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.
1) income from net profits made during the period of taxation on a flat rate basis, in the part to be distributed to shareholders or to cover losses arising during the period prior to taxation on a flat rate basis,
2) income from inherent gains,
3) income from expenses not related to the taxpayer’s business activities,
4) income from changes in the value of assets (in the case of mergers, demergers, conversions of entities or contributions in kind of an enterprise, or an organised part thereof, by an individual),
5) income from net profit in the part not distributed or not allocated to loss coverage during the period of application of the flat rate – in the case of a taxpayer who has ceased to be taxed on a flat rate basis,
6) income from undisclosed business operations.
In practice, the Zero tax on reinvested profits solution is taxed on income determined also as:
The Zero tax on reinvested profits solution does not apply only to profit distributed as dividends, but also to other forms of its distribution, for example, in the form of pecuniary, non-pecuniary, chargeable, gratuitous or partially chargeable services performed for the benefit of shareholders, partners, or for the benefit of entities directly or indirectly related to them, in particular:
The intention of the legislator was to include in the catalogue of income for taxation by flat rate taxation on corporate income also other benefits, alternative to dividends, made for the benefit of shareholders or entities related directly or indirectly to the taxpayer or to those shareholders. The provision of art. 28m(3) of the CIT Act indicates that any benefit whose beneficiary, directly or indirectly, is a shareholder or other related party, is deemed to be inherent gain. The benefit is to be exercised in relation to a right to a share in profit, other than a distributed profit.
For a benefit to be considered an inherent gain, it should be related to influencing the actions and decisions of the flat taxed company. A benefit deemed to be an inherent gain, where the party is a shareholder of a flat taxed company, can be assessed in the context of a dividend-equivalent benefit. Such a benefit will arise, among other things, when a taxpayer, by carrying out a legal transaction (one or more), achieves the same economic effect as would be achieved by paying out profits in the form of dividends.
The payment of so-called “inherent gains” implies the creation of a corresponding income for the company subject to flat rate taxation.
However, inherent gains income does not include benefits that are not performed in connection with the right to share in the profit, i.e. benefits taken (performed) without any influence of other related parties on the operation and decisions of the company taxed with the flat rate, in respect of such benefit.