Settling shifted profits for 2022

What makes it challenging is the fact that the provisions are vague at best and have already been changed.

At the beginning of the year, a legislative amendment entered into force, modifying the conditions for recognising costs as shifted profits.

However, the new rules apply only to income earned after 1 January 2023, so the shifted profits tax for 2022 should be settled as per the original regulations.

Catalogue of Costs

The CIT Act provides for the following catalogue of costs that may constitute shifted profits: 

• intangible services, including advisory services, market research, advertising services, management, control, data processing, insurance, guarantees, sureties, and services of a similar nature;
• so-called royalties relating to all kinds of fees and charges for the use of, or the right to use, intellectual property rights (e.g. licences, know-how, and trademarks);
• transfer of debtor insolvency risk resulting from loans other than those granted by banks and credit unions;
• debt financing related to the acquisition and use of funds;
• so-called exit fee (fees and remuneration for the transfer of functions, assets, or risks).

Tax Settlement Rules for 2022

The types of costs listed above are deemed to be shifted profits if the following conditions are met: 

1. the sum of such costs incurred in a tax year for the benefit of related and unrelated entities constitutes at least 3% of the sum of tax deductible costs incurred by the taxpayer in that year;
2. the income tax actually paid by the related entity for the year in which it received the receivables was lower than 14.25%;
3. the receivables accounted for at least 50% of the related entity’s revenues;
4. the related entity included the receivables among tax deductible costs (or deducted them from income, tax base, or tax) or paid the same in the form of dividends for the year in which it received the receivables.

Shifted profits are taxed at a 19% rate, with the tax base being the sum of costs listed in the CIT Act catalogue, to the extent that such costs meet all the above conditions (jointly).

Exemption for Real Economic Activity

The new regulations aim to eliminate artificial structures that make it possible to shift profits to jurisdictions with very low effective tax rates.

For this reason, the rules on shifted profits do not apply if the costs are incurred for the benefit of related entities whose total income is taxed in an EU or EEA member state, provided that such entities carry on substantial real economic activity in that country. 

The Amendment Act will Change Settlement Rules

The amendment modified the conditions for recognising costs incurred after 1 January 2023 as shifted profits.

In particular, for a shifted profits tax liability to arise, the related entity will now have to transfer at least 10% of receivables to another entity, recording the same as tax deductible costs or as dividends. In addition, the foreign entity’s total revenue from catalogue-listed receivables from all related Polish companies will have to account for at least 50% of its total revenues.

Crucially, the amendment introduced a provision according to which a Polish company that included the aforementioned receivables among tax deductible costs has to demonstrate that they do not constitute shifted profits.

Another example of tightening the regulations is the introduction of special rules for payments made to related entities based in so-called tax havens. In the case of such payments, it will now be presumed that the costs incurred constitute shifted profits. 

How to Secure the First Settlement?

Even though the burden of proof does not apply to the CIT return for 2022, taxpayers would nevertheless be well advised to carefully verify whether they are obliged to pay shifted profits tax.

The documentation prepared in the process of such verification can then be used in the event of a tax audit. Given the unclear regulations and numerous interpretative doubts, exercising due diligence is crucial for mitigating the risk of a dispute with the tax authorities.