Qualified Domestic Minimum Top-up Tax (QDMTT) – Which entities are subject to it and how to calculate it?

This article answers the following questions:

• Which entities will be subject to the legislation on qualified domestic minimum top-up tax?
• How to calculate qualified domestic minimum top-up tax?

The draft act on top-up taxation of constituent entities of international and domestic groups provides for the introduction of qualified domestic top-up tax (QDMTT). It will be collected by Polish tax authorities from entities located in Poland after the adoption of the provisions implementing the European Union Directive on global minimum tax (Pillar 2). 

Which entities will be subject to the legislation on qualified domestic minimum top-up tax?

In accordance with the most recent draft act, the following entities will be subject to qualified minimum domestic top-up tax:

• constituent entities of a multinational group or domestic group located on the territory of Poland;
• joint ventures or joint venture affiliates located on the territory of Poland;
• stateless constituent entities being flow-through entities, if they have been established on the territory of Poland;
• stateless constituent entities being permanent establishments, if these establishments conduct their activities in Poland and are subject to corporate income tax.

Qualified domestic minimum top-up tax is calculated by taxpayers who, within the meaning of the law, are low-taxed constituent entities. 

In short, the objective of qualified domestic minimum top-up tax is to impose tax on basically all constituent entities of multinational and domestic groups located in Poland.

Calculation of qualified domestic minimum top-up tax

How to determine if an entity is subject to QDMTT and calculate it? First, it should be determined if Poland is a low-taxed jurisdiction for a particular group. To this end, for each taxpayer of the group, qualifying income/loss and adjusted covered taxes as well as jurisdictional qualifying income/loss and the effective tax rate of that group in Poland are calculated. Only on that basis, it is determined if the group generated jurisdictional qualifying net income for a fiscal year, and if the effective tax rate is lower than the minimum tax rate (15%). 

We described how to perform the effective tax rate test in one of our previous articles on the principles of settlement of global minimum tax.

If Poland is a low-taxed jurisdiction, then, in accordance with the QDMTT regulations, jurisdictional qualified domestic minimum top-up tax for a particular fiscal year is calculated first. For this, the following formula needs to be applied: 

Note that: 

• top-up tax percentage  is the difference between the minimum tax rate (15%) and the effective tax rate;
• excess profit is the difference between a jurisdictional qualifying net income and a substance-based income.

Next step is to calculate qualified domestic minimum top-up tax. To do this, taxpayers need to apply another formula:

The computation method is thus similar to jurisdictional top-up tax under the income inclusion rule (more information about that tax and the income inclusion rule can be found in this article). The main difference is that the amount of tax calculated according to the formula for qualified domestic minimum top-up tax is not reduced by qualified domestic minimum top-up tax, as logic would dictate.

It should be also pointed out that qualified domestic minimum top-up tax is calculated regardless of the percentage of the ownership interest which parent entities of a group hold in the constituent entity which is the taxpayer. However, it is not calculated if the taxpayer incurred a qualified loss for a fiscal year. Taking into account the above, when implementing the procedures imposed by the Pillar 2 Directive in your organisation, it is worth taking a closer look at the finances and all tax liabilities of your business.

If you have any questions or doubts, you are highly welcome to contact our experts. We also recommend a simple way to check if your company will be subject to top-up taxation by completing our special interactive questionnaire.