According to information from the Ministry of Finance, 6,997 Polish companies decided to settle using the Zero tax on reinvested profits solution between January and August 2022. This is as much as 1,546% more than in the first 8 months of the previous year, when only 425 companies relied on this solution. Zero tax on reinvested profits solution is therefore an attractive alternative to classic forms of company taxation. This is because it means that the company can opt for corporation tax on its income in the form of a 10% flat rate.
Zero tax on reinvested profits solution instead of classic income tax
Instead of the classic CIT of 9% or 19% on income earned but not yet distributed, a company may not pay tax when the profit is earned, or benefit from its preferential taxation of 10% if the shareholders of a “small taxpayer” decide to pay dividends.
In addition, a major advantage of the Zero tax on reinvested profits solution is the much lower taxation of dividends paid to shareholders and partners compared to classic CIT. With traditional corporate income tax accounting (based on a 9% or 19% CIT rate), small taxpayers and those commencing a business activity are able to pay CIT at a 9% rate. However, when juxtaposed with the need to charge personal income tax on dividends paid to shareholders, the total burden on the profit generated by the company will be 26.29%.
Maximum CIT rate of 20%
In the Zero tax on reinvested profits solution, the maximum rate is 20% of the tax base. As mentioned above, “small taxpayers”, on the other hand, pay 10% tax. However, the effective tax rate is lower. This is because the shareholder can deduct his or her dividend tax from the Zero tax on reinvested profits solution paid by the company. Consequently, larger taxpayers will by far save the most from the use of the Zero tax on reinvested profits solution. In their case, the combined CIT and PIT tax rate (on the dividend paid out) will be 25% – instead of 34.39% when opting for classic taxation.
Zero tax on reinvested profits solution vs. traditional tax
The Zero tax on reinvested profits solution also differs from traditional taxation in the moment when the tax obligation arises. Joining the Zero tax on reinvested profits solution allows you not to pay tax as long as the profit generated by the company remains in the company. The company will therefore only pay tax when profits are distributed, e.g. in the form of dividends. In practice – it is the company that decides when it will pay income tax.
The absence of an obligation to make monthly advance payments means that funds for day-to-day operations remain in the company and at its disposal for longer – which significantly improves liquidity. In addition, the use of the Zero tax on reinvested profits solution makes it much easier to fulfil settlement obligations. This is because it does not require separate accounting, determination of tax deductible costs, calculation of tax depreciation, etc.
However, in order to take advantage of the Zero tax on reinvested profits solution, some requirements must be met (art. 28j(1) of the CIT Act). These conditions must be met jointly:
1) The company’s passive income (e.g. from interest, loans, copyrights) cannot exceed operating income.
2) The company must have an appropriate employment structure – this requirement […]
3) Only natural persons can be shareholders of the company.
4) Company cannot hold shares (shares) in the capital of another company, participation titles in an investment fund or collective investment institution, etc. In other words, it cannot have a daughter company.
5) The company may not prepare financial statements in accordance with International Accounting Standards.
Choice of income taxation in the form of the Zero tax on reinvested profits solution
The Zero tax on reinvested profits solution (i.e. flat rate taxation) may be imposed on the taxpayer referred to in art. 3(1) of the CIT Act, i.e. a company with its registered office or management on the territory of the Republic of Poland and subject to taxation in Poland on its entire income, regardless of the place of its generation.
What conditions must be met to benefit from the Zero tax on reinvested profits solution?
A company may choose to be taxed under the Zero tax on reinvested profits solution if the following conditions are met.
Can newly established companies also benefit from the Zero tax on reinvested profits solution?
For a taxpayer commencing business activity, the revenue structure condition is deemed to be met in the first tax year of flat taxation.
How do you choose the Zero tax on reinvested profits solution?
Flat rate taxation on corporate income is a tax option, i.e. it is voluntary.This can be done by the end of the first month of the tax year in which the company wishes to benefit from the Zero tax on reinvested profits solution, or during the tax year.
Period of application of the Zero tax on reinvested profits solution
If the company chooses the Zero tax on reinvested profits solution, it will apply for 4 immediately consecutive tax years. If the company does not opt out of the flat rate taxation within this period – the period of taxation under these rules will be automatically extended for the next 4 tax years.
Unless the taxpayer submits information on the abandonment of flat rate taxation in the CIT-8E return (art. 28r(1) of the CIT Act), filed for the last tax year in which the taxpayer is to be taxed on a flat rate basis.
What are the tax rates in the Zero tax on reinvested profits solution?
Flat rate on income is paid when profits are distributed and at a different rate than the standard CIT. The flat rate depends on the amount of revenue the taxpayer earns, i.e. being a small taxpayer, or a taxpayer commencing business activity.
For a small taxpayer and a taxpayer commencing business activity, the CIT rate is 10% of the tax base. For other taxpayers, the rate is 20% of the tax base.
How is the tax on dividend payments from a company taxed under the Zero tax on reinvested profits solution reduced?
Tax on dividend distributions from a company taxed under the Zero tax on reinvested profits solution is paid on a preferential basis, i.e. it is subject to a deduction:
- 90% of the amount of the company’s tax due attributable to the partner’s share – in the case of a distribution from a company that is a small taxpayer,
- 70% of the amount of the company’s tax due attributable to the partner’s share – in the case of a distribution from a company that is not a small taxpayer.
When is the Zero tax on reinvested profits solution paid?
By the end of the third month of the tax year, the taxpayer is obliged to submit a declaration on the amount of income earned for the previous tax year.
Catalogue of income to be taxed by the Zero tax on reinvested profits solution
Pursuant to art. 28m(1) of the CIT Act, the Zero tax on reinvested profits solution, i.e. a flat rate on corporate income, is generally subject to taxation on 6 categories of income.
When do we pay the Zero tax on reinvested profits solution on exit?
The exit from the Estonian system will not lead to a situation where the company will have to pay tax once on the entire profit generated during the flat tax period. Tax on this profit – as in the Estonian system – is only paid when it is distributed. The amount of tax is determined by applying the tax rate that was in force at the time of accounting for the Zero tax on reinvested profits solution.
Who cannot benefit from the Zero tax on reinvested profits solution?
The Zero tax on reinvested profits solution cannot be used by, among others:
- financial enterprises referred to in art. 15c(16) of the CIT Act, namely
- national banks,
- credit institutions,
- co-operative savings and credit banks and the National Association of Cooperative Savings and Credit Unions,
- investment companies,
- associations,
- managing an alternative investment company,
- domestic insurance company and foreign insurance company,
- domestic reinsurance company and foreign reinsurance company, voluntary fund,
- open-ended fund,
- employee fund,
- central securities depository.
Loss of entitlement to the Zero tax on reinvested profits solution
If a taxpayer loses the right to flat rate taxation as a result of a breach of the conditions for its application, the taxpayer may file a notice on the choice of flat rate taxation again after the expiry of 3 tax years, but not earlier than after the expiry of 36 months, following the calendar year in which the taxpayer lost the right to flat rate taxation (art. 28l(2) of the CIT Act).
Resignation from the Zero tax on reinvested profits solution
The question of opting out of the Zero tax on reinvested profits solution, when voluntarily choosing this form of taxation for 4 years, is questionable. The case has already received a tax interpretation.
Tax interpretation. In a letter dated 22 August 2022, 0111-KDIB1-1.4010.112.2022.1.BS, it was considered that, in principle, the Zero tax on reinvested profits solution is chosen for 4-year periods. The taxpayer may also opt out of this form of taxation at any time, pursuant to art. 28I(1)(1) of the CIT Act. However, the condition is that the resignation must take place at the end of the financial (tax) year.
What are the tax preferences for CIT companies supporting Ukrainians?
Until the end of December 2022, companies taxed with the Zero tax on reinvested profits solution and providing humanitarian aid to Ukrainian citizens (through other entities) can benefit from tax relief. This is made possible by the Decree of the Minister of Finance of 18 March 2022 on the non-collection of a flat rate on the income of companies in connection with counteracting the effects of hostilities on the territory of Ukraine.