Summertime cranks up the heat for income taxes

With summer in the air, tax is invariably the last thing you want to be thinking about. However, I feel it is my duty to keep you up to date on the fate of the various draft tax laws that, earlier this month, were finally approved by the Sejm and forwarded to the Senate for the next stage in their long and drawn-out development. I will break this down into a two-part mini-series, starting this week with a summary of the most significant changes to the Corporate Income Tax Law (CIT) as provided by the draft bill and concluding in my next column with a summary of the most significant changes to the Personal Income Tax Law (PIT). My thanks go out to my fellow tax manager Filip Świtała, without whose help this CIT summary would never have been written.

Profits from participation Redemption of shares (both compulsory and voluntary) will be subject to withholding tax, with the exception of shares acquired for a contribution in kind. The redemption of the latter will instead attract capital gains tax. Cash payments for fractional shares will also be subject to withholding at source. It seems (after an initial analysis) that the demerger of a company will be tax neutral only if, as a result of the demerger, the acquiring company receives assets and liabilities making up an organized part of the enterprise. A spin off (where the demerging company survives the demerger) will be tax neutral only if both the receiving and the demerging companies end up owning an organized part of the enterprise. Otherwise the demerger may be subject to CIT on both sides: the transferring company (capital gains tax) and the shareholder (withholding tax).

Tax point in business activity - clarification Under the proposed changes, the tax point would arise upon the issue of an invoice but no later than the last day of the month in which the disposal of rights, the delivery of goods or energy or the delivery of services has occurred. Alternatively, the tax event would take place on the last day of the month in which payment was received. At export, the tax point would be on the day (the customs office should confirm the date) of the transfer of goods abroad, whereas in the case of leasing, hiring, renting or similar agreements, it would be on the date when the receivables were due. For contributions in kind, the tax event would be the day of the registration of the company or the registration of the capital increase.

Capital gains Income from the redemption of shares (compulsory or voluntary) acquired for a contribution in kind of an enterprise or its organized part will be subject to the regular tax rate. The new rule is applicable to shares acquired before Dec. 31, 2002. The company subject to a demerger would be liable to tax on the net assets transferred to the acquiring company (unless the assets and liabilities subject to the transfer and assets and liabilities remaining in the demerging company make up an organized part of the enterprise). It will be possible now to decrease the revenue by the net book value of the assets calculated for tax purposes.

Share premium Confirming the latest court practice, share premium will be tax exempt in both joint stock and limited liability companies. The exemption appears to include share premium also realized on contributions in kind. Release of bad debt provisions The current rules are not clear on the tax treatment of bad debt write-offs (that is, the release of provisions for bad debts), but under the proposed wording, bad debt provisions previously claimed as tax deductible would be taxed at release.

Self-governing business organizations Charges paid to business organizations in which membership is voluntary (organizacje przedsiźbiorców i pracodawców) will be deductible up to the limit of 0.15% of the salaries paid in the preceding tax year and will attract social security charges. It is not clear whether there is an additional limit - the amount of salaries actually subjected to the charges, which this year is zł. 64,620 per employee.

Goodwill Finally, the term składniki majątkowe has been clarified as assets less those liabilities that are functionally related to the business activity of the transferor.

Thin capitalization Interest paid to a company that is a Polish tax resident will not be subject to thin capitalization restrictions except for companies operating in the Special Economic Zones regime.

Depreciation The news is that fixed assets entered into the register with delay will be treated as disclosed fixed assets, meaning that the respective depreciation charges will become tax deductible starting from the month following the disclosure. The rule allowing amortization of costs associated with the setup of a joint stock company has been abolished. Therefore, only costs incurred before Jan. 1, 2003, can be depreciated under the existing rules or written off in 2003 as tax deductible. Certain new categories of fixed assets will be subject to the 30% depreciation charge in the first year. In the following years, the general rules will continue to apply. This charge will be applicable to fixed assets acquired from the date on which the new law was published (which could be before Jan. 1, 2003). Also, the depreciation rates can be changed (increased or decreased) under the following conditions: (a) within a month from the day of entry into the register or (b) from the first month of each of the following tax years.

20% withholding tax on services Intangibles as well as services without a tangible effect (especially all advisory, marketing, management, controlling and extending guarantees) supplied to a Polish company will be subject to 20% withholding tax unless a doubletax treaty provides otherwise. I leave the above without comment, although if you have any specific queries, let me know and perhaps I will supplement this two-part series with a "most commonly asked questions" column. Stay tuned for what awaits on the PIT front.

Anna Szymańska is a tax senior manager in the Warsaw office of Ernst & Young.