Minimum income tax only from 2023 (and under new rules)

Minimum income tax only from 2023 (and under new rules)

The possible obligation to pay the minimum tax in 2022 will be abolished. In turn, starting next year, its construction will be modified quite significantly. These are the most important changes envisaged by the draft amendment to the Polish Order in the area of CIT. The level of profitability ratio from operations, below which companies will be subject to the tax, is to be raised. There will also be an alternative, simplified method of determining the tax base. 

The Polish Deal introduced provisions for a minimum income tax (which is a de facto income tax). It has been portrayed in media as a kind of “tax on large corporations,” but in reality it covers a significant number of taxpayers who do not fall into this category – the list of exclusions is very narrow, and the 1% profitability threshold (income-to-revenue ratio) adopted for its purposes means that the tax can affect many businesses, particularly those in low-margin industries, such as software trading. However, the government is announcing changes in this area.

What from the next year?

The recently published draft amendment to the Polish CIT Order brings two important changes in the context of the minimum tax. First – an exemption from the obligation to pay the tax in 2022. Second – a modification of its construction starting next year.

In principle, the changes in the tax’s shape seem to be aimed at mitigating its severity. This is because the catalog of income and expenses not included in determining the level of profitability (or loss) has been expanded to include:

  • lease payments incurred,
  • revenues and costs directly related to revenues from the sale of receivables to a factoring service provider (factor),
  • an increase in the cost of salaries and wages, social welfare contributions and electricity compared to the previous year,
  • revenues and costs corresponding to the amount of excise tax.
Secondly, the tax base will change. The changes do not refer to what is to be included in it, but to what extent. According to the draft, the modification of the tax base includes:

  • a reduction in operating income to 2% (instead of the current 4%) – this is the most important change,
  • changes to the excess of debt financing costs incurred for the benefit of related parties over the amount calculated according to the formula (resulting in an increase in the level of costs included in the base),
  • changes to the excess of costs of intangible services, royalties, and guarantee and surety services incurred for the benefit of related parties or entities registered in tax havens (resulting in an increase in the level of such costs included in the tax base).

Proponowane od 2023 r. zmiany mają w pewnym stopniu charakter łagodzący zasady stosowania podatku minimalnego, poprzez poszerzenie katalogu podmiotów wyłączonych z jego stosowania. Z drugiej strony podwyższenie progu rentowności z 1 do 2% sprawi, że podatkiem będzie objętych potencjalnie zdecydowanie więcej przedsiębiorców.

On the other hand, the level of profitability ratio from operations below which companies will be subject to the minimum tax is to be raised – from 1 to 2%. This change is not beneficial at all and increases the subjective scope of taxation.

The draft’s authors also propose an alternative, simplified way of determining the tax base, according to which only 4% of operating income will be taken into account (while cost elements will not be taken into account).

Who will benefit from the new exemptions?

The announced changes also do not bypass the scope of exemptions from the minimum tax, which will be expanded to include:

  • entities whose majority of revenue is derived from the medical activities, 
  • small taxpayers,
  • municipal companies,
  • entities that have achieved a profitability level of at least 2% over the last three fiscal years,
  • entities that declared bankruptcy or are in the process of liquidation.

In addition, it should be pointed out that the level of profitability for corporate groups to be changed, resulting in non-coverage of the minimum tax – from 1 to 2%.

In the view of the current economic situation, the suspension of the minimum tax regulations in 2022 should undoubtedly be viewed as positive. Adding tax obligations and burdens to entrepreneurs would be far from prudent in the current situation. The changes proposed from 2023 onward are to some extent mitigating in terms of the tax’s application, including by expanding the catalog of entities excluded from its application. On the other hand, the increase in the break-even point from 1 to 2% will potentially make far more entrepreneurs subject to the tax. However, it should be borne in mind that there is still a long legislative road ahead of the draft, so the final shape of the regulations may be subject to change.