as the place in which the goods are located immediately before their dispatch or transportation. Supply of goods which are not transported is considered to be effected in a place where the goods are at the moment of supply. In the case of the goods installed or assembled by a supplier or for his benefit, the place of installation or assembly is considered to be the place of supply.

Following the amendment to Council Directive 2006/112/EC on the common system of value added tax, starting from January 1st, 2010 rules for determination of a place of taxation in case of services have been changed also in Polish provisions. First of all a principle was introduced that in case of majority of services rendered by Polish taxpayers for business entities from abroad as well as in case of services purchased by Polish taxpayers from business entities from abroad - the VAT is settled by the purchaser of the service. In case of services rendered by Polish taxpayers for entities without a status of VAT taxpayers , the services as a rule are settled at the local (Polish) VAT rate.

The VAT provisions provide however for many exceptions in this respect:

1. services connected with immovable property, including the services rendered by estate agents and experts, accommodation in hotels and holiday centres and preparing and coordinating construction works, such as services of architects and of firms providing onsite supervision - the place of supply is the place where the property is situated;
2. restaurants’ services and catering are subject to taxation in a place where they are actually carried out;
3. short-term rental of transport means is subject to taxation in a place where the transport means are actually placed at a customer’s disposal; a short-term rental is disposing of transport means incessantly in the period of 30 days, and in case of sailing units - 90 days.

Taxpayers exempt from taxation

Taxpayers who recorded in the previous tax year the turnover not higher than 100.000 PLN (the limit is in force in 2010, and starting from 2011 shall increase to PLN 150.000) may enjoy tax exemption. Therefore, despite performing taxable activities within the framework of their business activity, they are not bound to charge VAT upon their sales. Simultaneously, however, they would not be entitled to deduct input VAT.

Payment of tax

As a rule VAT is settled on a monthly basis. However it is possible to choose a possibility to settle VAT on a quarterly basis. The possibility primarily envisaged only for so called “small taxpayers” with turnover in the previous year not exceeding EUR 1.200.00 as of 1 January 2009 is accessible for all taxpayers.

Tax returns shall be submitted to a relevant tax office up to the 25 day of the month following each month or each quarter. Up to this date a payment of tax for a given settlement period shall be executed into the account of the tax office. Starting from January 1st, 2009 entities other that “small taxpayers” are entitled to submit quarterly returns but are obliged to pay tax - either in the form of a lump sum or resulting from the settlement - on a monthly basis within 25 days of the month following the month settled.

Procedure of VAT refund to foreign entities

The rule being in force from January 1st, 2010 is that VAT is refundable to foreign entities on their application if such VAT results from invoices documenting goods or services purchased in Poland or from customs duty documents (in case of import of goods) and if these goods or services were used by the foreign entities to undertake activities authorising to decrease output VAT by the amount of input VAT on the territory of the State in which they settle VAT or a tax of a similar nature. It should be underlined that non-EU taxpayers are eligible for VAT refund subject to reciprocity rule.

The procedure of VAT refund to foreign entities is set out in the Regulation of the Minister of Finance dated of 24 December 2009 (hereinafter referred to as “the Regulation”). Pursuant to this Regulation in order to obtain VAT refund the following conditions have to be met jointly within the period covered by the application:

- the applicant shall not have its place of residence, registered seat nor permanent place of activity in Poland,
- the applicant shall be registered as VAT (value added tax) or similar tax taxpayers in the country of its residence, registered seat or permanent place of activity,
- the applicant shall not be registered as VAT taxpayer in Poland,
- the applicant shall not perform within the territory of Poland activities being subject to Polish VAT (apart from certain activities, mentioned in the Regulation, including, among others, transactions settled pursuant to reverse charge rule).

An entity authorised to apply for VAT refund, having its seat or residence in other than Poland EU member state, submits the application to the Second Tax Office Warszawa Srodmiescie via electronic communication through tax authorities in its state.
An entity from another country (from outside EU) submits an application in writing on a form envisaged in the Regulation directly to the Second Tax Office Warszawa Srodmiescie.

The application for VAT refund may refer to periods not shorter than three months and not longer than one tax year. The application concerning any given year has to be filed until 30 September of the following year. The amount of VAT to be refunded may not generally be lower than the equivalent in PLN of EUR400(if the application refers to a period shorter than one tax year but not shorter than 3 months) or EUR50 (if the application refers to the whole tax year or a period shorter than 3 last months of the year). The application has to be prepared in the Polish language. The application should be filed with the Head of the Second Tax Office - Warszawa Środmiescie along with the following:

a. in case of applications submitted electronically:

- information specified in Annex 1 to the Regulation,
- copies of invoices or customs duty documents, if the tax base specified on the invoice or the customs duty document is higher than equivalent in PLN of EUR 1.000 or the tax base specified on the invoice documenting purchase of fuel is not lower than EUR 250,

b. in case of applications in writing on the form envisaged in the Annex 2 to the Regulation

- originals of VAT invoices and/or customs documents, from which VAT refund results, and
- the original of a certificate (hereinafter referred to as “the Certificate”) confirming that the entity applying for VAT refund is registered as the VAT taxpayer in the country of residence, registered seat or permanent place of activity.

The Certificate should be issued by tax authorities of the country of residence, registered seat or permanent place of activity of the applicant. The form of the Certificate constitutes an appendix to the Regulation. If local tax authorities use different forms of certificates they are generally accepted, if these forms contain all information required by the Polish form.

According to the Regulation the VAT should be refunded within four months from the date of filing the application. However the above mentioned term may be extended if the application requires additional verification.

The amount of VAT refunded is transferred in PLN to the bank account of the applicant. If the VAT is transferred to an account opened in a foreign bank, the Polish tax authorities do not bear banking charges related to the transfer.

source: www.paiz.gov.pl 

International Double Taxation system in Poland

Poland has entered into Tax Treaties with 84 countries including all the EU member states. These Treaties have priority over Polish domestic law.

All taxpayers registered in Poland are liable to corporate income tax which is payable on worldwide taxable income and capital gains. Non-residents are subject to tax on their Polish source income and capital gains. In general, there is no special tax rate for capital gains in Poland. Capital gains are usually added to the regular income of  a company and based on the standard tax rates.
Interest, royalties and dividend paid abroad are also subject to withholding tax in Poland. The standard rates of withholding tax are: 20% for interest, 20% for royalties and 19% on dividends. The said rates may be reduced according to the provisions of the Tax Treaties. Using the lower rates (even 0%) is possible if the payer of the interest/royalties/dividends has a certificate of residence of their recipient issued by the recipient’s local tax authorities. The certificate of residence is an authorized certification that a certain entity or individual is legally resident within a tax authority's jurisdiction.

Implementation of EU Directives

Before Poland joined the EU in 2004, it was obliged to undertake steps necessary to implement the European Council Directives on tax matters. The most important implemented Directives are the Parent–Subsidiary Directive and Interest and Royalties Directive. Based on the said Directives, payment of dividends made by a company with its registered office in Poland to a foreign company can be free of tax provided that the following conditions are jointly met:

- dividends are paid to a non-resident company,
- the beneficiary is subject to income tax in other EU countries or the European Economic Area,
- the beneficiary directly has held at least 10% shares of the dividends payer for a period not less than 2 years (this requirement does not have to be met at the time the above payments are made).

Furthermore, Poland may impose withholding tax on interest and royalties at a rate not higher than 5% once conditions similar to the above are met (however, the shareholder condition refers to 25% of shares not 10%). From July 2013 no withholding tax will apply to interest and royalties so their treatment will be identical to dividends.

Methods for eliminating double taxation

In order to avoid taxation of the same income in two countries, the Tax Treaties concluded by Poland provide two methods for the avoidance of double taxation:

- exemption with progression method or
- tax credit method.

Exemption with progression means that the country of the taxpayer’s residence exempts income from foreign sources. However, the taxpayer must declare this in his tax return. The tax authorities first calculate the tax on the total income (both taxable and exempt). Then the average tax rate on the total income is determined. Finally, such rate is applied to the taxable income only. Most of the Tax Treaties concluded by Poland introduce this method of avoiding double taxation.

Under the tax credit method, all income is subject to tax, but the taxpayer is entitled to a tax credit for the tax paid abroad.  This means that he can deduct the tax paid abroad from the tax due at home. However, countries using the credit method do not refund taxes if the taxpayers pay foreign taxes at a higher rate so the tax credit is limited to the domestic tax rate. This method is also introduced in the Tax Treaties which Poland signed and in cases where there is no Tax Treaty in place.

Source: Trinity Corporate Services (www.trinitycs.com)
Market leader in trust services including company formation, shelf companies, accounting, payroll and management services.