CIT on Transferred Income
March 19, 2024
Starting from January 1, 2022 (and in its current form from January 1, 2023), a new regulation aimed at protecting the tax base in the corporate income tax system operates in the Polish legal system. This concerns the provisions of the CIT Act introducing a separate source of income in the form of so-called transferred income, which is taxed at a flat income tax rate of 19%.
What is transferred income?
Transferred income is understood as specific costs incurred by Polish taxpayers for the benefit of a foreign-related entity, provided that the related entity receiving the payment:
- is taxed on the received remuneration at a rate of 14.25% or lower,
- derives at least 50% of total revenues from the taxpayer or other related companies covered by this regulation,
- transfers, in any form, at least 10% of revenues to another entity:
- by including these expenses as deductible costs for income tax purposes, or deducting these expenses or revenues from income, tax base, or tax in any form, or
- if these revenues contribute to profits earmarked for distribution, regardless of the timing, in the form of dividends or other income from participation in the profits of legal entities.
Additionally, the total of specified costs incurred by the taxpayer in the tax year for the benefit of related entities must constitute at least 3% of the sum of the taxpayer’s revenue-generating costs for that year.
ATTENTION! All the above conditions must be met collectively.
Furthermore, for costs to meet the definition of transferred income, they must also fall within the categories of expenses listed in the regulations. For example: advisory services, costs of debt financing, or fees for the transfer of functions, assets, and risks.
Exceptions from the provisions of the CIT
An exclusion has also been provided, according to which taxation of transferred income will not occur if the costs were incurred for the benefit of a related entity subject to taxation on its entire income in a European Union member state or in a state belonging to the European Economic Area and conducting substantial genuine economic activity in that state.
The principles of taxing transferred income
The above entails the necessity for entrepreneurs to conduct analyses of transactions involving related entities to determine whether the conditions for taxing transferred income are met, including, among others:
- whether the incurred costs fall within the categories of expenses listed in the regulations on transferred income;
- whether the value of these costs incurred in a given tax year exceeds the threshold specified in the law;
- what is the actual income tax paid by the related entity on the received remuneration;
- whether these costs have not been further distributed by the entity for which they were incurred, and whether they constitute at least 50% of the revenues obtained by that entity.
Transferred income under CIT – what are deadlines?
Taxpayers subject to the tax on transferred income are required to calculate the tax on transferred income for the tax year in the annual CIT-8 return filed for the year 2023. The deadline for tax payment is the deadline for submitting the annual return, which is March 31, 2024.
To declare the tax on transferred income, the CIT/PD attachment must be included in the annual return.
The tax on transferred income is also due in situations where the entity incurred a tax loss in the given tax year. The legislator imposes on Polish taxpayers the obligation to prove that a given expense does not meet the definition of transferred income by obtaining information from the related entity regarding the taxation rules of its revenues/incomes, cash flows, or revenue structure. In economic practice, obtaining such information may pose a significant challenge for Polish entrepreneurs and a great difficulty in exercising due diligence.
Tags CIT, transferred income
