| 29 March, 2023

Diverted profits tax

Under the regulatory amendment, the deadline for filing the corporate income tax return and payment of corporate income tax is to be delayed until June 30, 2023 (for taxpayers whose tax year coincides with the calendar year). Nonetheless, the procedure for verifying whether an entity is subject to diverted profits tax is very complex and requires obtaining a range of information about related parties, so we recommend that you start analyzing this issue without further delay.

What is diverted profits tax? 

Fundamentally, it is a new kind of CIT levy aimed at counteracting the effects of transferring profits to countries with more beneficial income tax rates. Subject to this tax are specific costs incurred directly or indirectly to the benefit of related entities. Diverted profits tax is settled separately from “regular” CIT. This means that the obligation to pay tax on diverted profits may also arise when the taxpayer reports a loss.

How to determine whether tax on diverted profits applies to me? 

Verification whether a given entity shall be subject to tax on diverted profits is a multi-step process. The analysis covers both the Polish taxpayer and the foreign related entity. The table below illustrates the key factors to be analyzed:

Factors pertaining to the taxpayer

Factors pertaining to the foreign related entity

  • Has the taxpayer incurred, directly or indirectly, so-called passive expenses for the benefit of the related entity?
  • The following, among others, are considered passive expenses: costs of intangible services , IP rights fees, expenses connected with transferring debtor insolvency risk, costs of debt financing, fees and remuneration for the transfer of functions, assets, or risks;
  • Does the sum of the passive expenses incurred to the benefit of related and unrelated entities constitute at least 3% of the total sum of tax-deductible expenses?
  • Has the related entity actually paid income tax at the rate of 14.25% (or lower) for the year in which it received the payment, and
  • have the passive expenses constituted 50% of the revenue of the related entity and were specifically subject to being classified as tax-deductible or redistribution, e.g., in the form of dividends?
  • Is the related entity subject to taxation on all of its profits in an EU or EEA member state, and if so, does it carry out actual business activity in that country?

We would also like to point out that starting from January 1, 2023, amended regulations came into force concerning tax on diverted profits, which shall be applicable for the tax filings for 2023. One of the key changes consists in shifting onto the taxpayer the burden of proof that the conditions for being subject to diverted profits tax have not been met. In practice, this means that it is the taxpayer who incurs (directly or indirectly) the so-called passive expenses for the benefit of a related entity that will have to demonstrate that it is not obligated to pay tax on diverted profits.

Doubts concerning diverted profits tax may arise especially when verifying whether a given entity shall be subject to it. Nonetheless, the tax calculation itself may also pose a problem. For this reason, should you have additional questions relating to any issues connected with diverted profits tax, please contact either the TIAS Tax Department at: office@tias.pl 

O autorze

Adela Ochman