Although the minimum tax regulations have been in force for almost two years, the Ministry of Finance has exempted legal entities from the obligation to pay it (from 1 January 2022 to 31 December 2023). However, this ‘grace period’ ends in just under two months (on 1 January 2024) and this novel feature of the Polish tax law system will come into force. So what exactly is the minimum tax and who will have to pay it? What will the rate be and how should the tax base be determined?
As provided for in Article 24ca(1) of the CIT Act*, the tax applies to companies that are taxpayers within the meaning of Article 3(1) and tax capital groups which, in the tax year:*
- incurred a loss from sources of income other than capital gains, or
- achieved a share of income from sources other than capital gains, as defined in accordance with Article 7(1) or Article 7a(1), in income other than capital gains of no more than 2%,
– is 10% of the tax base.
The legislator has therefore introduced two conditions that must be met in order to pay the minimum income tax. These are: the taxpayer has incurred a loss from their main business activity (1) or the proportion of income from the taxpayer’s main business activity in total revenue was no more than 2% (2).
The minimum income tax rate will be 10% of the tax base. The tax base may be determined in two ways:
- by summing up (the general rule for determining the tax base):
- 1.5% of the value of revenue generated in a given tax year by the company from its main business;
- debt financing costs incurred for related entities (calculated according to a special formula set out in Article 24ca(3)(2) of the CIT Act);
- the costs of consultancy services, market research, advertising services, management and control, data processing, insurance, guarantees and sureties, and similar services (also calculated according to a special formula set out in Article 24ca(3)(4) of the CIT Act);
- by the taxpayer assuming that the tax base amounts to 3% of the value of revenue from their main business activity (simplified method of determining the tax base).
Entities subject to the obligation to pay the minimum tax will be companies and tax capital groups. The legislator has also introduced a broad list of exemptions (subject-based exemptions) from the payment of this tax. Thus, pursuant to Article 24ca(14) of the CIT Act, the following, amongst others, are exempt from the application of the minimum income tax:
- taxpayers starting a business (up to 3 years from the start of business activity);
- financial institutions (e.g. banks, financial institutions);
- taxpayers who are parties to a cooperation agreement;
- certain entities forming part of a group of at least two companies, in which one company directly holds at least 75% of the shares;
- “small taxpayers” for corporate income tax purposes;
- municipal companies;
- taxpayers whose revenue in a given tax year was 30% lower than in the previous year;
- taxpayers placed in bankruptcy or liquidation;
- companies providing mainly healthcare services;
- taxpayers whose profitability in one of the last three tax years exceeded 2%.
In summary, the structure of this tax, the method of its calculation, and the very fact that a company which is actually making a loss will be required to pay the tax will undoubtedly cause entrepreneurs many problems and difficulties. Furthermore, it is worth noting that from next year, Member States will be required to transpose Council Directive (EU) 2022/2523 of 14 December 2022 into their national legal systems, which will introduce a global minimum level of taxation for international groups of companies and large domestic groups within the Union.
Frequently asked questions
Who will have to pay the minimum CIT tax from 2024?
This obligation applies to companies and tax capital groups that incurred losses from their main activity or achieved very low profitability. The exemption period for legal entities ends at the beginning of 2024, so from that time these provisions begin to apply in full scope.
What conditions must companies meet to be subject to minimum taxation?
The regulations introduce two alternative conditions, the fulfillment of either of which results in the obligation to pay tax. These are incurring a loss from sources of income other than capital gains or achieving a share of income from main activity in revenues at a level not exceeding 2 percent.
What is the rate of minimum income tax and how is it calculated?
The rate of minimum income tax is 10 percent of the tax base. This base can be determined in two ways, either by summing up specific revenues and costs or by adopting a simplified form, where the base amounts to 3 percent of the value of revenues from main activity.
Which entities are exempt from paying minimum CIT tax?
The legislator provided for a broad catalog of exclusions, which include, among others, taxpayers starting their activity, financial enterprises, and municipal companies. Small taxpayers, companies providing mainly healthcare services, and entities in bankruptcy or liquidation are also exempt.
Are there other grounds for exemption from minimum income tax?
Yes, taxpayers who in a given tax year obtained revenues 30 percent lower compared to the previous year are also exempt from the obligation. Additionally, exemption is granted to taxpayers whose profitability in one of the last three tax years amounted to above 2 percent.
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