On the 1st of January 2019, a new Polish tax legislation entered into force. It reduced the corporate income tax rate to 9% for taxpayers having revenues equal or less than EUR 1,200,000. The new legislation raises concerns which will be examined in more detail below.
False claims that the new corporate tax rate is the lowest in the EU
Many legal and accounting companies started announcing that the Polish corporate tax rate of 9% is the lowest in the EU. However, they miss to point out that the 9% rate is a conditional tax rate and not a standard tax rate. A conditional tax rate is a rate that applies only if certain specific conditions are met. Low conditional tax rates have been known in the EU for a long time. For example, in Lithuania, the standard corporate income tax rate is 15%, but a conditional tax rate of 5% applies to entities with fewer than ten employees and less than EUR 300,000 in gross annual revenues. In certain circumstances, even a rate of 0% can apply to the first year of corporate operations in Lithuania.
Incentivizing companies to reduce their revenues
Principally, businesses aim to increase their revenues to the maximum possible extent. However, the new 9% conditional tax rate incentivizes companies to keep their revenues no higher than EUR 1,200,000 per year. Thus, although Poland adopted the low tax rate with the aim to stimulate its economy, it may have the opposite effect.
Discriminating companies on the basis of revenues and not profits
The new legislation treats companies having equal profits differently. For example, a company having EUR 5,000,000 revenues and EUR 1,000,000 profit will not be entitled to use the low tax rate of 9%, whereas a company having EUR 1,150,000 revenues and EUR 150,000 expenses will be entitled to benefit from the low tax rate. This puts companies having high revenues and low profits in a disadvantageous position compared to companies with high profits and low revenues. This, in turn, may have a negative impact on the economic system.
Possibly temporary nature of the rate of 9%
The legal clauses regarding the corporate tax rate of 9% are included in a regular income tax law and can be changed through a regular legislative procedure. Article 217 of the Polish constitution states: “The imposition of taxes, as well as other public imposts, the specification of those subject to the tax and the rates of taxation, as well as the principles for granting tax reliefs and remissions, along with categories of taxpayers exempt from taxation, shall be by means of statute.” This means that a regular statute can change the tax rate. It should be noted that some countries ensure the stability of their tax rates by adding a clause in their constitutions ensuring that the tax rates may be changed only through special procedures.
Taking into account the above, the current low tax rate of 9% may be changed very quickly and companies that invest significant amounts in Poland may be forced to leave the country and incur significant losses as a result of their relocation.
The rate of 9% does not apply to all types of income
The reduced rate does not apply to: (i) dividends; (ii) capital gains; (iii) the value of properties received as a consequence of the liquidation of a legal entity or a limited joint stock person; (iv) other revenues from participation in profits of legal persons and limited joint stock companies; (v) revenues from the sale of receivables previously acquired by the taxpayer; (vi) revenues from proprietary rights, such as trademarks, know-how, revenue from securities, licenses, and derivative financial instruments; (vii) revenues from the sales of shares in companies; and (viii) revenues from the sale of receivables which were previously acquired by the taxpayer. The regular rate of 19% applies to the aforementioned transactions.
Poland attempts to attract foreign investors by decreasing its corporate tax rate to 9% in certain cases. However, the laws regarding the reduced corporate tax rate has serious drawbacks and investors need to be cautious before establishing companies in Poland. The country with the lowest unconditional income tax rate (both corporate and personal) in the EU remains Bulgaria. Its corporate and personal income tax rates amount to 10% and apply to all types of income (except for income of sole traders). Bulgaria treats companies having high and low revenues equally as it taxes profits and not revenues. Furthermore, the Bulgarian personal and corporate income rates of 10% have not been changed for more than ten years. This clearly indicates that the Bulgarian businesses can expect the tax rate to remain unchanged in the near future.
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