Category: Bez kategorii

Lump sum on the income of capital companies, popularly known as the Estonian CIT, was introduced to the Polish legal system at the beginning of 2021 as an alternative form of taxation to the general rules. The first version of this model of taxation, however, was quite far from its Estonian prototype, which was to be a determinant of a pro-investment, taxpayer-friendly and maximally informal form of taxation.

Therefore, at the beginning of 2022, an amendment to the regulations came into force to convince Polish entrepreneurs to choose to tax with Estonian CIT. As part of the introduced changes, not only the name of the model has been modified, i.e. now we are talking about a lump sum on company income, but also the group of taxpayers entitled to apply the lump sum has expanded, or the requirements for the application of this preferential taxation method have been “loosened”. As a result of these changes, and in the face of increasing tax burdens in connection with the so-called In the Polish Government, the Estonian CIT is becoming an alternative taxation for Polish taxpayers worth considering. In such a situation, it is worth looking at several practical aspects of the Estonian CIT, which, although addressed in theory in the regulations, may still raise significant doubts in practice.

 

Starting the copmany and transformation

The CIT Act provides for two tax rates for Estonian CIT – 10%. applicable in the case of a small taxpayer and a taxpayer starting business, and 20 percent. In other cases. What about taxpayers who were established as a result of transforming, for example, a sole proprietorship into a limited liability company? or also partnerships, e.g. general partnership? In such a situation, it can be concluded that we are dealing with the commencement of business, since in practice the establishment of a company is a continuation of the economic activities carried out? The analysis of the provisions of the CIT Act relating to taxpayers starting business activity (i.e. taxpayers within the meaning of the CIT Act) and the “Guide to the lump sum on company income” published on 23 December 2021 (hereinafter: the Guide) shows that in such a situation we have to dealing with starting a business. In addition, the Guide emphasizes that the transformation of a sole proprietorship into a business start-up is not a restructuring activity listed in Art. 28k paragraph. 1 points 5-6, which would make it impossible to apply the lump sum.

As a result, entrepreneurs conducting sole proprietorship or general partnerships, after the transformation, are entitled to apply the 10% rate of Estonian CIT in the first year after the transformation.

In this case, it is worth noting that the possibility of applying the lower of the Estonian CIT rates for start-ups was introduced only under the provisions in force from January 1, 2022.

Therefore, the legislator met the expectations of entrepreneurs who can benefit from the preferential rate not only if their revenues do not exceed PLN 2 million, but also when they have just started operating in the form of a company.

 

Not only dividends

The key attribute of Estonian CIT is no need to tax the profit earned, and as a result, no need to pay monthly or quarterly CIT advances until its payment. The CIT Act indicates the events that will result in the obligation of the flat-rate payer to settle the tax, i.e .:

1. allocating the profit earned in the period of taxation with a lump sum to be paid to shareholders (payment of dividends, but also advance payments for dividends) or to cover losses incurred before the tax period of Estonian CIT (adopting a resolution to allocate the generated profit to cover losses from previous years),
2. the rise of income from the so-called hidden profits
3. incurring expenses not related to the conducted activity,
4. excess of the market value of the assets being acquired over the tax value of these assets (income from changes in the value of assets) – in the case of transformation of entities,
5. obtaining income from the so-called undisclosed business operations.

 

While payments to shareholders or a surplus resulting from transformations seem to be a fairly obvious method of payment of profit, which causes the necessity to pay the tax, the definition of the so-called hidden profits. Also in this case, the legislator hurries to explain by pointing to an exemplary catalog of activities that may generate taxation as hidden profits.

And so, among these types of events, one should mention,is granting loans to partners or entities related to them, as well as benefits for private foundations or trusts and donations, including gifts and offerings of all kinds, or underestimating the market value of transactions with a related entity. It should be noted here that the list of transactions contained in the CIT Act is not exhaustive and in practice all kinds of benefits for partners, but also for their families as related entities, can be treated as income from the so-called hidden profits.

In addition, a category that raises some doubts, causing the necessity to pay the tax is also incurring expenses not related to the conducted activity. The CIT Act in no way specifies what falls into this category, although a vague explanation can be found in the Guide. According to the Guide, in the case of analyzing whether we are dealing with an expense not related to the conducted activity, it is possible to use not only the qualification of expenses as non-tax costs in accordance with Art. 15 sec. 1 of the CIT Act, but also the entity’s current practice (helpful if it was a CIT taxpayer) and court and administrative judgments. And so, as an example of expenses not related to the conducted activity, one should indicate, inter alia, interest and contractual penalties excluded from the category of tax costs pursuant to Art. 16 of the CIT Act. By the way, it is worth pointing to the case-law favorable to taxpayers in the field of contractual penalties arising in the event that breaking the contract was more economically beneficial for the taxpayer than maintaining it. As a result, despite the fact that taxpayers taxed with Estonian CIT do not recognize tax revenues and costs based on the regulations contained in Art. 15 and 16 of the CIT Act, knowledge of these regulations, but also of jurisprudence, may be crucial in the case of, inter alia, identification of expenses not related to the business activity leading to the obligation to pay the tax.

 

Taxation of partners

In the case of CIT taxpayers, there is double taxation of profits generated by these companies. This means that the payment of profit is taxed both at the level of the company that is a taxpayer of Estonian CIT (10% or 20% of the value of the payment, e.g. dividend) and at the level of a partner who is a natural person (19% PIT rate for revenues from capital gains). ).

At the same time, the CIT Act provides for the mechanism of deduction by the partners of the tax paid by the company from the due PIT tax. The amount of the deduction in this case depends on whether the taxpayer of Estonian CIT will have the status of a small taxpayer or not. In the case of a withdrawal from a non-small taxpayer company, the deduction ratio will be 70%. the amount of tax due to the company per shareholder, and in the case of a small taxpayer it is 90 percent. Consequently, the total taxation of profits in a small taxpayer is 20%, and in other cases 25%.

Illustrating it on a numerical example, assuming that an Estonian CIT taxpayer has two partners, each of whom has 50 percent. shares: >> see table below.

Author’s view

Katarzyna Zadroga, tax advisor, Senior Consultant at ALTO

The amendment to the regulation on lump sums from companies, which entered into force on January 1, 2022, will certainly be an incentive for Polish taxpayers looking for an alternative method of taxation, bearing in mind the unfavorable consequences of the Polish Deal, in particular for entrepreneurs operating on a smaller scale. lowering the requirements for the application of Estonian CIT or reducing tax rates may seem particularly attractive for sole proprietorships or partnerships which, due to the planned business development, will decide to operate in the form of a CIT taxpayer company. Therefore, the benefit achieved by such companies in the event of a decision to use the Estonian CIT taxation option would be not only to systematize the issue of potential business development, but also to reduce the tax burden imposed on sole proprietorships by the regulations of the Polish Deal.

Regardless of the above, it is worth noting that the Polish lump sum on company income is still far from its Estonian prototype, especially when it comes to the simplicity of operation and the number of reporting obligations. It still does not explicitly follow from the provisions, inter alia, How should the income from the transformation of companies be documented (in such a situation, should a zero declaration be submitted on the CIT / KW form?). As a result, it seems that possible regulatory deficiencies will be explained by the practice of tax authorities, as irrespective of the numerous reporting obligations, one may hope that soon we will notice a significant increase in the number of taxpayers choosing this form of taxation, due to the fact that the alternative for Estonian CIT it is in practice to pay higher taxes than in 2021.

We briefly recall the most important changes introduced to the Polish legal system by the said amendment to the Commercial Companies Code.

On April 4, 2022, the President signed the government bill amending the Commercial Companies Code (KSH) and certain other acts (print 1515). Earlier, the Sejm rejected the Senate’s resolution rejecting the bill. Due to this, the new regulations refer to a large extent (but not only!) To the legal relations between parent companies and their subsidiaries, hence they are often referred to as the so-called “Holding law”.

Below, we briefly recall the most important changes introduced to the Polish legal system by the amendment to the Commercial Companies Code.

 

Holding law

For the first time in the Polish legal system, regulations concerning the law of a group of companies (holding law) appear, referring directly to actual holdings.

A statutory definition of a “group of companies” is introduced – as a parent company and a company or subsidiaries that are capital companies, guided by a common strategy in order to achieve a common interest (interest of a group of companies), justifying the parent company exercising uniform management over a subsidiary or subsidiaries . It is worth emphasizing that, according to the Act, a “group of companies” is a qualified relationship of dominance and dependence between companies that follow a common economic strategy. It is therefore necessary to distinguish a “group of companies” from the “ordinary” relationship of dominance and dependence between companies, as referred to in Art. 4 § 1 point 4 of the Commercial Companies Code. It is essential for group law that the parent company and subsidiary of a group of companies must also take into account the “interest of the group of companies” in addition to the own interests of each company.

Participation in the group of companies is voluntary. It requires adopting a resolution of the shareholders’ meeting (general meeting) of the subsidiary with an indication of the parent company and disclosure of participation in the group by entering a note in the register. The parent company may issue binding instructions to the subsidiary participating in the group regarding the conduct of the company’s affairs.

More on the institution of binding orders and responsibility for their execution: < under this link >.

 

Changes in the law of compulsory buyout and repurchase of shares (stocks) of minority shareholders (squuze-out and sell-out)

The legislator has increased the availability of the use of the institution of compulsory buyout of shares (stocks) – squuze out, moving this institution also to a limited liability company. So far, the squuze out has been available only under the provisions of S.A. In addition (both in the case of S.A. and sp.z o.o.), the statutory thresholds for its application have been liberalized – in principle, a compulsory buyout may apply to shares or stocks representing no more than 10% of the share capital by the parent company that has at least 90% of the share capital ( so far, squuze out was only possible with regard to minority shareholders representing no more than 5% of the share capital by shareholders representing at least 95% of the share capital).

Identical statutory solutions – i.e. introducing the institution also in sp.z o.o., liberalization of the application conditions (the same as in the case of squueze out) were applied to the sell-out institution – compulsory repurchase of shares / stocks belonging to minority shareholders of a subsidiary.

It is worth noting that the above (new regulations) regarding squuze-out or sell-out apply to companies participating in the group of companies. Regardless of this, the current squuze out (sell-out) mechanism on general principles for private S.A. (Art. 418 of the Commercial Companies Code), including the conditions for its application, remain unchanged.

 

Broader powers of supervisory boards, more effective supervision

The new regulations provide for more specific rights and obligations of the supervisory board in order to increase the effectiveness of supervision in capital companies. The amendment to the Commercial Companies Code also places emphasis on the effectiveness of maintaining the information balance between the management board and members of the supervisory board, and on the control mechanisms of supervisory boards.

The provisions introduce, among others: the right of the supervisory board to request preparation / submission of information, documents, reports, explanations, the obligation of the management board to provide certain specific information to the supervisory board on its own initiative, new reporting obligations of the supervisory board, regulations on supervisory board committees, a new instrument as an advisor to the supervisory board (an external entity with expertise and qualifications to audit specific issues).

 

Changing the liability rules for members of the management board and members of supervisory boards

The rules of liability of members of corporate bodies will be based on the category of “business judgment” – the business judgment rule. The amendment to the Commercial Companies Code explicitly stipulates the obligation of loyalty of members of the management board and supervisory board of capital companies. A member of the body is obliged to perform his duties with due diligence resulting from the professional nature of his activity and to remain loyal to the company. In practice, based on the principle of business assessment of the situation, a member of an authority does not breach the obligation to exercise due diligence if he or she has consulted, in the performance of his duties, analyzes that should be taken into account in the given circumstances when making his assessment.

 

A new way of shaping the term of office and mandates of members of company bodies

The amendment resolves the doubts of the doctrine and jurisprudence regarding the determination of the moment of expiry of the mandate in connection with the end of the term of office. As a general rule, the term of office is calculated in full financial years (unless otherwise stated in the articles of association).

 

An extended catalog of people excluded from performing functions in company bodies

The catalog of persons excluded from being a member of the body, liquidator, and proxy has been expanded. The extension of the catalog of excluded persons is related to the extension of the catalog of crimes for which a person to be a member of the body, liquidator or commercial proxy cannot be convicted by a final judgment. In the criminal part of the Commercial Companies Code, additional types of crimes appeared.

You can read more about the liability of members of bodies in capital companies based on the new regulations in the article by Urszula Brzezińska-Grzęda and Tomasz Fiałek (ALTO)<under this link >

On April 12, 2022, on the website of the Government Legislation Center, a new draft act on the protection of persons reporting violations of the law, commonly known as the Whistleblower Act, was published.

The act is to implement Directive (EU) 2019/1937 of the European Parliament and of the Council of 23 October 2019 on the protection of persons who report breaches of EU law. The above directive provided for the implementation of the whistleblower protection provisions by 17 December 2021, but this deadline was not met. The original bill, prepared in October 2021, after consultations and as a result of comments submitted during the opinion-giving process, was subject to significant changes, on the basis of which a new draft was prepared.

It is not known when the bill will be debated by the Seym, therefore it is difficult to predict the final date of signing and entering into force of the act, but due to the exceeded deadlines, a significant acceleration of the legislative process cannot be ruled out.

The new draft provides for many significant changes in relation to the original assumptions of the amendment – from a change in the scope of companies covered by the obligation to introduce a breach notification procedure, through entities dealing with external reports, changes in penalties for prohibited acts, to a change in the vacatio legis period.

The most significant changes in the draft of April 2022 in relation to the first draft include the extension of the scope of entrepreneurs who will be covered by the Act. While the size of the company remains the same as in the original project, the method of calculating this size has changed. This is because it results from two changes – firstly, the definition of the entity obliged to introduce the procedure has been changed. In the previous project, he was defined as an employer within the meaning of the Labor Code. However, it was postulated that this definition was too narrow and that the procedure should also include people cooperating with the enterprise on the basis of civil law contracts. Moreover, in order to standardize the scope of persons who will be entitled to exercise the rights of whistleblowers, the definition of them as an employee within the meaning of the provisions of the Code of Civil Procedure was abandoned and the existing catalog was extended to include apprentices or the so-called uniformed services. The new version of the draft reduces the period of data storage in the register to 12 months. A significant change also consists in extending the scope of the prohibition of retaliation to the reporting person. There was also a ban on attempting such actions as well as the mere threats to do so. The new draft also introduces changes to the mandatory notification procedure, including the inclusion of a system of incentives to use it in the procedure.

Another significant change is the removal of the use of the term “central authority” in favor of a public authority. This change is probably due to an erroneous use of the term central authority, as its activities are to be performed by the Ombudsman, who is not a central authority within the meaning of the provisions, in accordance with the draft act. On the other hand, the penal provisions provided for in the draft act were relaxed. For example, obstructing or attempting to obstruct the reporting process is subject to a penalty of a fine or restriction of liberty (previously imprisonment for up to 3 years, which, however, remains appropriate for a situation of using violence, threats or deception). The last change – although one of the most important from the point of view of the companies covered by the Act – is the change in the vacatio legis period of the regulations. The first draft only provided for a 14-day deadline for the entry into force of the act, the current one is already 2 months. In addition, provisions have been introduced that allow entities that are primarily covered by the obligations under the Act to have a one-month deadline for carrying out these tasks. The total deadline for introducing the procedure will de facto be 3 months from the signing of the act. For other entities, the date remained unchanged – December 17, 2023.

The scale of the proposed changes encourages you to closely follow the progress of work. The final shape of the regulations may, however, be subject to further changes, as there are voices from the community pointing to new or further unadjusted defects in the act. It is also not known when the regulations will finally go to the first session of the Sejm and whether they will be referred to parliamentary committees.

The discussions related to the surprising tax changes introduced as part of the Polish Order have not stopped yet, and the highly advanced works related to the amendment of these provisions are already underway. The largest reform of the tax law in many years had a negative impact on the taxation of a large number of people running a business, including insurance agents.

The government decided to react to the great social dissatisfaction resulting from the Polish Deal by introducing changes aimed at eliminating some of the unfavorable regulations for entrepreneurs. The Ministry presented a number of solutions in the draft act, which were additionally supplemented after conducting public consultations. Below, we present the most important proposals from the perspective of insurance agents.

It is worth noting that this is the first such large change in PIT introduced during a tax year, and a change in the rules of settlements during the year is possible only in a situation where it is beneficial for taxpayers.

 

Taxation of agents after the entry into force of the Polish Deal

As a reminder, it is worth pointing out that agents running a business can choose from three taxation options, i.e .:

1. the most popular flat taxation (19%),
2. taxation using the tax scale (17% / 32%) and
3. lump sum taxation on revenues (generally at a rate of 17% or 15%).

 

The Polish Deal has significantly modified the method of calculation and the amount of public burdens for entrepreneurs, in particular in the field of health insurance. Currently, entrepreneurs taxed on a straight-line basis pay a health insurance contribution at the rate of 4.9%, progressively taxed on income at a rate of 9%, while those taxed with a lump sum pay a flat-rate contribution depending on the income ceiling (three thresholds). In any of these variants, the health insurance contribution does not reduce taxation, although previously taxpayers had the option of deducting a significant part of the contribution from the tax.

 

Health insurance contribution 2.0

Of all the changes introduced as part of the Polish Order, entrepreneurs felt the most severely affected by the health insurance premium. The government decided to introduce a slight improvement and in the Polish Deal 2.0 it plans to modify the rules of accounting for health insurance contributions.

For taxpayers taxed on a linear basis, the draft provides for the possibility of including the paid health insurance as tax cost. In the tax year, the taxpayer is to be able to deduct health insurance up to PLN 8,700 from the income, and in subsequent years this amount is to be increased.

Entrepreneurs taxed on a flat rate basis will be able to reduce their income by 50% of the value of paid health insurance premiums.

Importantly, the change will apply from the beginning of 2022, and contributions paid before the entry into force of the act are also to be deductible.

Therefore, the most unfavorable change in the Polish Deal will be slightly neutralized and the health insurance premium will have a small impact on reducing taxation. However, it will not be a return to the solution binding until the end of last year, when the health insurance contribution reduced the tax, so the tax benefit was incomparably greater.

 

What’s next for middle class relief?

The issue that raised the most doubts among taxpayers and accountants was and still is the relief for the middle class. Despite the fact that the relief was supposed to be a positive solution, it caused more problems than benefits. Now the Ministry of Finance plans to abolish the relief for the middle class. And this is already in relation to the settlement for 2022.

Interestingly, the proposed regulations are to assure taxpayers that this change will be beneficial. If at the end of the year it turns out that in a specific case taxation with the use of the tax credit would be more favorable, it will be applied in the annual settlement. We can only hope that the proposed solution will actually work this time.

The elimination of the middle-class tax relief will apply to agents who conduct business activities subject to the tax scale and people who are employed under an employment contract.

For the same group of people, the first tax rate in the case of taxation using the tax scale will be reduced from 17% to 12%. From the taxpayer’s perspective, lowering the tax rate is undoubtedly beneficial. Importantly, the lower tax is to apply already to the settlement for 2022.

It is also worth noting that the regulations still contain favorable solutions introduced at the beginning of the year, i.e. an increase in the tax threshold to PLN 120,000. PLN and the tax-free amount up to 30 thousand. zloty.

 

What about the choice of taxation method?

In connection with the change in the rules of taxation of economic activities, the legislator plans to introduce the possibility of changing the taxation method in relation to 2022!

If the agents using the so-called the flat rate (19%) believe that the tax scale would be more favorable for them, in the settlement for 2022 they will be able to choose the annual settlement according to the tax scale. However, this will not result in the choice of this form of taxation for subsequent tax years, which will have to be done separately.

A similar option to choose the tax scale will be available to agents who chose flat-rate taxation at the beginning of this year. In addition, those taxed with a lump sum will have the option to resign from lump sum taxation for the remainder of the year until August 22, 2022 – then at the end of the year it will be necessary to submit two annual tax returns.

 

How will agents settle PIT for 2022?

Polish Deal 2.0 is to introduce regulations that are more favorable than those currently in force. As a result, at the end of the year, the amount of the fiscal burden should be lower than originally assumed, and the planning related to the selection of the best method of taxation for 2022 may in many cases be out of date.

In the annual settlement, agents will have to verify whether it will be better for them to use the tax scale settlement and, possibly, choose this form of taxation for 2022. The Ministry informs that taxpayers will be provided with advanced calculators with which they will be able to check which method billing will be better for them.

We do not know the final shape of the regulations that will apply to the settlement of agents for 2022, but the calculations made at the end of last year have become obsolete and will not be useful.

The draft amendment was approved by the Council of Ministers and is currently at the stage of work in the Seym. The amended regulations are to enter into force on July 1, 2022.

The training is organized by the Compliance Institute, among others for employees of the Ministry of Finance (MF) and the National Tax Administration (KAS).

Once again Sylwia Kulczycka and Dominik Niewadzi will be trainers of the ATCO (Approved Tax Compliance Officer) course organized by the Institute of Compliance. During the class they will present a holistic approach to tax compliance management with focus on a practical introduction to compliance management and implementation of the Tax Compliance Management System (TCMS).

The concept of this workshop fully takes into account the requirements of global and national standards for tax compliance management, as well as the practice of using these solutions in Polish conditions. The training is dedicated for among others, employees of the Ministry of Finance (Ministry of Finance) and the National Revenue Administration (KAS) who take that class in preparation for the implementation of the Cooperation Program.

ATCO course consists of three intensive days of training under the watchful eye of the best industry experts

 

More information: instytutcompliance.pl/certyfikaty/atco