Taxation

Business activity conducted by natural persons either individually or through partnerships is subject to personal income tax. Partnerships are so called transparent entities – they are not themselves subject to taxation, only partners are individual taxpayers.

Income from business activity of a natural person exceeding a tax free amount (3,091 PLN) can be taxed in accordance with three methods: progressive, flat rate and lump sum.

Currently progressive scale is the following:

  • tax base up to 85,528 PLN – 18%
  • tax base above 85,528 LN – 32%.

The tax base constitutes revenue less actual costs of business activity. There are several types of costs which are not deductible; in general for the expense to constitute a taxable cost it must be incurred with the purpose of obtaining income or with the purpose of preserving the source of income. This method allows for several deductions, such as deduction on children, and joint taxation with a spouse or child (see personal taxation for details on deductions).

Taxpayers conducting a business activity may tax their income  with 19% flat rate tax. The tax base is also revenue less costs; however, most of deductions and joint taxation with a spouse or child is not possible.

In certain cases – rental income, certain professions and types of activity revenue – not income – constitutes tax base and the imposed tax is a lump sum (3% – 20% of revenue). In case of this taxation method no tax deductible costs may be taken into account.

Taxation of Corporate Income

Income of corporate (legal) persons is taxed with a 19% flat rate.. The tax base is determined based on accounting books, it may however, differ from the bookkeeping result of the company due to differences in accounting and tax regulations on determining revenue and costs, in particular many so called non-taxable costs.

Entities having their seat or management in Poland are subject to taxation with respect to their global income irrespective of where it was generated (unlimited tax liability). Other entities are subject to taxation in Poland only with regard to income generated in Poland (limited tax liability).

The income is considered to be the surplus of total revenues over tax deductible costs incurred in a tax year. If tax deductible costs exceed the amount of revenues, the difference constitutes a loss.

Considering establishment in Poland and the preferred form thereof, one must take into account the tax burdens on profits derived from Poland. In case of establishment in form of a company – body corporate – the issue includes taxation of income from the shares in the company’s capital transferred in form of dividends.

Taxation of Dvidends

Definition
Dividends are defined as income from shares and income from other corporate rights participating in profits, such as :

  • income from remitting the shares,
  • value of the assets received upon liquidation of the company,
  • income of the company allocated for increase of the share capital,
  • payments in cash received by the shareholders upon merger, acquisition or division of the company,
  • undistributed profits in case of transformation of a company into a partnership.
  • Income from debt-claims is not considered as dividends.

Dividends subject to withholding tax in Poland are only those paid by a company having its seat and thus residency in Poland. Taxation of dividends distributed by a non-resident company solely because the corporate profits from which the distributions are made originated in Poland is in principle excluded. Income derived from activity conducted in Poland directly by a non-resident company (not via a subsidiary company) constitutes business profits, not dividends.

Taxation
Tax rate on income from dividends derived from a company seated in Poland amounts to 19%. However, provisions concerning nonresidents must be interpreted and applied together with double tax treaties (DTT). Most DTTs entered into by Poland provide either for exemption or a lower tax rate applicable to dividends, subject to conditions.

The tax is withheld by the company upon payment of the dividends. The company sends its shareholders and the Polish tax office information about the amount of dividends paid and tax withheld.

Conditions for application of a DTT
The favorable taxation at source is usually conditioned on the legal status of the recipient (usually it has to be a company) and a determined amount of shareholding (for instance 10% in USA-Poland and Germany-Poland DTT).

Many DTTs restrict application of their favorable provisions to the beneficial owners of dividends. Therefore, in principle, the dividend must be received directly by their owner, without an intermediary, in order to apply the exemption or a lower tax rate.

The provisions of the DTT do not apply in case the recipient of dividend carries on business in the source country through a permanent establishment, and the shareholding is effectively connected with the permanent establishment. In such a case dividends are taxable as part of the profits of the permanent establishment in Poland.

The preferential regulations of DTTs apply only if the tax residence of the recipient of dividends is confirmed with a certificate of fiscal residence. The certificate is a document issued by the tax authority, stating that the recipient of dividends is seated and subject to unlimited tax liability in a relevant country.

In case any of the conditions are not met, dividends are taxed with 19% rate.

Eliminating double taxation
The tax on dividends is withheld in the source country and subsequently they are taxed in the residence country as income of the recipient. In order to eliminate this double taxation, DTTs provide either for an exemption or a credit as a method applied by the residence country.

State of fiscal residence of dividend’s recipient either:

  • exempts such dividend from taxation – exemption method, usually with progression i.e. influencing the tax rate applicable to taxable income or
  • allows for deduction from income tax an amount of tax paid in the source country – credit method, limited to the appropriate proportion of tax due in the residence state.

In cases of some DTTs (for instance the USA-Poland DTT) it is also possible to credit the so called underlying tax – corporate income tax paid in Poland on the income from which the dividend is derived ? subject to limits provided by the law of residence state.

Exemption available in the EU
Income from shares and income from other corporate rights participating in profits transferred from a company seated in Poland to a company seated in Poland or in another European Union country is exempt from taxation.

The exemption is subject to several conditions. Generally, the beneficial owner of dividends must have a direct shareholding of at least 10% in the capital of its subsidiary incessantly for at least two years.