Here we discuss some basic concepts related to the Corporate Income Tax Act: the object of taxation and taxable entities. We will examine carefully revenue: sources of, exclusions from and how its amount is determined.

It should be noted that both Income Tax Acts, i.e. Corporate Income Tax Act and Personal Income Tax Act, are similar or even identical in many respects concerning the taxation of business activities. So both Income Tax Acts contain many provisions whose wording is very similar or even the same when it comes to revenue, expenditure or methods by which income is determined.

Taxable persons in corporate income tax

The concept of “legal persons” in the context of income tax is a slight simplification, because the catalogue of taxable persons for this tax is much wider.

So let us see what entities may be taxable persons for corporate income tax purposes.

The Corporate Income Tax Act mentions the following entities as taxable persons:

a) legal persons;
b) non-corporate bodies, with the exception of companies without legal personality, except that corporations in the process of formation are taxable persons;
c) tax capital groups (groups consisting of at least two corporations having legal personality which are linked by capital and satisfy the conditions specified in the Act);
d) companies without legal personality having their registered office or management in another state, if pursuant to the tax regulations of that state they are treated as legal persons and are taxable on their entire income in that state, regardless of where such income is earned.

A legal person is an organisational unit which may be the subject of rights and obligations under civil law. The fact of having a legal personality stems either directly from the Act (e.g. Article 33 § 1 of the Civil Code), or from the fact that an entity is entered into the register (e.g. Article 12 of the Code of Commercial Companies dealing with corporations).

The concept of other non-corporate body is not defined in the Act. Such general wording allows the conclusion that taxable persons in corporate income tax are all organisational units unless specifically excluded. Hence, taxable persons are companies without legal personality, i.e. partnerships: civil partnerships, general partnerships, limited liability partnerships, limited partnerships and limited partnerships on shares. However, things will change in the case of limited liability partnerships on shares, which starting from 2014 will be incorporated into the circle of corporate income tax payers.

Examples of organisational units that are (or may be) taxable persons in corporate income tax include: housing communities, associations and campaign teams.

An interesting “form” of a taxable person is a tax capital group. A group comprising at least two corporations may become one entity for income tax purposes. A tax group pays advance income tax and the annual tax, which is the difference between the total income and the total loss of individual entities within the group. The main tax benefit resulting from the establishment of a tax capital group is the possibility to cover the losses of one group company as they arise with income earned in a given tax year by another company in the same group.

Example:

Three corporations having legal personality form a tax capital group.

The companies achieve the following income from their business operations: Company X – income of 40,000 PLN, Company Z – income of 60,000 PLN; Company Y – loss of 20,000 PLN.

In a tax capital group framework, a taxable base is determined by reference to the concept of aggregate income and deduction of total losses. So the total income of the tax capital group is 80,000 PLN (40,000 PLN + 60,000 PLN - 20,000 PLN).

The tax capital group's tax liability for the tax year concerned is 15,200 PLN (80,000 PLN x 19%). If each company operated individually, their respective tax liabilities would be:

- tax payable by Company X: 7600 PLN (40,000 PLN x 19 %);
- tax payable by Company Z: 11,400 PLN (60,000 PLN x 19%);
- whereas Company Y would have the right to settle its loss over the next 5 tax years.

If the Companies X, Y and Z operate as a tax capital group, they will pay the total tax of 15,200 PLN. On the other hand, if they operate individually, their tax liability will amount to 19,000 PLN

The above example shows that establishment of a tax capital group is economically justified if at least one member company generates losses, because such losses can be covered with the current gains of the remaining companies.

Unfortunately, legal regulations impose a number of obligations on entities wishing to create a tax capital group. That is why it is not a popular arrangement. Companies that intend to create a group must, among other things, have average per-company equity of at least 1,000,000 PLN, while one of the group companies (the parent company) should have at least a 95% share in the capital of each of the remaining companies. In addition, such companies must not have any arrears with their payments towards the budget. Moreover, the group must throughout its life (at least 3 years) earn income whose share in revenue is not lower than 3%.

The Act also indicates that the group of taxable persons can include foreign companies, which admittedly do not have a legal personality, but pursuant to tax regulations in their country of origin are treated as legal persons and are taxable on their entire income in that state, regardless of where such income is earned.

An example of such entity may be a German limited partnership on shares (in German: Kommanditgesellschaft auf Aktien). Pursuant to the German legislation it is treated as a corporation, so in spite of the fact that in Poland limited partnerships on shares (S.K.A.) are not taxable persons in CIT (although only until the end of 2013), a German KGaA operating in Poland will be subject to corporate income tax.

Related parties

A special type of taxable person includes related parties, i.e. the entities linked by capital or personal ties. Related parties may not exploit the existing ties to reduce their taxable income. In practice, this means that such entities must cooperate on an arm's-length basis. If they do not follow the above requirements, then a tax authority will be authorised to levy tax based on income estimation (Article 11 of the CIT Act).

Example:

Two limited liability companies JON and JIM are related parties. JON sells office supplies to JIM. Sales in 2012 amount to 50,000 PLN. At the end of the year, JON records a loss of 100,000 PLN, while JIM makes a profit of 100,000 PLN. As a result, JON will not pay any tax (because it has recorded a loss), and JIM will pay 19,000 PLN in tax.

Related entities often feel the temptation to exploit the links in order to reduce tax. Since in our example, JON's loss is big, no tax will apply even if the loss is reduced, but JIM will be able to reduce its taxable income in this way.

Therefore, the companies agree that instead of selling goods at the price of 50,000 PLN, they will set the price at 70,000 PLN. In this way, JON's revenue increases by 20,000 PLN, and JIM's expenditure is higher by 20,000 PLN. As a result, JON's loss becomes reduced to 80,000 PLN (so still does not have to pay the tax), whereas JIM's profit will amount to 80,000 PLN, so will pay the tax of 15,200 PLN. By exploiting the inter-company links, JIM manages to save 3800 PLN on tax.

For the state budget, such cooperation, involving the use of inter-company links in order to reduce income and tax, is a harmful arrangement. Therefore, tax authorities try to prevent it by verifying whether the terms of cooperation between related parties do not deviate from the arm's-length principle.

Related parties are obliged to draw up special tax documentation for their transactions (Article 9a of the CIT Act) – for the tax authorities, this documentation constitutes proof that the terms of cooperation (usually the price) between related parties are not affected by the existing inter-company links.

If a taxable person fails to submit such documentation of transactions to tax authorities, and the ensuing tax proceedings prove that the terms of transactions established or imposed differ from those which would apply between independent entities, and as a result the taxable person does not disclose income or discloses income lower than should be expected, then the higher income/lower loss will be established (compared to the figure declared by the taxable person). The difference between the income declared by the taxable person and that established by tax authorities is taxed at the rate of 50% (Article 19 para. 4 of the CIT Act).

Tax-exempt entities

As mentioned above, the Act seeks to tax every possible entity that earns income. However, the law provides for certain exemptions for some public finance entities. These include the State Treasury, the National Bank of Poland (NBP), earmarked funds, the Social Insurance Institution (ZUS) and pension funds. These entities exist outside the tax legislation framework, and as such are not obliged to file tax returns.

Non-taxable revenue

The provisions of the Corporate Income Tax Act do not apply to:

1) revenue from agricultural activities, with the exception of special branches of agricultural production;
2) revenue from forest management;
3) revenue from transactions that may not be the subject of legally binding agreements (e.g. crime, bribes);
4) revenue of a ship-owner that is subject to tonnage tax.

Unlimited and limited tax obligation

As in the case of individuals, the legislation defines the scope of tax obligations for legal persons depending on the residence of the taxable person.

Legal persons (and other entities) that have their registered office (or management based) in Poland, are taxed on their entire income, regardless of where it is earned (unlimited tax obligation).

In contrast, entities that do not have a registered office or management in Poland are taxed in Poland only on that part of their income that they earn within Polish territory (limited tax obligation).

The concept of a registered office is defined in the Civil Code and, unless there is a specific provision to the contrary, a legal person's registered office is understood as the place where its governing body is established.

Tax year

While discussing corporate income tax, it is also worth mentioning that sometimes a tax year is not synonymous with the calendar year. Indeed, a tax year can sometimes last longer than 12 months.

A general rule specified in the Tax Code is that the tax year corresponds to the calendar year, unless a specific tax law provides otherwise. And the Corporate Income Tax Act is precisely the only exception and does provide otherwise. Pursuant to the Act, a taxable person has the right to adopt a different tax year as long as it lasts 12 months.

Changes in the “tax calendar” result in a “transition year” of more than 12 months (though it must not last longer than 23 months).

Example

A company whose tax year to date has corresponded to a calendar year adopts a resolution that the tax year should now be the period of 12 consecutive months between 1 June and 31 May. Once the “old” tax year ends, i.e. after 31 December, the company will have one month to notify the head of the tax office of the change.

Then the new tax year will last between the end of the “old” tax year and the end of the “new” one. So in the example, it will be the period between 1 January of that year and 31 May of the following year (17 months). The next tax year will last the “prescribed” 12 months, i.e. from 1 June to 31 May.

Changes in the tax year may be related to the periodicity of income earning, or a desire to extend the period in which the tax loss can be deducted.

Example:

For Company X, the tax year corresponds to the calendar year. In 2007, the company incurs a loss of 550,000 PLN. Because over the next few years, the company earns a fixed income of 100,000 PLN/year, it is able to deduct 400,000 of the loss in the years 2009-2012.

In 2013, the company plans to earn income of 100,000 PLN. This means that it will be unable to deduct 50,000 PLN of the loss (similarly to personal income tax, under corporate income tax arrangements, the loss may be deducted over the period of 5 consecutive years, and an annual deduction must not exceed 50% of the entire loss amount).

In this situation, the optimization solution will be the decision to change the tax year and assume that it will last, say, from 1 December to 30 November. Thus, the first year after the change (and at the same time the fifth year in which the loss could be deducted for the last time) will run from 1 January 2013 to 30 November 2014, or 23 months. This period should be sufficient for the company to achieve income of at least 150,000 PLN and thus deduct the remainder of the loss.

Object of taxation in corporate income tax

According to the general principles, an object of taxation in corporate income tax consists of income, regardless of the source of revenue from which such income is derived.
Income is the excess of total revenue over revenue expenditure, as earned in a tax year. If revenue expenditure exceeds the total revenue, then the resulting difference is a loss.

Like with personal income tax, if a taxable person records a loss in a tax year, they can reduce their income with the loss amount over the following consecutive 5 tax years, provided that no single annual deduction exceeds 50% of the entire loss amount (Article 7 of the CIT Act).

For revenue derived from interest in profit of legal persons (such as dividend) and revenue of foreign entities related to intangible services (e.g. interest, royalties, copyright, or consulting) – the object of taxation is revenue (Article 10 and 21 of the CIT Act).

Revenue

In fact, the Corporate Income Tax Act does not give a definition of revenue.

The regulations only specify types of revenue – by means of a list of examples contained in Article 12; moreover, they specify an exhaustive list of types of a business entity's cash inflows that are not considered revenue.

Let us have a look at the most popular forms of revenue that are mentioned in the Act.

Money and monetary assets received

A general rule in the case of monetary revenue is that it must be “received”. A taxable person receives money when it becomes part of their property.

Within the meaning of the Act, money is also considered received when it becomes available to a taxable person, e.g. when it is credited to the person's bank account.

Value of property or rights received free or charge or partially paid, and the value of other free-of-charge or partially paid performances

As in the case of individuals, free-of-charge performances received by legal persons may be considered revenue. Any benefit received by a taxable person free of charge may constitute revenue for tax purposes. And as with individuals, this issue is controversial and results in conflicting interpretations and judgments in the legal person domain.

An example of a controversial “performance” is granting a free-of-charge guaranty for a loan taken out by the company by a shareholder in that corporation.

Taxable persons claim that it is difficult to speak here of any performance at all, given that a shareholder does not incur any expenditure, and does not provide any special labour input in connection with the guaranty. Although some tax authorities and administrative courts agree with this approach, the Ministry of Finance expresses a “dissenting opinion” on this issue, and in its general interpretation (which serves as “ministerial recommendations” for tax authorities) states that the use of such guaranty by the company is actually revenue.

According to tax authorities, free-of-charge performances for companies also include resignation from remuneration by a board member or other persons performing any services for the company. So in this situation, a free-of-charge performance is doubly disadvantageous to taxable persons.

Example:

A member of the board resigns from remuneration. How does this fact affect the amount of tax paid by a company?

Suppose that in a tax year the company's revenue is 1,000,000 PLN, and its expenditure is 400,000 PLN. Average remuneration of board members in similar companies approximates to 100,000 PLN/year.

If the company actually paid such remuneration to the board member, it would be the company's expenditure item, which would increase its total expenditure. Consequently, corporate income for the tax year would amount to 500,000 PLN, which at the current CIT rate of 19% would mean a tax of 95,000 PLN.

Resignation from remuneration by a board member is a free-of-charge performance for the company's benefit.

In the situation described here, expenditure remains at the actual level of 400,000 PLN, but the value of the performance concerned increases the company revenue so that it amounts to 1,100,000 PLN. Thus, the company income amounts to 700,000 PLN, and its income tax is 133,000 PLN.

Although the company saved 100,000 PLN on the remuneration concerned, its tax increased by 38,000 PLN. Therefore, the real benefit for the company amounted to 62,000 PLN. Actually, we can say that by having resigned from their due remuneration, the board member has done the greatest favour to... the tax authorities.

The rules for determining the value of free-of-charge performances in the regime of corporate income tax are akin to those for personal income tax:

- if a performance is related to services falling within the scope of a performing entity's business activity – the value is established based on the prices charged to other customers;
- if a performance is related to services purchased – the value is established based on purchase prices;
- if a performance consists of the provision of premises – the value will be an equivalent of the rent that would be payable if a rental agreement was concluded for the premises;
- in other cases ­ the value is established based on market prices charged for the provision of services or property or rights of the same kind and type, taking particularly into account their condition and wear, and the time and location when and where they are made available.

The value of partially paid performance that are considered a taxable person's revenue is the difference between the value of such performances, as determined in accordance with the above-mentioned principles, and the fee paid by the taxable person.

Value of written-off or time-barred liabilities (including borrowing liabilities)

An interesting type of performance which constitutes tax revenue is writing-off of liabilities, including interest on borrowings.

For a lender, interest is revenue when received. So, if no interest is received, even if the fact results from writing off the item by the lender, no tax consequences occur.

On the other hand, interest written-off becomes the borrower's revenue under the concept of a free-of-charge performance. This is because the borrowing company has been released from the obligation to pay.

Example:

A company obtains a borrowing on which it should pay 10,000 PLN interest in 2012. The lender remits the interest. For the borrower, interest remittance translates into the higher income tax. If the company paid 10,000 PLN interest, its tax would be lower by 1900 PLN.

On the contrary, the performance received increases the tax by 1900 PLN. By the same token, the company will be required to pay 38% more in tax. Just as in the previous example, the remittance of 100,000 PLN in interest translates into the company's real benefit of 6200 PLN.

3800 PLN is the tax authorities' gain.

So we cannot overlook the fact that when a company does not pay due interest on time (even for many years), its position will be better than if the interest was remitted.

Value of claims returned that have previously been written down as uncollectible or written off and recognised under revenue expenditure

It may happen that a debtor does not pay. In the business activity domain, revenue consists of (to be discussed in a little while) performances that are due, even if they have not been received. So even though we have not received payment, we have to pay the tax on any revenue that is due.

The tax regulations, however, provide for some leeway to “compensate” for the tax loss resulting from the debtor's insolvency. Once relevant conditions are satisfied, unrecovered debt may be recognised under revenue expenditure and thus reduce the tax amount.

If, however, after the recognition of debt under revenue expenditure, the outstanding amount is recovered, then the revenue should be disclosed again as revenue.

Example:

Company X provides a service to Fraudstery PLC and issues a corresponding invoice for 10,000 PLN. It recognises the amount as revenue and pays the tax due on that amount (let us assume that it is 1900 PLN).

Unfortunately, in spite of intensive debt collection efforts, the amount has not been recovered. So Company X recognises the uncollected claim under expenditure and thus reduces the tax due (by the same 1900 PLN).

If, however, Fraudstery PLC returns the debt, Company X will have to recognise revenue again.

Revenue in foreign currencies

In corporate income tax, revenue in foreign currencies is converted into PLN according to the same rules as in personal income tax, i.e. according to the average FX rate announced by the National Bank of Poland, as applicable on the last working day preceding the revenue day.

Revenue from business activities

As a general rule, revenue in the income tax regime consists of a performance received.

This rule, however, does not apply to business activities. Revenue related to business activities and special branches of agricultural production is understood as revenue that is due, even if not actually received, less the value of goods returned, and the rebates and cash discounts granted.

So in business activities, the revenue day is the day when a receivable originated rather than the day when a taxable person received money for the product sold or the service rendered. This solution can lead to a situation in which a taxable person has not received any payment from their contractor, but will still be obliged to pay income tax. Here we deal with the principle known as the accrual principle.

With respect to business revenue, the accrual principle does not apply to revenue in the form of interest on borrowings granted, cash at bank and contractual indemnities received, as they are all governed by the cash-basis principle (revenue is generated only upon receipt of the performances concerned).

Rebates and cash discounts are price reductions. A rebate is granted based on the subject (for specific customer categories), the object (e.g. form of sales), or in connection with actual or anticipated damage suffered by a counterparty (e.g. in connection with sales of lower grade or defective products).

Cash discount applies when payment occurs in the form that is more convenient for the seller, e.g. in cash or at an earlier date than the date specified in the contract.

Revenue day in business activities

The revenue day in business activities is understood as the day when goods are delivered, a property right is disposed of, or a service is rendered or partially rendered but not later than:

- the invoice day; or
- the day of payment of the amount due.

Example:

Company A sells goods on 30 April (and releases them on the same day). A corresponding invoice is issued on 3 May. Revenue is generated in April (goods release date).

Company B completes a transport service on 27 February, and issues a corresponding invoice on 15 March.

Revenue is generated in February (service performance date).

If the parties agree that the service should be settled in billing periods, then the revenue day shall be the last day of the billing period specified in the contract or on the invoice, and should fall at least once a year (this provision applies as appropriate to electricity, heat and network gas supplies).

In practice, providers of company services may freely establish the revenue day (provided that at least one such day is designated during a year).

Example:

A company rents out commercial premises starting from 1 January. The agreement assumes that the parties will make settlements on a quarterly basis, and invoices will be issued on the last day of the quarter. What will be the revenue day?

In accordance with the legislative provisions, the revenue will be generated not later than on the invoice day or the day of payment of the amount due. Since in our example the settlements will be quarterly and the amount due will be paid once the invoice is issued, the revenue day will fall on the invoice day.

Revenue from transfer of property or property rights for consideration

In the case of sales, revenue consists of the price. However, if the price is significantly and unreasonably divergent from the market value of the property or rights, then a tax authority determines the revenue at market value. This means that the tax authority may issue a decision in which it determines revenue that is different (obviously higher) than the price-based revenue.

Market value of property or property rights is established based on market prices charged in trading in property or rights of the same kind and type, taking particularly into account their condition and wear, and the time and location when and where they are transferred for consideration.

In a situation where a tax authority finds that the price indicated in the contract is significantly divergent from the market price of property or rights, it will, in the first place, request all parties to the contract to change the value or indicate reasons for having stated a price that is significantly divergent from the market value.

If the parties do not comply with that request (i.e. they fail to respond, change the value, or indicate reasons for having stated the price that is significantly divergent from the market value), then the tax authority will establish the value taking into account an opinion of an expert or experts. If the value determined in this way differs by at least 33% from the value expressed as the price, the cost of such opinion of an expert or experts will be borne by the transferring party.

Exemptions from revenue

The CIT Act also lists categories that are not classified under tax revenue (Article 12 para. 4 of the Act). The following items are excluded from revenue (non-exhaustive list):

- payments collected or accrued receivables relative to supplies of goods and services that will be performed in subsequent reporting periods;

So advances on supplies of products or services are not considered revenue.

- accrued but not received interest on receivables, including on borrowings (loans) granted;

Even if interest is related to business activities, for such interest we do not apply the accrual basis but the cash-basis principle. In other words, revenue does not originate just because interest is due: it must be actually received by a taxable person.

- refunded, redeemed or abandoned taxes and charges which constitute income of the state budget or local government budgets, not recognised under revenue expenditure;

- other reimbursed expenses, not recognised under revenue expenditure.

Both of these categories are a practical expression of a general rule that if a taxable person receives a refund of any performances that they have not originally recognised under revenue expenditure, then the refund will not be revenue either.

Example:

Revenue expenditure may not include, for example, income tax. So a tax refund (if any) will not be considered revenue either.

- the amount of interest received in connection with the refund of overpaid tax liabilities and other budgetary dues, as well as interest on the refunded difference in tax on goods and services, as defined in separate regulations;

On the whole, overpaid tax does not bear interest. However, if a tax authority fails to complete the refund within the time limit specified in legal regulations, then the refund bears interest.

Such interest, however, will not be the taxable person's revenue.

- value of performances provided by volunteers on the conditions specified in regulations governing activities in the public interest and volunteerism.

We have already mentioned that a free-of-charge performance for the benefit of taxable persons creates revenue. However, such revenue does not originate if performances are provided by volunteers.