The tax base is the overall income, which is the difference between aggregated taxable revenue and aggregated tax-deductible cost. Subject to a number of exemptions, the tax base includes all sources of income. Consequently, there is no special treatment for income such as capital gains or interest. In practice, the taxable income is calculated by adjusting the profit reported for accounting purposes. The relevant adjustments are necessary due to differences between the tax and accounting treatment of numerous revenue and cost items. As a result, the taxable base is usually higher than the accounting profit. Important details of the calculation of the taxable income are described in the following paragraphs.
Tax-deductible costs and capital expenditure
The tax-deductible cost is defined as any expense item that was incurred in order to generate taxable revenue, or to protect a source of revenue. However, there is a long list of exceptions, i.e., expenses that cannot be included into the tax-deductible costs despite the underlying purpose of generating revenue. The list starts with investments in fixed or intangible assets (capital expenditure). They cannot be included into tax-deductible costs directly; instead the acquired assets can be depreciated for tax purposes. Furthermore, once the above assets are sold, a taxpayer can include into the tax-deductible costs their initial value net of depreciation.
Non-deductible expenditure
Non-deductible costs (other than capital expenditure) include, among other things, the following items:
- accounting provisions (subject to exceptions);
- proportionate part of depreciation write-offs made on cars costing in excess of EUR 20,000;
- donations;
- entertainment expenses;
- income taxes paid in Poland or abroad;
- penalty interest on tax arrears;
- contractual penalties resulting from supply of defective goods or services;
- expenses related to non-taxable revenue, or not related to any revenue.
Interest and thin capitalisation
Interest paid on debt is generally tax deductible for the debtor when paid. At the same moment such interest shall be included into the taxable revenue of the creditor.
However, interest on a loan drawn to finance investments on fixed and intangible assets is not deductible if paid or accrued within the investment period. Instead, such interest increases the initial value of fixed or intangible assets, which is subsequently depreciated for tax purposes.
Furthermore, CIT Law prescribes thin capitalisation restrictions related to interest paid on loans drawn from qualified lenders. Qualified lenders are:
- A direct shareholder (or direct shareholders) with at least 25% of the shares in the borrower’s share capital; or
- A sister company, provided that the same entity (or individual) holds at least 25% of the shares in the borrower’s share capital and 25% in the lender’s share capital.
Thin capitalisation restrictions can be applied if a loan or credit is drawn from qualified lenders and a Polish corporate income taxpayer shows the 3:1 debt-to-equity ratio as defined in the Corporate Income Tax Law. Thin capitalisation restrictions apply to interest on loans and credits drawn from foreign as well as from Polish tax residents.
Tax depreciation of fixed assets
As mentioned above, capital expenditure is not directly deductible. Instead the relevant fixed and intangible assets are depreciated and depreciation write-offs are included in the tax-deductible costs. Below are shown depreciation rates for selected fixed assets:
- Industrial buildings: 2.5% per annum;
- General machinery: 10% per annum;
- Computers: 30% per annum;
- Road vehicles: 20% per annum
It should also be noted that in numerous cases an accelerated depreciation is available. For example, so-called “second-hand” road vehicles (including, among others, passenger cars) can be depreciated at 40% annual rate.
Tax depreciation of intangible assets
Polish Law provides for favourable depreciation rules related to intangible assets. Generally, the depreciation rate for such assets is 20% per annum. However, there are very important exceptions where the applicable rate is much higher:
- Copyrights: 50% per annum;
- Software licenses: 50% per annum;
- Research & development expenditure: 100% per annum.
Provisions and accruals
Generally, provisions are not deductible for corporate income tax purposes. However, provisions made for unpaid receivables can be tax deductible provided that a number of conditions are met.
Starting from 1 January 2007 accruals are not tax-deductible. Therefore, the accrued amounts can be set off against the taxable income only when paid or booked as liabilities based on the appropriate document (e.g. an invoice).
Tax losses
Where the aggregated annual tax-deductible cost exceeds the taxable revenue, a taxpayer shall report a tax loss that can be carried forward over five consecutive years. However, only 50% of such a loss can be deducted against income reported in any one particular year of the above 5-year period. Therefore, the whole process of the loss carry-forward takes at least 2 years.
Interest, royalties, capital gains and dividends sourced in Poland
Interest, royalties and capital gains sourced in Poland are treated as regular income and taxed at the standard 19% CIT rate.
Dividends sourced in Poland (received from Polish residents) are excluded from the overall income. Instead, they are subject to 19% tax, which is withheld and remitted to the tax office by the payer of dividends. In the past the above tax was recoverable for all corporate taxpayers. That is, any corporate entity which received dividend from a Polish company was allowed to deduct the above 19% tax against its general CIT imposed on the overall income. If the general CIT was less then the tax on dividend, the deduction could be made in the following years. While amending the CIT Law for 2007, the Parliament decided to replace the deduction with the “participation exemption” based on the relevant EU directive. Nevertheless the above deduction scheme was upheld based on the transitional rules which apply to dividends paid up to the end of 2007.
Simultaneously, the participation exemption was introduced with the effect from 1 January 2007. Based on the relevant provisions, domestic dividends are free from the 19% tax provided that the Polish beneficiary holds at least 15% share in the paying company for at least two years.
Interest, royalties, capital gains and dividends sourced abroad
Interest, royalties capital gains and dividends sourced abroad are treated as regular income and taxed at the standard corporate income tax rate (exceptions related to dividends are discussed below). Income tax paid on such income in other countries can be credited proportionately against Polish CIT liabilities. Furthermore, the applicable double tax treaty can provide other method of double taxation avoidance (please see below the subtitle “Avoidance of double taxation”)
With respect to dividends from foreign sources, the CIT Law also provides for “underlying tax credit”, which is related to the corporate income tax paid by a foreign subsidiary under a foreign tax jurisdiction. Such underlying tax credit can be applied subject to conditions specified in the CIT Law. These conditions include the existence of the Double Tax Treaty between Poland and the subsidiary’s country of residence as well as the 75% shareholding of the Polish holding company in the foreign subsidiary. The underlying tax credit does not apply, if a foreign subsidiary is based in the EU, Iceland, Liechtenstein, Norway or Switzerland. This is due to the fact that dividends received from such subsidiaries can be subject to even more favourable treatment which is described in the next paragraph.
Dividends received from subsidiaries having their residences in the EU countries as well as in Iceland, Liechtenstein, Norway and Switzerland are CIT-exempt (“participation exemption”) provided that the Polish recipient holds at least 15% of the shares in the paying company for at least two years (with respect to the Swiss subsidiaries, the minimum shareholding is 25%).
Leasing
Under an operating lease, the total amount of rental payments is a tax-deductible cost for the lessee and taxable revenue for the lessor. Furthermore, the lessor is entitled to depreciate the leased object for tax purposes (provided that the leased object is a fixed or intangible asset).
Under a financial lease, the capital element of lease payments is tax-neutral for corporate income tax purposes. Therefore, only the interest element is a tax-deductible cost for the lessee and taxable revenue for the lessor.
An agreement is classified as a financial lease if the following conditions are met jointly:
- A lease agreement has been concluded for a fixed period of time;
- The total amount of the lease payments is equal to or higher than the initial value of the leased asset;
- The lease agreement includes a provision that the lessee is entitled to depreciate the leased asset for corporate income tax purposes; consequently, the lessor is not entitled to depreciate the leased asset.
