Pillar 2: summarising amendments of the Polish Ministry of Finance

This article will answer the following questions:

• Does, according to Pillar 2, a domestic branch constitute a separate entity? 
• What is the likely cost of obtaining a ruling on top-up tax?

The works on implementing the latest regulations introducing Pillar 2 to the Polish legal system are in full swing. On 9 August 2024, the Ministry of Finance published an extensive report presenting the results of prior public consultations, proposed changes as well as the position of the Ministry regarding the suggested amendments. What exactly will change and how will top-up tax function in Poland and is the Ministry of Finance willing to introduce changes to the draft published in April this year? 

How will the regulations governing the effectiveness of the global minimum tax in Poland change?

First of all, it should be noted that the majority of changes the Polish Ministry of Finance made in the document is related to the fact that the legislator had taken into account various editorial comments and corrected stylistic errors and typos. A fair share of the changes also consists in supplementing the justification for the draft Act by adding extra clarifications or definitions.

However, the Ministry of Finance did take into consideration a couple of crucial proposals brought up by taxpayers that will shape the draft Act. Among the most significant changes of this type there are, i.a.: introducing a more precise definition of a constituent entity, supplementing the catalogue of covered taxes, including withholding tax in the allocation of covered taxes and adopting a new approach to safe harbours and issuing advance (protective) rulings on top-up tax.

How will the decisions of the Ministry of Finance affect MNEs and domestic groups as well as the methods of calculating minimum tax? 

Precise definition of constituent entity 

The Ministry of Finance decided that a domestic branch of a company should not constitute a separate entity, as the report prepared by the branch cannot be considered separate from the report of the parent entity under the Pillar 2 Directive. From the perspective of a Polish parent entity, a domestic branch also fails to meet the definition of a permanent establishment, which is a separate constituent entity.

Covered taxes catalogue

The Polish MInistry of Finance has included in the draft Act an open catalogue of covered taxes (Art. 78 and 79), which was also supplemented in the justification for the draft Act. The following are named among the covered taxes, as stated in the CIT Act:

• CIT charged on general terms – Art. 18,
• withholding tax (WHT) – Art. 21 and 22,
• tax on income from the sales of virtual currencies – Art. 22d,
• tax on controlled foreign companies (CFC) – Art. 24a,
• tax on shifted income – Art. 24aa,
• income tax on revenue from buildings – Art. 24b,
• minimum tax – Art. 24ca,
• tax on qualified income from qualified intellectual property rights (IP BOX) – Art. 24d,
• tax on income from unrealised profits (exit tax) – Art. 24f.

In the justification for the draft Act implementing the global minimum tax, the Polish legislative also indicated examples of taxes not considered covered taxes:

• PIT,
• property tax,
• retail sales tax,
• tax on certain financial institutions.

Allocation of covered taxes

The Ministry of Finance has included withholding tax (WHT) among covered taxes, one taken into account for the calculation of the effective tax rate under QDMTT (which is consistent with the OECD administrative guidelines of July 2023). 

Under Art. 93, p. 5 of the draft Act, covered taxes on income paid to shareholders (from ownership interest, dividends, or other similar payments) are allocated to the paying constituent entity. 

The payments listed here include withholding tax and taxes on a net basis incurred by entities that directly own the constituent entity.

Safe harbours and 5-year exemption for domestic groups

The Polish legislator also introduced an amendment to Art. 129 of the draft Act. In its new form, it indicates that the 5-year exemption mentioned there also covers the domestic top-up tax for group constituent entities whose ultimate parent entity is located in Poland. 

This means that – after meeting the conditions set out in Art. 128, p. 1-2 – an MNE with a parent entity in Poland will not have to calculate either the global top-up tax or the domestic top-up tax.

Opinions on top-up tax 

The Ministry of Finance has also announced that it is considering changing the amounts due for issuing a ruling on top-up tax and an advance (protective) ruling on top-up tax.

Here are the proposed amounts:

• up to PLN 15,000 – the initial fee and up to PLN 50,000 – the main fee for a ruling on top-up tax 
• up to PLN 65,000 for an advance protective ruling. 

Although these fees are still high, the change would be significant as, according to first announcements, the initial fee was supposed to be up to PLN 25,000 and the main fee up to PLN 75,000 for rulings on top-up tax and PLN 100,000 for an advance (protective) ruling.

The entry into force of the regulations implementing Pillar 2 and the global minimum tax entail a number of changes for companies operating in Poland 

The changes introduced by the Polish Ministry of Finance discussed here are significant, but it should be noted that most of the solutions proposed in the course of public consultations had not been taken into account as the legislator had considered them unjustified or stated that they referred to matters beyond the required scope of the implementation. 

Nevertheless, in order to be sure that the company is well prepared for the upcoming changes, taxpayers should read the latest version of the draft Act on global top-up tax. If you require a more in-depth analysis of the topic or consultation, we strongly encourage you to reach out to our experts.