www.pwc.pl Pocket Book

Poland 2011 Overview

Poland PwC in Poland has over 40 partners Poland is situated in Central Europe. and 1,500 staff located in Warsaw, It borders Germany, Ukraine, Russia, Gdańsk, Poznań, Kraków, Wrocław Belarus, the Czech Republic, Slovakia and Katowice. It provides audit, fi nancial and Lithuania. Through the Baltic Sea, reporting and accounting advisory, it has easy access to Scandinavia. Poland consulting, forensic services, valuation is a member of many international and strategy services, HR consulting, organizations, including the European legal services, mergers and acquisitions Union (EU), North Atlantic Treaty services, regulatory services, tax Organization (NATO), World management and accounting services, Organization (WTO) and Organisation indirect , tax litigation, transfer for Economic Co-operation pricing services and international tax and Development (OECD). services.

Poland is a republic. The government of the Republic of Poland is based on the separation of and balance between legislative, executive and judicial powers. The legislative power is vested in the Seym and the Senate, executive power is vested in the President of the Republic of Poland and the Council of Ministers and judicial power is vested in the courts and tribunals. Poland’s capital is Warsaw and the offi cial currency is the Zloty (PLN). The Polish public administrative system is divided into central and regional (self-government) administration. According to a cardinal principle in the Constitution, citizens elect local authorities. The sources of universal binding law in the Republic of Poland are the Constitution, statutes, ratifi ed international agreements and regulations.

The courts and tribunals constitute a separate power and are independent of the other branches of power. Judges are appointed for an indefi nite period by the President of the Republic and are not removable. Court proceedings have at least two stages. Tax cases are considered by the Voivodeship Administrative Court and the Supreme Administrative Court, as a court of second resort.

2 Tax Pocket Book 2011 Corporate taxes Companies in Poland are subject to the following two main taxes: Corporate (CIT) and Value added tax (VAT). CIT

Signifi cant developments

Important amendments to the CIT revenues; however, in case regulations, which came into force of resignation, fi nancial means as at 1 January 2011, include do not constitute taxable revenues taxation of the following: only in the respective part); • Transactions with limited d. New rules on the calculation partnerships; in particular, the new of tax deductible costs of assets legislation introduced the following: contributed and subsequently a. New rules on calculation of the value sold. of the contributed assets • Redemption of shares, i.e. under (depending on whether the assets the amended regulation, sale subject to contribution were of shares (stocks) for the purpose previously depreciated); of redemption are no longer subject b. New rules on calculation of costs to taxation as a dividend income incurred with respect to sales but general taxation rules apply; of the contribution (depending • Interest, royalties and dividend on whether the assets subject payments by introducing additional to contribution were entered requirements to benefi t into the register); from withholding tax (WHT) exemption; c. New rules on the calculation • Share for share transactions; of partner’s income in case according to the new regulation, of liquidation of and resignation share for share exchange will be tax from the limited partnership neutral provided that all companies (i.e. received assets and fi nancial involved in the transactions meet means do not constitute taxable EU/European Economic Area (EEA)

2011 Tax Pocket Book 3 residence tests (before 1 January, participation has no limits. Both types the test concerned only acquiring are subject to the general CIT rules, and transferring company); including the 19% . The same • Valuation of assets for tax purposes, rate applies to branches of foreign in case of in-kind contribution companies (see the „Branch income” by an enterprise/organised part section for more information). of business, as well as costs calculation, in case of sale of share acquired in the process mentioned above; Corporate residence namely, valuation of assets should be based on the contributor’s tax A company is considered to be a resident book value; if its registered offi ce or management • EU/EEA seated investment and pension is located in Poland. Polish residents funds by ending the tax discriminatory are subject to tax on their worldwide treatment, i.e. since 1 January 2011, income. Non-residents are taxed only investment and pension funds on their Polish-sourced income. seated in EU/EEA may benefi t from exemption on income derived The tax authorities’ right to tax from Poland if certain conditions a non-resident is further limited are met. if the non-resident’s home country concludes a double with Poland. In this case, the Polish tax authorities are entitled to tax only the portion General rules of the non-resident’s income that is derived through a (PE) CIT is the only tax levied on corporate located in Poland. The exceptions relate income. The CIT rate is 19%. CIT to specifi c types of income such as royalties, applies to all legal entities (including, interest, dividends and capital gains that but not limited to corporations), are taxed according to special treaty rules. which are companies under organisation and „organisational entities without Certain entities are explicitly excluded corporate status” (with the exception from taxation under CIT Law of partnerships) that run business (e.g. Treasury and National Bank activities. Partnerships are regarded of Poland). As at 1 January 2011, as „transparent entities”, which mean EU-based investment funds shall that partnerships are not taxpayers. also be exempted on the grounds Instead, the income generated of such provision (before this date, by partnerships is allocated only Polish investment funds enjoyed to and taxed in the hands of the partners the exemption). (starting from 1 January 2011, taxation of such entities will be less favourable as new regulations Branch income on contributions in-kind have been introduced). Foreign businesses are allowed, under certain conditions, to establish According to these rules, CIT also applies their branch offi ces (exclusively to companies with foreign participation. within the scope of their “foreign” Such companies may be set up as either business activity) and representative limited liability companies or joint-stock offi ces (exclusively with regard companies. The percentage of foreign to promotion and advertising) in Poland.

4 Tax Pocket Book 2011 A branch offi ce almost always has PE cost. Other write-offs in the value status in Poland. Once a branch of inventory are not recognised for tax is established, the foreign company purposes until the inventory in question pays CIT at the standard rate of 19%, is sold. When inventory is lost or sold, based on the income attributable a tax deduction is allowed for the costs to the operations of the Polish branch. incurred when the inventory For this purpose, as well as for accounting was purchased. The methods acceptable purposes, a branch is obliged to maintain for inventory valuation for tax accounting books that include (and accounting) purposes are standard all the data necessary to establish cost, average (weighted) cost, fi rst-in the taxable base. In this respect, general fi rst-out (FIFO), and last-in fi rst-out income determination rules relevant (LIFO). to Polish companies apply to branches as well. If a branch can demonstrate, based on a double tax treaty, that its business presence in Poland Capital gains does not amount to a PE, its profi ts are not subject to Polish CIT. There is no separate . Capital gains or losses are aggregated with an entity’s other Income determination or losses. Capital losses are tax-deductible. Tax base The tax base is the overall income, which is the difference between aggregated taxable revenue Domestic dividends and aggregated tax-deductible costs. A tax-deductible cost is defi ned Dividends received from Polish residents as a “cost incurred in order to generate (domestic dividends) are excluded revenue” as well as a cost incurred from overall income. Instead, such to “protect a source of revenue.” dividends are subject to a 19% tax, which is withheld and remitted to the tax Subject to numerous exemptions, the tax offi ce by the payer of the dividends. base includes all sources of income. Consequently, there is no special treatment However, based on the participation for income such as capital gains or interest. exemption, which has been effective from 1 January 2007, domestic In practice, taxable income is calculated dividends are no longer subject to the 19% by adjusting the profi t reported tax, provided that the Polish benefi ciary for accounting purposes. The relevant has held at least a 10% share in the paying adjustments are necessary due company for at least two years. to differences between the tax and accounting treatment of numerous Starting from 1 January 2011, revenue revenue and cost items. As a result, from the voluntary redemption the taxable base is usually higher of shares shall no longer be treated than the accounting profi t. for tax purposes as a dividend, and consequently, it will not enjoy Inventory the participation exemption Generally, the value of inventory shortages (i.e. the method of redemption, voluntary may be included as a tax-deductible or automatic, will matter).

2011 Tax Pocket Book 5 Starting from 1 January 2011, a new Foreign income reporting obligation will be imposed, i.e. apart from the certifi cate Resident corporations are taxed of residence in order for a payer on their worldwide income. However, not to have to collect the WHT, an applicable double tax treaty between it is necessary to obtain a certifi cate Poland and the relevant foreign state stating that the payment benefi ciary holding, shall exempt the foreign is not exempted from taxation income from taxation in Poland. in its country of residence. In all other cases (in particular, when income is not covered by any treaty), Poland uses the ordinary credit method to avoid . Therefore, a Polish resident is liable for income tax Transactions between related parties imposed on his worldwide income, should be conducted in accordance but the tax is proportionately reduced with the arm’s length principle. The tax by income tax paid abroad. authorities may increase the taxable base if the pricing used between related parties differs from that which would have been used between unrelated Dividends from abroad parties in a similar business transaction and the difference results in income Generally, dividends collected by a Polish being shifted from a Polish taxpayer resident, if paid to another entity (whether a Polish by a non-resident, are treated as regular resident or not). Similar rules apply income and taxed at the standard CIT to transactions between Polish residents rate. Corporate tax on such dividends and residents of countries. paid in other countries may be credited These transactions may be subject proportionately against Polish CIT. to transfer pricing principles even CIT law also provides for an „underlying if the parties are not related. CIT law ”, which is related to CIT paid also contains detailed requirements by a foreign subsidiary under a foreign for transfer pricing documentation. tax jurisdiction, subject to a number Taxpayers can apply for an advance of conditions. Specifi cally, a double tax pricing arrangement (APA) to reduce treaty between Poland and the subsidiary’s their transfer pricing risk. An APA country of residence should be in place decision is issued by the minister and the Polish recipient of the dividend of Finance in response to a taxpayer’s should hold at least 75% of the shares application. APA will oblige a taxpayer in the foreign subsidiary. to follow a specifi ed methodology when calculating the transfer prices More favourable rules apply to dividends applicable to transactions between received from subsidiaries residing related entities. In exchange, the tax in EU countries, Iceland, Liechtenstein, authorities may not challenge Norway or Switzerland. Such dividends the agreed upon methodology. are CIT-exempt (i.e. participation exemption) provided that the Polish recipient has held at least 10% of the shares in the paying company for at least two years (with respect to Swiss subsidiaries, the minimum shareholding is 25%).

6 Tax Pocket Book 2011 Apart from the below, Polish CIT law Deductions includes provisions for accelerated depreciation (within specifi ed Tax depreciation limits) for assets used in deteriorated Depreciation is treated as a tax-deductible conditions and for second-hand cost. Generally, depreciation allowances assets. are calculated based on the straight-line method and the maximum rates provided Tax losses in the CIT law. If this is the case, a taxpayer A tax loss reported in a tax year deducts equal annual write-offs, calculated may be carried forward over the next by multiplying the maximum rate fi ve consecutive tax years; however, of depreciation by the asset’s initial value in any particular tax year, the taxpayer until the total value of write-offs equals may not deduct more than 50% the initial value (typically, the initial of the loss incurred in the year value equals the purchase price). in which it was reported. For example, a taxpayer that incurred PLN 100 For certain categories of machinery annual loss in 2010 may carry it forward and vehicles (excluding passenger cars), to 2011-2015. However, the maximum the reducing-balance depreciation loss deducted in any of these years method may be applied. Under this may not exceed PLN 50, assuming method, the tax depreciation may that no other losses are available be accelerated during the initial period for deduction). of the asset’s use by multiplying the statutory maximum rate by two. Payments to foreign affi liates The rate is then applied to the net value Deductions may be claimed of the fi xed assets (i.e. initial value for royalties, management services reduced by earlier annual write-offs). and interest charges paid to foreign The reducing-balance method is applied affi liates. until the annual depreciation write-off equals the hypothetical write-off Note: However, interest expenses that would be made under the straight-line are subject to thin capitalisation method. From this point, the depreciation restrictions (see the following section). allowance is taken based on the straight- Also, transactions with related line method for its remaining useful companies should be made according life. to market conditions. If a company shifts income to another entity (especially The main categories of assets a foreign entity), the tax authorities and the related statutory annual tax may adjust the taxable base upward depreciation rate are the following: (see Transfer Pricing section). Various buildings and constructions 1.5 – 10 % Machinery and equipment (general) 7 – 20 % Machinery for road building and construction 18 – 20 % Machinery for the paper industry 14 % Offi ce equipment 14 % Computers 30 %

2011 Tax Pocket Book 7 Thin capitalisation calculated on the excess of the car value A portion of the interest paid by a Polish over EUR 20,000 and company on a loan granted by a qualifi ed 7. A portion of the depreciation write-offs lender (a qualifi ed shareholder made on a passenger car – the portion or a qualifi ed sister company) will not calculated on the excess of the car be considered a tax-deductible cost value over EUR 20,000. Furthermore, if the value of the Polish company’s expenses incurred in connection overall debt to shareholders and other with the acquisition of fi xed and intangible affi liates, mentioned in the , assets (e.g. licenses, trademarks exceeds three times the value of the Polish and know-how) are not directly deductible. company’s share capital (a 3:1 debt:equity Instead, the acquired assets are subject ratio). A qualifi ed shareholder is defi ned to depreciation. If such assets are sold, as a holder of 25% or more of the voting a business is entitled to deduct the net power of a Polish company. A qualifi ed value, that is, the cost of acquisition sister company is one in which reduced by the overall value of the tax a shareholder holds at least 25% depreciation allowances made. Similar of the value of the shares. treatment relates to the acquisition of shares or land, except that these Taxes particular assets are not depreciable. Income tax and, in most cases, VAT Therefore, the full cost of an acquisition is not deductible. However, VAT of shares or land may be deducted is deductible for CIT purposes when such assets are sold. if it cannot be offset against the company’s output VAT. Other taxes, if paid in the course of business activities, Group taxation are generally deductible in full. The CIT law includes provisions on group Business expenses taxation (i.e. in theory, a group Generally, a tax-deductible cost is defi ned of companies) if it meets certain as a cost incurred to generate taxable conditions and can be treated as a single revenue or to „protect a source taxpayer. However, the conditions of income”. The last element are demanding and, as such, only a limited of the defi nition of a tax-deductible cost number of taxpayers are of this type. was added a few years ago to reduce uncertainties regardingthe deductibility of business expenses that do not directly generate revenue. Tax incentives

CIT law provides a list of items that are Polish legislation provides investment not deductible for tax purposes, even incentives related to business activities if the items meet the general conditions carried out in 14 zones defi ned described above. This list contains as Special Economic Zones (SEZs). over 60 items, including the following: A business entity can benefi t from tax 1. Written-off, lapsed accounts receivable; incentives, provided that the entity 2. Entertainment costs; obtains a permit from the Ministry 3. Accrued but unpaid interest; of Economy to conduct business 4. Accounting and comparable provisions; activities in SEZs and meets other legal 5. Tax penalties and penalty interest; requirements. 6. A portion of the insurance premium In general, in many Polish SEZs, the amount paid on a passenger car the portion of (i.e. exemption

8 Tax Pocket Book 2011 from income tax) for large enterprises formalities. Few treaties treat payments equals 50% of the qualifying expenditures for technical services as royalties (investment expenditures or two-year (e.g. India). labour costs). In other words, the CIT exemption allows the investor to avoid Special treatment: paying tax up to the limit calculated EU directives on the basis of the qualifying expenditures. The CIT law provisions and certain If the allowable limit of the tax EU directives provide special treatment exemption exceeds the annual tax for dividends, royalties and interest paid due, the excess may be utilised to numerous European countries. in the following tax years. Furthermore, the limit of the may be After joining EU, Poland was granted increased 20% for small enterprises a transitional period to phase out WHT and 10% for medium-sized enterprises. on interest and royalty payments made by Polish corporate residents Consequently, in the case of making to associated EU or EEA companies. signifi cant investments, it is possible Starting from 1 July 2009, the WHT for businesses that run activities in SEZs rate on these payments is 5%. Starting to enjoy exemption from income tax from 1 July 2013, a full exemption for a considerable period. will apply. In general, the transitional rules, as well as the full exemption after 1 July 2013, only apply to interest and royalty payments between WHT associated companies (parent-subsidiary relationships or sister-sister relationships) Domestic provisions: in which capital involvements General rules are signifi cant. The general domestic WHT rate for dividends is 19%. Dividends Dividends paid to corporate residents also encompass income from liquidation of EU and EEA countries are exempt of a company and from the redemption from WHT, subject to certain conditions of shares, with the exception of gain specifi ed in the CIT law. The basic from voluntary redemption, requirement is that the foreign which is treated as a capital gain subject benefi ciary holds at least 10% to 19% CIT rate in Poland, if the gain of the shares in the Polish company is realized by a taxpayer from a non-treaty for a minimum of two years. This condition country or the treaty includes a so-called is also fulfi lled if the required period real estate clause. The general WHT passes after the day of payment rate is 20% and 10% on interest of the dividend. If the period and royalties paid to non-residents, is interrupted afterwards, the company respectively, regarding services of sea is obliged to pay the tax at a standard or air transportation. These WHT rates rate with interest. may be reduced by double tax treaties. Also, a 20% WHT is charged on payments Note: From 1 January 2011, several made to non-residents for intangible additional conditions, which have services, such as consulting. However, to be met to apply the reduced if a payment is made to a country rate/exemption from WHT based that has a double tax treaty with Poland, on the directive, were introduced this tax may be avoided with the completion (e.g. the company receiving the dividend/ of certain minimal administrative interest/royalty cannot be exempt

2011 Tax Pocket Book 9 from tax on all its income, regardless Treaty rates of its source; the recipient has to have If EU special rules do not apply, the domestic ownership title to the shares in the Polish WHT rates can be decreased by a double company). tax treaty concluded between Poland and the payment recipient’s country Additionally, the amendments state of residence, if certain administrative that to enjoy the exemption from WHT conditions are met (i.e. the payer obtains on dividends and decreased WHT a valid certifi cate of fi scal residence rate on interest and royalties, based of the payment recipient/benefi cial owner). on the directives’ provisions, the relevant double tax treaty should allow exchange The following table lists the WHT rates of tax information between the tax as provided in the treaties concluded authorities of Poland and the country by Poland. of the payment recipient. Currently, Poland’s binding treaties with Switzerland Note: The following table shows only and Liechtenstein do not encompass rates that result from general treaty such provisions; thus, the domestic provisions; the treaties themselves application of the directive does not apply occasionally include special provisions to payments made to entities (applicable in special circumstances from these countries. or to special entities) that provide lower WHT rates than the ones listed.

Furthermore, if a treaty rate is higher than a domestic one, the latter rate should apply.

Recipient Dividends Interest Royalties % % % Non-treaty 19 20 20 Treaty: Albania 10/5 10 5 Armenia 10 5 10 Australia 15 10 10 Azerbaijan 10 10 10 Austria 15/5 5/0 5 Bangladesh 15/10 10 10 Belarus 15/10 10 0 Belgium 15/5 5/0 5 Bosnia and Herzegovina 15/5 10 10 (Yugoslavian Treaty)

10 Tax Pocket Book 2011 Recipient Dividends Interest Royalties % % % Bulgaria 10 10 5 Canada 15 15 10/0 Chile 15/5 15/5 10/5 China, P.R. 10 10 10/7 Croatia 15/5 10 10 Cyprus 10 10 5 Czech Republic 10 10 5 Denmark 15/5/0 5/0 5 Egypt 12 12 12 Estonia 15/5 10 10 Finland 15/5 5/0 5 France 15/5 0 10/0 Georgia 10 8 8 Germany 15/5 5/0 5 Greece 19 10 10 Hungary 10 10 10 Iceland 15/5 10 10 India 15 15 22.5 Indonesia 15/10 10 15 Iran 71010 Ireland, Republic of 15/0 10/0 10/0 Israel 10/5 5 10/5 Italy 10 10 10 Japan 10 10 10/0 Jordan 10 10 10 Kazakhstan 15/10 10 10 Korea, Republic of 10/5 10 10

2011 Tax Pocket Book 11 Recipient Dividends Interest Royalties % % % Kyrgyzstan 10 10 10 Kuwait 5/0 5/0 15 Latvia 15/5 10 10 Republic Lebanon 555 Lithuania 15 10 10 Luxembourg 15/5 10/0 10 Macedonia 15/5 10 10 Malaysia 01515 Malta 15 10 10 Mexico 15/5 15/5/0 10 Moldova 15/5 10 10 Morocco 15/7 10 10 Mongolia 10 10 5 Montenegro 15/5 10 10 (Yugoslavian Treaty) Netherlands 15/5 5/0 5 New Zealand 15 10 10 Norway 15/0 5/0 5 Pakistan 19 20/0 20/15 Philippines 15/10 10 15 Portugal 15/10 10 10 Romania 15/5 10 10 Russia 10 10 10 Serbia 15/5 10 10 (Yugoslavian Treaty) Singapore 10/0 10 10 Slovak Republic 10/5 10 5 Slovenia 15/5 10 10

12 Tax Pocket Book 2011 Recipient Dividends Interest Royalties % % % Republic South Africa 15/5 10 10 Spain 15/5 0 10/0 Sri Lanka 15 0 10/0 Sweden 15/5 0 5 Switzerland 15/5 10 10/0 Syria 10 10/0 18 Tajikistan 15/5 10 10 Thailand 19 20/10/0 15/5 Tunisia 10/5 12 12 Turkey 15/10 10 10 Ukraine 15/5 10 10 United Arab Emirates 555 United Kingdom 10/0 5/0 5 United States 15/5 0 10 Uzbekistan 15/5 10 10 Vietnam 15/10 10 15/10 Zimbabwe 15/10 10 10

2011 Tax Pocket Book 13 Tax administration

CIT settlements An annual CIT return should be submitted to the tax offi ce within three months following the end of the tax year. The same deadline applies to the settlement of the annual CIT liability. In fi nancial terms, the fi nal settlement is not signifi cant, since most of the annual liability is paid by CIT advances throughout the tax year.

CIT advances should be paid for each month by the twentieth day of the following month. Starting from 2007, CIT advances do not need to be reported on a monthly basis and, thus, the annual return is the only tax return associated with CIT. Entities that started business activity (except for companies organised as a result of certain transformations) and those whose gross sales revenue (including VAT) in the prior tax year did not exceed EUR 1,200,000 are entitled to opt to make advance settlements on a quarterly basis (instead of on a monthly basis).

14 Tax Pocket Book 2011 VAT

Signifi cant developments

Important amendments to the VAT Free-of-charge disposal/private regulations, which came into force use of goods as at 1 April 2011, include the following: A free-of-charge disposal/private use of goods belonging to the taxpayer’s Mandatory reverse-charge business will, as a rule, constitute mechanism for non- residents a VATable supply in Poland, if input VAT incurred on the acquisition Supply of goods of these goods was wholly or partly deductible. However, the above rule The obligatory reverse-charge mechanism will not be applicable to the disposal applies to a domestic supply of goods of printed advertising materials, performed by a taxpayer who does not samples and gifts of small value. Such have a seat or a fi xed place of business a disposal of goods will still not be treated in Poland, a purchaser who is a taxpayer as a taxable supply of goods. with a seat or a fi xed place of business in Poland, or is a legal entity Free-of-charge services (and is not a taxpayer) with a seat in Poland. A free-of-charge supply of services is treated as a supply of services Supply of services for consideration (thus it is taxable) in the following cases: Under the new VAT regime, when services - When the goods forming part are supplied by a taxpayer who does not of the assets of a taxpayer’s business havea seat or a fi xed place of business are used for purposes other than those in Poland and the place of taxation of the taxpayer’s business (including is Poland, the purchaser has to apply the private use of this taxpayer, the reverse-charge mechanism, his staff and shareholders), if input even when he does not have a seat VAT incurred on such goods or a fi xed place of business in Poland. was wholly or partly deductible; and

2011 Tax Pocket Book 15 - When a taxpayer renders services free of charge for the private use General rules of e.g. the taxpayer himself, his staff and shareholders, as well as all other Polish VAT applies to the following free-of-charge supplies of services activities: for purposes other than those • Supply of goods and services of the taxpayer’s business. within the Polish territory; • of goods outside the EU The new VAT rate for children’s territory; clothing and footwear • Import of goods from countries that do not belong to the EU; From 1 January 2012, the standard • Intra-community acquisition VAT rate (currently 23%) will apply of goods (imports from countries to supplies of children’s clothing belonging to the EU) and and footwear. So far, the reduced VAT • Intra-community supply of goods rate (currently 8%) is applicable ( to countries belonging for these goods. to the EU). The amended VAT Act came into force from 1 January 2011. The new regulations introduced the following VAT rates changes: 1. The new VAT rates, which are The VAT rates are 23% (standard as follows: rate), 8%, 5%, 0% and exemption. • 23% - base rate; The standard 23% VAT rate applies • 8% - on the supply of goods generally to the supply of all goods for the Social Housing and services, except for those covered Programme (no greater 2 by special VAT provisions that provide than 150m ); other rates or treatments. Supplies • 5% - books and journals, covered by a reduced rate of 8% unprocessed food, basic food include, among others, the supply (inter alia: bread, dairy products, of pharmaceutical products cereal products and beverage and passenger transport services drinks - from 7% to 5%). and also the supply of goods for the Social Furthermore, VAT Act provides Housing Programme (no greater preferences for some goods and services, than 150m2). The 5% rate includes which are: books and journals, unprocessed food • 0% tax rate and and basic food. Zero-rated activities • Exemptions. include, among others, the export 2. Other changes limiting the deductibility of goods to countries outside the EU. of input VAT on the purchase or lease VAT-exempt supplies include, among of company vehicles and increase others, certain fi nancial, insurance of some rates. and educational services. 3. The departure of the VAT Act from the statistical classifi cation applied so far in the process of identifying particular services for VAT purposes.

16 Tax Pocket Book 2011 Note: Businesses involved in intra- Basic calculation rules community acquisitions or supply of goods are obliged to submit additional VAT returns with respect In general, VAT due equals the VAT to these particular transactions. on outputs less the VAT on inputs (in other words, input VAT is deducted from output VAT). Input VAT may be deducted from output VAT International services when a business (with VAT-payer status) receives an invoice for goods or services purchased. Input VAT may not be deducted The treatment of international services unless a purchased supply is linked largely depends on the place of supply, to VATable activities. Furthermore, since this determines whether the deductibility of input VAT is restricted those particular services are subject by VAT law with respect to the purchase to Polish VAT. Polish VAT applies only of certain goods and services. In addition, to those services that are supplied subject to numerous conditions, output within Poland. If a Polish entity VAT may be reduced when receivables, provides such services, it should invoice resulting from VATable sales, become the recipient based on general rules uncollectible. (i.e. rules that are equally applicable to purely domestic services). If a Polish business receives services that are supplied in Poland (and such services are rendered VAT refunds by a foreign provider), such Polish business should recognise the “import Polish VAT law allows direct refunds of services”, and as a result, should when input VAT (available for deduction) report output and input VAT of the same exceeds output VAT. A Polish business amount (equal to the value of the services may also be entitled to a VAT refund multiplied by the applicable VAT rate). owed by another country under certain Therefore, in most cases, the import circumstances. If such a country belongs of services is VAT neutral. Finally, to the EU, the procedure is substantially taxpayers should consider circumstances simplifi ed due to EU Directive 2008/9/EC. in which a Polish business renders The same directive provides favourable services outside Poland. In this case, rules for businesses based in other EU as previously mentioned, the services countries that are seeking VAT refunds are not subject to Polish VAT; however, in Poland. This directive was implemented the business in question is entitled in Poland as at 1 January 2010. to deduct input VAT paid in relation to these activities.

The rules determining the location Reporting rules where international services are provided changed on 1 January 2010, following Generally, the VAT reporting period the implementation of EU Directive is one month. VAT returns should 2008/8/EC. Generally, the place be submitted by the twenty-fi fth of supply depends on the recipient of the month following the VAT reporting of services. If the recipient is a business period. From 1 January 2009, all taxpayers entity, the place of supply is determined may opt for a quarterly, instead to be the recipient’s country; of a monthly, reporting period. if the recipient is a private person,

2011 Tax Pocket Book 17 the place of supply is determined to be the service provider’s country. However, these general rules are subject to several exceptions.

Tax administration

VAT settlements Similar to CIT, the VAT-reporting period is a month. VAT returns should be submitted by the twenty-fi fth of the following month. However, starting 1 January 2009, all taxpayers are entitled to opt to fi le VAT returns on a quarterly basis. Taxpayers choosing a quarterly reporting period should submit VAT returns by the twenty-fi fth of the month, following the last month of the quarter being reported. The VAT due should be paid by the same deadline as the one provided for fi ling the monthly (or quarterly) VAT return. Finally, businesses involved in intra- community acquisitions or supplies of goods (cross-border sale transactions within the EU), are obliged to submit additional VAT returns that report these particular transactions.

18 Tax Pocket Book 2011 Other taxes Excise duties

Signifi cant developments

On 1 September 2010, changes in excise Depending on the excise goods came into force and introduced new rules in question, one of the four methods related to areas including the following: of calculating excise tax may be applicable: • Taxation of the illegal consumption • A percentage of the taxable base; of electricity; • An amount per unit; • Changes in the taxation of passenger • A percentage of the maximum retail vehicles; price and • Movement of excise goods under • An amount per unit and a percentage suspension regime Excise Movement of the maximum retail price. and Control System (EMCS); The excise rate for car petrol is PLN 1,565 • Import of excise goods from non-EU per 1,000 litres. Passenger cars are subject countries and sending them forward to the following excise rates: using duty suspension, • A rate of 3.1% for cars with an engine arrangements and cubic capacity not exceeding • Changes in the scope and conditions 2000 cm3; and of certain excise duty exemptions. • rate of 18.6% for cars with an engine cubic capacity exceeding 2000 cm3. Notwithstanding the above information, Polish excise duty law provides for a wide General rules system of excise duty exemptions as well as 0% taxation. Under specifi c Excise duties are levied on the production, circumstances, such preferential sale, import and intra-community treatment may apply to certain goods acquisition of „excise goods,” which are that are otherwise taxed based listed in the excise duty law and include, on the general rules. This circumstance (among others) alcohol, cigarettes, concerns, for example, specifi c energy energy products (petrol, oils, gas etc.), products used for purposes other passenger cars and electricity. than fuel or for heating.

2011 Tax Pocket Book 19 Capital tax

Property tax rates are fi xed A share capital increase is subject by municipalities within limits set to a 0.5% capital tax, payable by a company in the Law on Local Taxes and Fees. that receives a capital contribution. In 2011, the land used for business This tax applies equally to limited-liability purposes is subject to a rate limit companies as well as to joint-stock of PLN 0,80 per square metre. Buildings companies. A merger, division, used for business purposes are subject or the transformation of one company to a rate limit of PLN 21,05 per square into another company is no longer metre. subject to capital tax, even if the transaction results in a share capital increase for any party. A similar exemption applies to a capital increase resulting from an in-kind contribution, including a whole business or its branch.

20 Tax Pocket Book 2011 Taxes on individuals

Signifi cant developments

Important amendments to personal with accommodation benefi ts income tax (PIT) regulations, provided by employers to employees implemented in 2011, include for all forms of such accommodation; the following: • Modifi cation of certain rules concerning joint tax reconciliation • Implementation of specifi c regulations with a spouse and a joint tax concerning the taxation of income reconciliation with a child; received from holding shares • Changes related to certain rules in a non-legal entity (partnership), for determining income from business in particular, among others, activity and the contribution of assets to a non-legal • Application of tax exemption entity, evaluation and depreciation for income from share incentive of assets contributed to a non-legal (or similar) programmes, regardless entity, determining the revenue of the method of purchase and costs from the disposal of assets or acquisition of the shares, contributed to such an entity, and also to the shares of companies personal tax consequences with their seats in other EU or EEA of the liquidation of a non-legal entity member states. or the resignation of a shareholder of such an entity; • Modifi cation of the rules concerning certain tax relief and tax exemptions Territoriality and residence (for example, the amended act modifi es the documentation Defi nition of a resident requirements with respect A resident is a person who: to the deduction of internet expenses 1. Has a centre of personal or business and rehabilitation expenses, interests (a life interest centre) and modifi es certain tax exemptions. in the territory of Poland or It extends, amongst others, 2. Spends more than 183 days in a fi scal the tax exemption connected year in the Polish territory.

2011 Tax Pocket Book 21 Taxations of residents awards and bonuses, compensation and non-residents for unused holiday or vacation time, Polish tax residents pay Polish PIT all other monetary amounts on their worldwide income. Non-residents and benefi ts in kind, as well are subject to Polish tax on their Polish- as all other free services sourced income only. In many cases, from the employer. non-residents can benefi t from a 20% fl at tax rate calculated on their revenues Special rules for non-residents (i.e. with no deduction of costs). Specifi ed types of income, if earned This fl at tax applies to various sources by non-residents, are subject to special of income, including management fees treatment. The specifi ed types (but not to employment contracts). of income are taxed at a fl at rate The above general rules, resulting of 20% calculated on revenue (cost from the Polish domestic legislation, deductions are not allowed), unless may be modifi ed by the applicable a double tax treaty between Poland double tax treaties. and the individual’s country of residence provides otherwise. These types of earnings include the following: Gross income 1. Revenue from copyrights and other intellectual property such as trademarks, Overall income patents and designs including revenue PIT is levied on an individual’s overall from the sale of the rights in question. income. The taxable base is calculated 2. Income from the transfer of technology as the sum of income generated and know-how. from all taxable sources, subject 3. Remuneration for leasing industrial, to a number of exceptions (some commercial or scientifi c equipment. sources are taxed separately and left 4. Income from independent work outside the overall income calculation). in the fi elds of art, literature, science, education, journalism and sports, Income from a particular source including income from participation is defi ned as the surplus of revenue in artistic, scientifi c and cultural from such source over the tax-deductible competitions. costs related to the same source. 5. Income from work commissioned The tax-deductible costs exceeding by national or local authorities revenue within a single source of income or administrative bodies, courts result is a tax loss. Annual loss and prosecutors. generated within a source of income 6. Income received as fees for membership cannot be set-off against income generated of boards of directors, supervisory boards, from other sources. Instead, a taxpayer committees and other decision-making is entitled to make a carryforward bodies of legal entities. by deducting such a loss over the next 7. Income from rendering personal fi ve years from the income derived from services based on an agreement the same source; however, with a legal person or other entity, in any particular year, the taxpayer as long as these services are not rendered cannot deduct more than 50% within the scope of independent business of the loss, subject to the carryforward. activity, i.e. they are not offered to the public. Employee income 8. Income received from activities Employee revenue includes basic, performed personally under overtime and supplemental pays, management or similar contracts.

22 Tax Pocket Book 2011 the income is exempt from tax Transfer of real property only if the taxpayer was registered for permanent residency in the relevant Transfer of real property, if made building or fl at for at least 12 months within the scope of regular business prior to the disposal date. If the real activity, is taxed on general rules. property was purchased from 1 January Consequently, it is added to other business 2009 onwards, the tax can be avoided income and taxed, based on the progressive only if the revenue from the transaction scale or the 19% fl at rate is spent on purchasing another real (see the Tax rates section). property for personal accommodation. Again, the purchase should be made However, special rules apply if the transfer within two years after the sale, subject of property is made outside the scope to the exemption. of business activity. These rules vary according to the date on which the real property was acquired. Transfer of shares If a sale transaction involves real property acquired before 1 January Transfer of shares is taxed by a separate 19% 2007, then PIT is levied on the revenue. tax calculated on the income (revenue The relevant tax rate is 10%. This tax less expenses on acquisition). This income is subject to a number of exemptions. is not added to income from other sources. For example, the transaction will not be subject to PIT if the sale is made after the lapse of fi ve years Dividends and interest after the end of the tax year in which the property in question Income from dividends paid by joint-stock was purchased. Furthermore, a seller companies and limited liability companies may avoid the 10% tax if he/she spends is not added to an individual’s overall the relevant proceeds on purchasing income. Instead, it is subject to 19% tax another real property for personal calculated on revenue (deductions accommodation; the purchase are not allowable). The same rules apply should be made within two years to the interest on loans and savings. after the sale, subject to the exemption. The exception concerns loans granted If the real property was purchased within the scope of regular business from 1 January 2007 onwards, activities. In this case, general PIT rules the subsequent disposal is taxed apply. Consequently, both the revenues at the 19% rate calculated on income. and the costs associated with such loans The income equals the difference between are taken into account when calculating the revenue on sale and the cost of earning the taxable base. Subsequently, income that revenue, increased by the overall from business activity is taxed according amount of depreciation allowances to the progressive scale or the 19% fl at (if any) made on the property in question rate (see the Tax rates section). before the disposal. Revenue earned from the disposal of residential real estate can be exempt from taxation in some cases. If a sale transaction involves real property acquired after 1 January 2007 but before 1 January 2009,

2011 Tax Pocket Book 23 Exempt income Tax deductible

More than 130 types of income are tax There is a standard deduction exempt. The most important types for employees. In most typical are the following: circumstances, it is PLN 111,25 1. Damages received on the basis (approximately EUR 28) per month. of administrative law, civil law and other legal acts (subject to numerous exceptions); An individual carrying out independent 2. Receipts from property insurance work may claim various allowances, and personal insurance claims (subject depending on the type of activities to some exceptions); performed. In a typical situation, 3. Remuneration paid to individual the standard deduction is 20% of revenue. businessmen out of international aid The most favourable treatment relates funds established by foreign fi nancial to revenue from copyrights; the relevant institutions or other countries, based standard cost deduction is 50% on agreements concluded between such of the revenue. institutions or countries and the Polish government; Individuals running business activities 4. Cash equivalents provided to employees as sole traders or partners in partnerships when they need to use their own tools, can deduct all expenses incurred to derive goods and equipment for their work; revenue or to „protect a source 5. Reimbursement of an employee’s of income”. However, it should be noted costs for relocation to another place that there is also a list of items of employment and the costs of settling that are not deductible even if they meet in the new place (up to 200% the above general conditions. This list of the monthly salary due to the employee contains over 60 items, including, in the month of transfer); among others, the following: 6. Limited daily allowances 1. Written-off lapsed receivables; and other amounts due to employees 2. Entertainment costs; during business trips; 3. Accrued but unpaid interest; 7. Additional pay granted to employees 4. Accounting and comparable provisions; who are temporarily transferred to work 5. Tax penalties and penalty interest; away from home and other benefi ts 6. Part of the insurance premium paid granted according to the principles on a passenger car (the part calculated and limits outlined in the rules for state on the excess of the car value employees; over EUR 20,000) and 8. Expenses covered by an employer 7. Part of the depreciation write-offs for employees staying in hotels made on a passenger car (the part or for employees’ accommodation calculated on the excess of the car value rented by their employer over EUR 20,000). (up to a certain limit); 9. Limited payments to employees who use their private cars for company business and Other deductions 10. Income originating outside the Polish territory if an agreement for the avoidance The employee’s portion of social security of double taxation signed by Poland contributions is deductible from gross and the foreign country provides income before tax. Other expenses for such an exemption. that may be deducted from gross income

24 Tax Pocket Book 2011 include donations (subject to numerous this relief is not applicable to income conditions and up to a limit of 6% earned in tax havens. of taxable income; only food donations are not subject to the limit). Other taxes Personal allowances For 2011, a personal allowance of PLN 556 Social security insurance (approximately EUR 146) for all taxpayers Both the employer and the employee who are taxed is based on the general are obliged to contribute to the Polish rules. This allowance is deducted social security system. Apart from paying against PIT (not the taxable base). their own share, the employer is obliged (See also the tax scale in the Tax rates to withhold the employee’s share category). of social security contributions and remit it to the Social Security Board (ZUS). Further, the annual PIT due for 2011 In both cases, the relevant payments can be reduced by PLN 1,112 are made monthly. (approximately EUR 280) for each child in a family (including foster families). In 2011, the employer pays total If a child was in the taxpayers’ custody contributions in the range of 17.48% only for a period of time, the allowance to 20.14% of the employee’s gross salary is proportionately lowered. (the employer’s contribution includes an accident insurance element that varies according to the business Tax credits sector). The contribution rate for the employee is 13.71% of gross Foreign income salary. The social security contributions When a Polish resident earns income payable by the employer and the employee in a foreign country that has not concluded are tax-deductible items in their respective a double tax treaty with Poland, double tax settlements. taxation is avoided based on the credit method. The Polish resident is liable The above rates apply to salaries below for income tax imposed on the worldwide a cap of PLN 100,770 (approximately income, but this tax is proportionately EUR 25,830). Above this cap, salary reduced by income tax paid abroad. is subject to a contribution rate of 3.22% Numerous double tax treaties provide to 6.15% payable by the employer for the same credit method. However, and 2.45% payable by the employee. some of them provide for the exemption method, i.e. foreign income covered Details of the social security by such treaty is exempted from contribution calculation are shown taxation in Poland. in the following table:

Note: From 1 January 2008, special tax relief has been introduced. This tax relief uses a complex deduction system, which effectively allows Polish residents to use the exemption method for all their foreign income, even if the applicable double tax treaty states that the credit method should be used. However,

2011 Tax Pocket Book 25 Contribution amount Paid by 14.26% of total gross salary Employer Pensions (up to a cap of PLN 100,770) and disability insurance 11.26% of total gross salary Employee (up to a cap of PLN PLN 100,770) Sickness insurance 2.45% of total gross salary Employee Accident insurance 1.80% of total gross salary (the rate applicable to employers, that employ up to 9 employees) 0.67% - 3.60% of total gross salary (the rate applicable to employers, that employ more than 9 employees - the precise rate depends on the business sector) Labour Fund 2.45% of total gross salary Employer Employee Guaranteed 0.10% of total gross salary Employer Benefi ts Fund

Health insurance The monthly contribution rate Expatriates from EU countries are entitled for health insurance is 9% to an exemption from social security of the assessment base. In the case contributions under EU regulations. of obligatory participation, The basic condition is that an E101/A1 the assessment base is equal certifi cate has to be obtained to the individual’s gross income less in the expatriate’s home country. social security contributions. In the case of voluntary participation, the amount Polish nationals who are subject to social of the assessment base is declared security insurance are generally subject by the insured individual but cannot to additional obligatory national health be lower than the average national insurance. Some categories of individuals salary as published from time to time. (such as sole traders) may voluntarily Contributions to health insurance participate in this system. Foreign are deducted from PIT, although only individuals are subject to obligatory up to a limit of 7.75% of the assessment health insurance only if they are subject base. Therefore, that part of the insurance to Polish social insurance and if they are contribution, equal to 1.25% residing in Poland on the basis of a visa of the assessment base, is an additional with work permit, residence card fi nancial burden on top of PIT. or temporary residence card. Foreign individuals not referred to above are neither obliged nor entitled to participate (i.e. voluntarily) in the national health insurance system, unless an appropriate international agreement provides otherwise.

26 Tax Pocket Book 2011 Tax administration

The employer is obliged to withhold the employee’s monthly advance payments. The advance payment for a particular month should be remitted by the twentieth of the following month. The employer is obliged to fi le with the tax offi ce the tax return, including information on the employee’s income and tax advances withheld with respect to that income. The above tax return is fi led only once for the whole year.

The fi nal PIT settlement is made by the individuals themselves. With some exceptions, individuals are obliged to submit the annual return for the tax year by 30 April of the following year. Within the same deadline, they have to pay the difference between the annual tax due and the total amount of advance payments made during the year.

2011 Tax Pocket Book 27