New rules concerning the imposition of the diverted profits tax
The amendment to the pertinent regulations that took effect on January 1, 2023, significantly changed the rules for imposing the diverted profits tax. The new regulations shall apply to transactions for
2023. It will therefore be necessary to re-verify whether an entity is subject to the diverted profits tax, as it may turn out that an entity that this tax did not apply to in 2022 will be covered by it in 2023.
- What is diverted profits tax?
The diverted profits tax is a new concept that aims to counteract the transfer of profits to countries with more favorable income tax rates. Unlike the “regular" corporate income tax (CIT), the tax on diverted profits is not levied on income, but on certain expenses (so-called passive expenses) that are incurred for the benefit of related parties and constitute tax-deductible expenses. Passive expenses include:
- intangible service costs,
- intellectual property rights costs,
- debt financing costs,
- fees and remuneration for the transfer of functions, assets, or risks.
The diverted profits tax is calculated separately from “regular” CIT and amounts to 19% of total passive expenses. This means that the obligation to pay the tax on diverted profits may also arise in a situation where, e.g., the taxpayer reports a loss
- How to determine whether tax on diverted profits applies to me?
The diverted profits tax applies to:
- companies that are Polish tax residents, that is, among others, Polish capital companies,
- tax capital groups, as well as to
- non-residents conducting business in Poland through a permanent establishment, i.e., among others, branches of foreign business entities that settle CIT in Poland.
As a general rule, passive expenses incurred for the benefit of the following types of entities are subject to the diverted profits tax:
- related entities with their registered offices or management boards located in so-called tax havens, and
- related entities with their registered offices or management boards located in countries with which Poland or the EU has not ratified an international treaty providing a basis for obtaining tax information from the tax authorities of those countries, in particular a double taxation treaty.
On the other hand, in the case of passive expenses incurred for the benefit of other foreign related parties, the obligation to pay the diverted profits tax may not arise when certain conditions are met, such as when:
- the sum of the passive expenses incurred for the benefit of related foreign entities constitutes less than 3% of the total sum of tax-deductible expenses, or
- the income (revenue) of the related foreign entity earned from passive expenses is subject to taxation at an income tax rate higher than 14.25%.
At the same time, as of January 1, 2023, an important change has been introduced with regard to the need to demonstrate that the obligation to pay the diverted profits tax has not arisen: it is the Polish entity that incurs passive expenses for the benefit of a foreign related party that must prove that the passive expenses do not meet the definition of diverted profits. In practice, this means that the entity incurring such expenses will be forced to obtain a range of information from the related party regarding, among other things, the taxation rules for the income/revenue of that entity.
Doubts concerning the application of the new regulations may arise, especially when verifying whether a given entity is subject to the obligations connected with the diverted profits tax. The calculation of this tax itself can also prove problematic. For this reason, should you have additional questions relating to any issues connected with the diverted profits tax, please contact either the TIAS Tax Department at: office@tias.pl or your accountant directly.
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