Postponement by one year of the entry into force in Poland of the rules on hidden dividends – important information for related entities

Hidden dividend – The Polish New Deal

Costs from related parties will not be allowed as tax costs. This will happen when these costs meet the statutory definition of the so-called “hidden dividend”. The Polish New Deal introduces so far unknown concept of “hidden dividend”. The act in art.16 sec. 1d indicates that certain costs constitute a “hidden dividend” if:

  • the amount or timing of those costs is in any way dependent on the taxpayer making a profit or on the amount of that profit; or
  • a prudent taxable person would not incur such costs or could incur lower costs in the case of comparable supplies performed by a person not connected, within the meaning of Article 11a(1)(3), with the taxable person, whereby in determining those costs the provisions of Articles 11c and 11d shall apply mutatis mutandis, or
  • these costs include remuneration for the right to use assets which were owned or co-owned by a partner (shareholder) or an entity related to a partner (shareholder) before the creation of the taxpayer.

The provisions being introduced aim to end the practice of extracting profits from companies. However, if an entity makes a gross profit and the costs associated with transactions with related parties do not exceed its value, the provisions will not apply.

Related parties

According to the Polish Corporate Income Tax Act (art. 11) and the Personal Income Tax Act (art. 25), related parties should be understood as:

  1. entities one of which exercises significant influence over at least one other entity; or
  2. entities significantly influenced by the same other entity, or by a spouse, relative or next-of-kin of the natural person exercising significant influence over one or more entities;
  3. a company without legal personality and its partners;
  4. the taxpayer and its foreign permanent establishment

In order to be referred to as related entities, there must therefore be a relationship between them in terms of persons or capital. Such entities may be natural persons, legal persons or organisational units without legal personality, or a foreign permanent establishment.

Hidden dividend provisions to come into force one year later

Following the session of the Polish Sejm on 1 October 2021, amendments under the Polish New Deal were adopted. The Polish Sejm postponed the entry into force of the hidden dividend provisions, while not changing its plans to repeal the provision that limits costs for intangible services. Without this limit, it will be possible to fully deduct from income the expenses for example for trademark licence fees, consultancy services. The amendment assumes the repeal of Article 15e of the CIT Act as from 1 January 2022. Hidden dividends occur in the case of three types of benefits, persons related to the company, for which the company pays. Firstly, the amount of payments for these benefits or the date of payment in any way depends on the achievement of profit by the company or the amount of this profit. The second situation is that the remuneration for these benefits is determined on a non-market basis, while the third situation concerns remuneration for “the right to use assets which were owned or co-owned by a shareholder or an entity associated with a shareholder prior to the establishment of the taxpayer”.

Implemented changes

Apart from the repeal of Article 15e of the CIT Act, the amendments provide for three new solutions. These are:

  • minimum tax on revenue (art. 24 ca of the CIT act)
  • tax on passed-on income (art. 24 aa of the CIT act)
  • total exclusion of the so-called hidden dividends from the costs of revenues (Article 16 par. 1 point 15b and par. 1c of the CIT Act).

The minimum tax on income and the tax on pass-through income introduce the same restrictions on the same expenditure as the already mentioned Article 15e.

Advantage to the taxpayer

As the provision on ‘hidden dividends’ was very controversial, an amendment was adopted postponing its entry into force until 2023. Thanks to this postponement of the hidden dividend provisions and at the same time the repeal of Article 15e of the CIT Act at the beginning of the year, taxpayers will be able to recognise certain expenses as costs without a limit. These will most likely be the costs of trademark licence fees. Other regulations will include a 19 per cent tax on the costs of consultancy services, market research, advertising services, called the “tax on the so-called passed-on income”. According to experts, the tax should not cover many entities. This is because it will not apply to a situation in which a counterparty from the European Union or European Economic Area countries conducts significant real economic activity. Besides, an additional condition for the collection of this new tax will be lower taxation in the country of the recipient of the payment. This is not normally the case for companies that pay for various services to a head office located in different Western European countries.