The Polish Ministry of Finance is planning the introduction of a global minimum tax. The effect on entrepreneurs

Publication date: March 04, 2024

The Polish Ministry of Finance plans to introduce a global minimum tax for entities belonging to international and domestic groups – according to the draft law included in the list of legislative and program works of the Council of Ministers. The global minimum tax system is to be based on three types of equalization tax.

Global minimum tax – draft law of the Ministry of Finance

The introduction of a global minimum tax is assumed in the draft act on equalization taxation of entities belonging to international and domestic groups, prepared by the Ministry of Finance, which is to be adopted by the government in the third quarter of 2024.

Introduction of GloBE principles

The draft law implements into Polish law the provisions of Council Directive (EU) 2022/2523 of 2022 on ensuring a global minimum level of taxation of international groups of enterprises and large domestic groups in the European Union. Its aim is to implement in the European Union the Global Principles for Counteracting Tax Base Erosion (“GloBE Principles”), i.e. the main part of the so-called Pillar II of the OECD.

The legislator indicated in the description of the draft law that the answer to the problems of international taxation is to introduce a system of the so-called global minimum tax. This is a solution in which the largest international enterprises will be checked every year whether they meet the requirement of the minimum effective level of taxation: 15%. If the effective level of income taxation for a given international group in a specific jurisdiction is below 15%, an appropriate top-up tax will be imposed on such a group.

Three types of equalization tax (IIR, QDMTT, UTPR) – Income Inclusion Rule (IIR); QDMTT (Qualified Domestic Minimum Top-up Tax); Untertaxed Profits Rule (UTPR)

The global minimum tax system introduced by the draft law is to be based on three types of equalization tax:

global equalization tax – IIR,

domestic equalization tax – QDMTT,

tax on under-taxed profits – UTPR.

Global Equalization Tax (IIR)

IIR imposes the obligation to pay the appropriate equalization tax, in principle, on the highest-level parent company in the group. In principle, this system is similar to the taxation regime for controlled foreign entities operating in many countries, including Poland. The group parent company in the jurisdiction in which it is established should pay top-up tax on its low-taxed subsidiaries in other jurisdictions.

Domestic equalization tax (QDMTT)

QDMTT works in a similar way to IIR, with the important difference that the right to collect the equalization tax remains in the country where the low-taxed group components are located, so most often it will be paid in the jurisdiction where the low-taxed income was located (and not necessarily where the parent company is).

In relation to the OECD standard, IIR and QDMTT were extended in the directive to cover large national groups, i.e. groups of entities operating in only one Member State.

Tax on under-taxed profits (UTPR)

The UTPR imposes an obligation to pay an equalization tax on the parent company on group entities located in a given jurisdiction where that parent company operates in another jurisdiction where there is no IIR.

From January 1, 2024, a global minimum tax, also known as an equalization tax, is in force.

The global minimum tax is to apply to capital groups:

• multinationals (MNEs) generating revenues in different tax jurisdictions (regardless of whether the group companies are based in the EU or outside the EU), and

• domestic,

whose consolidated revenue in at least two of the last four fiscal years was equal to or higher than EUR 750 million.

A capital group is defined broadly – it also includes one entity if it has branches.

The countries affected by the global minimum tax are not only countries based in the European Union, but also outside the EU. The introduction of the tax was supported by 138 countries and jurisdictions. In the EU, the global minimum tax is regulated by Council Directive (EU) 2022/2523 of 14 December 2022. The global minimum tax will be calculated as the difference between the income tax effectively paid in a given jurisdiction and the tax calculated at a rate of 15%.

The effective tax rate, i.e. the actual share of the tax burden in the group’s income, is to be calculated on the basis of the so-called qualifying net income in a given country and then compared to the 15% rate.

The equalization tax is to be paid in the country of residence of the parent company, regardless of whether it is due from its subsidiaries or from itself. This is the so-called IIR mechanism – Income Inclusion Rule.

If the parent company’s jurisdiction does not impose a global minimum tax, the equalization tax will be payable in the countries where the group entities are located. This is the so-called UTPR mechanism – Undertaxed Payments Rule.

The EU directive provides for a catalog of exclusions from the basis for calculating the equalization tax, including those based on economic substance.