During a pandemic that is quickly becoming one of the biggest economic crises of recent times, foreign investors are seeing the potential in the Polish market
Contrary to what classical economic theory might purport and what we would commonly believe, research actually shows that market players do not usually behave rationally. Instead, they often act in quite irrational ways, panicking and getting carried away by fear, or just blindly follow the crowd. Although these behaviors are also present during booms, it is during a crisis that they become exaggerated and the adverse effects may be most tangibly felt, particularly in plummeting prices and an substantial increase in economic instability.
From a macroeconomic perspective, this is not good news. Nevertheless, for a bold and seasoned investor, this period of falling prices and instability is an opportune time they have likely been waiting for, for quite some time. During these periods, many assets are discounted well below actual values indicated by financial and economic data. The situation in long-term investments is similar, primarily due to unpredictable market volatility during the crisis.
What should you pay attention to?
When making an investment decision, even the most seemingly promising one, you should get acquainted with local market conditions; this becomes particularly important when looking at a foreign investment. One of the most important elements to take into account are local tax regulations. In this article, we will try to present foundational elements and tax protocols that should be considered when evaluating an investment in Poland; a potentially risky yet potentially highly profitable foreign market for crisis investment. We shall present investor-friendly, legal and tax solutions that may be utilized when investing in Poland.
General information about taxes in Poland
The Polish tax system does not differ much from other European systems. The basic taxes imposed on entrepreneurs and investors are: CIT, PIT, VAT. In addition, there is a tax on civil law transactions, which is marginal and charged only on certain types of activities.
From the perspective of a foreign investor, the following elements of investment are relevant: (i) in what manner capital is invested, (ii) how the investment is exited, and (iii) the operational nuance embedded in conducting business.
Below we will briefly discuss these elements from the perspective of a foreign investor investing in Poland.
Investing in the stock market
Purchase of investment
There are many ways to invest in Poland. One modality is acquisition of capital assets for purely investment purposes (i.e. securities).
In this case, the securities may be purchased on the Warsaw Stock Exchange (i.e. on a regulated market) or outside a regulated market. From a tax perspective, method of acquisition is not significant when considering how the acquisition will be taxed. If assets are purchased on the stock exchange, please also be aware that the brokerage house will be the broker of the transaction. However, for out-of-market transactions, a brokerage will most likely not be necessary (unless the parties agree otherwise). In the case of transactions where financial instruments are purchased, a civil law transaction tax of 1% of the purchase value is levied on the purchaser. However, this transaction will be tax exempt if it is made through a brokerage house (or other investment company).
Sale of Investment
Exit from a capital investment, i.e. purchase of securities for investment purposes, will be taxed upon sale. As a consequence of the sale of securities, income or loss on investments will be realized. Because the investment was made by a foreign investor, income will be taxable in Poland and/or in the investor’s country of residence. In extreme cases, this may be subject to so-called double taxation, and taxed in both countries. In order to avoid this, appropriate provisions of international agreements concluded to avoid double taxation between Poland and the investor’s country of residence must be accounted for. However, please keep in mind that Poland has not executed such tax agreements with each and every country.
If these directives can be applied, most often the sale of securities will be taxed only in the investor’s country of residence. The exception may be companies with assets or value (directly or indirectly) consisting of at least 50% real estate located in Poland (so-called real estate companies). In this case, the sale may also be taxed in Poland at a rate of 19% (most often the investor’s country of residence will allow deduction of the Polish tax incurred).
However, if these country to country agreements do not apply (as mentioned, Poland has not concluded these contracts with many countries, e.g. Monaco), any transactions involving the sale of securities traded on the Polish stock exchange or shares of such real estate companies as referred to above, will be taxed in Poland. The taxation in Poland will amount to 19% and most likely this will not be deductible in the country of residence.
In all other cases, no tax should arise in Poland.
Purchase of investment
If a direct investment is made in Poland, one method of accomplishing this is to purchase the company, meaning buying the company’s shares. In this case, the consequences will be similar as above. Another way to execute this sale is to set up a new company in Poland to conduct business. In this context, it is worth mentioning the new construct introduced in the Polish legal system last year: Alternative Investment Company. This is a special type of company supervised by the Polish Financial Supervisory Authority. If this entity meets the prerequisite requirements, it may be exempt from taxation on the sale of shares in other companies. It is therefore a kind of investment vehicle, allowing reinvestment of funds from investment activities in Poland without tax being incurred.
When making direct investments, it is often necessary to provide financing to a new company or a newly acquired company. This can be done first through an injection of capital, for example in cash. In such cases, the increase in share capital will be subject to a civil law transaction tax incurred by the company, in the amount of 0.5% of the increase. However, if the company is granted debt financing, the value of the loan from a partner should be exempt from this tax. If the loan is granted by an entity other than a partner, the tax will also be 0.5%. Both methods of providing financing to a company will have greater consequences at the time of disbursement. We will discuss this issue in the following section.
Sale of investment and disbursing profits
The disposal of shares acquired in a Polish company will be subject to the same regulations as in the case of sale of shares on the stock exchange. Similarly, gains from the redemption of shares will generally be taxed (primarily in the form of a buyback of shares by a company). In the case of capital investments additional regulations were introduced in Poland in 2019 (Notional Interest Deduction). In short, this allows a Polish company to possibly settle additional tax deductible costs in the amount of hypothetical interest on the capital financing received (not to exceed PLN 250,000 per year).
If the company was financed by debt, repayment of the principal amount of the loan (or bond) will not be taxed in Poland. However, if interest is paid to the investor, the Polish company will be able to include interest as a tax deductible cost. However, it should be kept in mind that the possibility of including interest in tax costs is limited by regulations in the realm of so called thin capitalization. This boils down to the fact that, interest (and other costs of debt financing) if exceeding PLN 3 million in a year, can be included in tax deductible costs only if this does not exceed 30% of EBIDTA (calculated in a specific way). In addition, if interest is paid abroad, the Polish company is obliged to collect a withholding tax. The amount of this tax depends on the location and legal form of the investor and can be from 0% (in the case of companies from the European Union and EEA that own at least 25% of the company’s shares for at least two years and meet some additional conditions), to reduced rates of 5% -15% (in accordance with the relevant agreement on the avoidance of double taxation), up to 20% in the absence of a tax agreement and the possibility of exemption. It should also be kept in mind that, in Poland, there are provisions regarding obligation held by Polish taxpayers to exercise due diligence regarding the beneficial owner of a foreign payment recipient. In addition, it is likely that this year there will be additional restrictions applied to the option of applying for preferential tax withholding rates, which may lead to the effective application of the 20% rate.
This situation is similar in the case of payment of profits from the company in the form of dividends. A Polish company is obliged to collect withholding tax, but at a rate of 19%. It is possible to apply an exemption (for entities from the EU / EUG owning at least 10% of shares or stock for at least 2 years and meeting some additional requirements) and a lower rate of 5% -10% depending on the applicable international agreement. However, lower rates and the possibility of exemption are subject to the same restrictions as interest tax.
Taxation of Operations
In regard to the taxation of operating activity, topic from a tax perspective, this is by far the most convoluted of all three instances discussed. However, from the investor’s perspective, the details may not be as most relevant when making investment decisions. Therefore, we will only give a high level overview of relevant matters.
First of all, it is worth noting some general income tax regulations.Unlike federal states, i.e. Germany or the United States, income tax in Poland is charged only at the level of the central budget. Local governments receive part of these revenues, but this is done at the level of budget settlement and does not concern taxpayers.
The basic tax rate for companies and other legal entities is 19%. This rate works alongside specific rates for withholding tax and for the sale of securities, which we discussed above. In the of case of operating activities, income is taxed, this is calculated as the difference between the income and the tax deductible cost in a given tax year. The method of calculating income for tax purposes is different from accounting principles and may lead to many discrepancies that need to be verified by Polish tax advisers.
In the context of operating rates, there are also specific regulations
First, it is possible to establish a company that will be taxed at a rate of 9%. However, this applies only to small companies that did not exceed EUR 2 million turnover annually. Importantly, these companies cannot be formed as a result of any reorganization or restructuring of existing entities, nor can their assets consist of the assets of existing enterprises (in the value of over EUR 10,000). So, the 9% rate is only available to small companies that have not carried out any activity so far and are not a continuation of activities of other entities.
Secondly, there are also opportunities to obtain specific tax exemptions, in particular in the context of production activities carried out in particular locations specified by the Polish government.
Thirdly, it is possible to benefit from a reduced rate for innovative activities (the so-called IP Box). A rate of 5% can be applied to income from qualified intellectual activities. In the case of investments that may include innovative activities: licensing of production lines, know how, etc., which are to be sold, it is worth analyzing the possibility of taking advantage of this reduced rate. The use of this reduced rate however, is subject to a number of requirements. Therefore, before deciding to use this rate, an investor should speak with a professional advisor well versed in this realm.
Taxation of employees
From an operational perspective, the employee burden that an employing company must bear may also be relevant. In Poland, these expenditures are quite high and may amount to around 20% of gross compensation. Additionally, there are many different forms of employment, which differ in flexibility, responsibility, but also in the amount of employer end financial burden. For this reason, depending on the type of business conducted in Poland, the employment policy may have a significant impact on the overall financial burden of the company and should also be considered.
Tax on goods and services
Finally, one of the important tax aspects of doing business in Poland is the tax on goods and services (so-called VAT). The VAT system is very complex and contains many exemptions and exceptions to basic taxation code. From an investor’s perspective, however, the following facts are the most important. The basic rate for this tax is 23% and it is charged to the seller of services or goods. At the same time, the seller can deduct the tax that was included in the products and services that he purchased for business purposes. This tax is included in the price of products, so in effect the burden is borne by the recipient. However, due to differential rates, possibility of using a wide variety of nuanced exemptions and the complicated methods of accounting for these tax deductions, proper management of a VAT settlement policy for a company may have a significant impact on the overall result of an investment. For this reason, when making an investment in Poland, it is worth asking a professional advisor how to structure VAT settlements in the most advantageous way.
In summary, a period of slowdown and economic crisis will not necessarily mean a lack of investment opportunities. For some investors, a downturn in markets may bring on a slew of new investment prospects. In this case, investing in Poland may prove to be not only an interesting, but also potentially very fruitful opportunity. However, before acting on even the most promising investment, it is worth getting acquainted with the basics of the legal and tax regulatory environments. In this article we have presented the fundamentals of these basics that every foreign investors intending to invest in Poland must learn. However, due to the complexity of these regulations and the varied scope of available investments, the support of an adept advisor may prove to be crucial in making sound investment decisions, in particular by investors who are not familiar with local regulations.