1. Double Tax Treaties

Certain new treaties for the avoidance of double taxation have come into force between Poland and the following countries:
  • the Grand Duchy of Luxembourg,
  • the Kingdom of Morocco.

Please note that certain provisions of the aforementioned treaties are effective from 1 January 1997.

2. Second Economic Zone open

The Special Economic Zone in Suwalki (N.E. Poland) opened on 30 November. 12 companies currently have licences to operate in the zone, which allows for a 10 year exemption from Corporate Income Tax as well as a 50% exemption in the following 10 years where certain levels of investment are reached.

3. Changes in Personal Income Tax

The most important changes to the Act of 26 July 1991 (apart from changes in respect of 'building' deductions):

3.1. Per diems and other allowances received for business trips have been exempted from taxation regardless of whether or not the recipient is an employee of the company.

3.2. The exemption from taxation on the value of housing made available to employees working outside their place of permanent residence has been reduced to a monthly maximum of three times the lowest monthly wage for December of the previous fiscal year. For 1997 this will be approximately US$450.

3.3. Income received from international financial institutions or from sources granted by the governments of other states on the basis of agreements in force between them and Poland are to be exempted from taxation.

3.4. The tax rates for 1997 will be as follows:

income in PLN                         tax

up to 20,868                          at the rate of 20%
between 20,868 and 41,736             at the rate of 32%
over 41,736                           at the rate of 44%

(Currently, 1 USD = approx. 2.85 PLN.)

Simultaneously, the legislation stipulates a reduction in 1998 of the aforementioned tax rates to 19%, 30% and 40%.

3.5. It is permitted to deduct annually from tax payable by a taxpayer or his/her non-earning spouse expenses incurred for health purposes. 19% of the expenses incurred may be deducted, however no more than 19% of three times the minimum wage in December of the previous year.

3.6. Natural persons receiving income from, inter alia, personal service or similar contracts, without an intermediary payer of taxes, are obliged to make monthly settlements with the tax office, and not, as up to now, only annual settlements. 20% of the income is payable as monthly advance payments by the 20th day of the following month. The advance payment for December is payable at the same time as the annual declaration is filed.

3.7. Persons gaining income from an employment relationship or retirement benefits or pensions from abroad are obliged to pay tax advances by the 20th day f the following month for the period January to November. The advance payment for December should be paid at the same time as the annual declaration is filed, and not, as until now, at the same level as the advance payment for November by 20th December of the year in question.

3.8. Persons earning income from the sale of shares and other securities (with the exception of those exempt from taxation) should make advance payments of 20% of the income received (from 1998 - 19%) by the 20th day of the month following the month in which the income was received. Income received from such sources is, however, taxed in accordance with normal principles at the end of the tax year.

3.9. The use of private cars for business purposes: the personal income tax exemption on refunds received by employees for using their own cars for business purposes has been retained.

Where the employer refunds an employee's costs in accordance with the officially binding allowance for each kilometre used by state enterprises, the employee is obliged to document the vehicle's mileage according to a specified form. If this obligation is not complied with, the tax exemption will not apply to the employee and the refund will not qualify as a cost of earning income for the employer.

3.10. Revenue exempted from taxation: the list of income exempted from taxation has been increased. It includes, among others:

Revenue received in respect of redeemed shares or contributions to a company or in connection with the return or writing off of shares in a company which has legal personality. However, this exemption only concerns the amount of revenue which is equal to the price of acquisition. Where shares or contributions were the subject of a donation or inheritance, the exemption covers the income which equals the market value on the day of acquisition.

Revenue received on the basis of repaid additional payments made to companies with legal personality, on the basis of separate provisions, up to the value of the initial additional contributions made.

3.11. Deductions from income: primarily relief on the purchase of State Treasury bonds and donations to natural persons as well as to certain legal persons have been excluded from the list of tax deductible expenses. Other expenses, incurred for the taxpayer's:
  • own accommodation requirements, e.g. building a house, purchasing an allotment;
  • children's travel to school and their paid education;
  • paid, supplementary education and vocational training, as well as the purchase of equipment and training aids;
  • paid health care;

will be deductible from tax payable up to a specified limit.

4. Changes to Corporate Income Tax

4.1. Corporate income tax will be reduced as follows:

  • 1997 - 38%,
  • 1998 - 36%,
  • 1999 - 34%,
  • 2000 - 32%.

Each year's tax rate applies once the company's tax year commences, i.e. not necessarily from January each year.

4.2. Capital groups:

a) companies which want to form a capital group may be shareholders in companies other than those whose shares are traded publicly;

b) the provision essentially obliging groups to invest at least 50% of their income after tax has been deleted. A new provision states that companies forming capital groups must achieve a group profitability ratio of at least 8% every year;

c) the provisions concerning the necessity of all the companies to correct their tax returns if group tax status is lost has been repealed and the assessment of penalty interest on any resultant arrears has been deleted.

4.3. The provision defining income from participation in the profits of other legal persons has been further refined. Income now includes:
  • income actually received including the value of assets remaining distributed on liquidation;
  • income designated for increasing share capital as well as equivalent amounts transferred to such capital from other capital or the funds of legal persons.


4.4. Transfer pricing: the provisions of art. 11 have been broadened by the introduction of a definition of related parties, which highlights transfer pricing. Principles for the methods of assessing income in the case of such related parties have also been introduced as follows:
a) the comparative uncontrolled price method;
b) the resale price method;
c) the cost plus method;
d) the transaction profit method.

4.5. The waiver of a debt has now been included in taxable income even if it was not included as a tax deductible cost.

4.6. The limit of 10.000 ECU which was until now the maximum allowable for depreciation write offs of passenger cars has been extended to include motor vehicles with a maximum loading capacity of 500 Kg. This inclusion also covers expenses such as insurance and refunds in excess of statutory allowances for the business use of such private motor vehicles.

4.7. Where shares are sold which had originally been issued as a result of the shareholder making a contribution in kind, the tax base is the cost of the assets contributed less accumulated depreciation at the time of the contribution.

4.8. Losses incurred by banks as a result of guarantees or warranties granted from 1 January 1997 for the payment of credits and loans calculated in accordance with binding law (art. 16 para. 25 letter b) may be included as costs of earning revenues.

4.9. The following kinds of reserves will be allowed to be included as costs of earning income:
a) reserves made for receivables on the basis of guarantees or warranties for the payment of credits and loans granted by banks after 1 January 1997 with the exception of reserves made for irrecoverable receivables where a bank gave a warranty or guarantee which infringed the law, and which was confirmed by a legally binding court decision,

b) reserves for up to 25% of doubtful credits or loans as well as 25% of questionable receivables from guarantees or warranties for the payment of credits and loans given by a bank after 1 January 1997, with the exception, however, of reserves made to cover these credits or loans and also guarantees / warranties which were given in breach of the law, where such breach has been confirmed by a legally binding court decision.

It has also been specified that the aforementioned provisions include reserves made by banks in accordance with regulations issued by the President of the National Bank of Poland.

4.10. Bad debts may be tax deductible where their uncollectibility is documented (in addition to the current methods) in the form of a protocol, drawn up by the taxpayer, declaring that the expected court costs which would be incurred in claiming the receivables would be higher that the amount in question; an additional requirement which must be fulfilled is the prior making of a reserve for the aforementioned receivables, which was a cost of earning income.

4.11. A regulation has been introduced (this is the most comprehensive addition) detailing the investment expenditures which may be deducted from the tax base as well as how to make the deductions; in practice, a large part of the provisions thus far included in the Regulations concerning investment expenditure have been included in the CIT Act. The following are among the most important provisions in Art. 18a:

a) the "investment premium" deductible from the tax base has been defined which equals half the expenditure incurred in the first tax year for investment purposes,

b) it has been stated that in the case of prepayments (payments on account), these expenses are allowable as investment expenditure in the tax year in which the legal title to the assets to which they relate is transferred.

Moreover, where, in a tax year, a contract was entered into establishing the deadline for payment as the year following the year in which the assets were obtained, the expenditure connected with the price paid is deducted from the tax base in the year in which it is actually incurred.

4.12. The conditions which must be fulfilled in order for the taxpayer to utilise investment relief have been more precisely defined:
a) the attainment of the defined profitability ratio (4% for activities in the scope of the processing of farm produce, the rendering of building services, the production of building materials, the shipping and fishing industries, the tourism and leisure industry, and the production and sale of goods subject to state regulated pricing or profit margins, 8% for other kinds of activities);
b) prior to each deduction of investment expenditure carried out both in the course of the tax year and in the preliminary tax return for the year, the taxpayer may not have any outstanding state liabilities - tax or social security - which exceed separately for each type 3% of the due contributions and taxes; in the case of VAT, arrears may not exceed 3% of output tax.

4.13. A limit to investment relief deductions on expenses incurred in specific circumstances (e.g. export income exceeds 2.000.000 ECU annually) has been introduced for the years 1997 - 1999:
- for 1997 - 40% of the tax base;
- for 1998 - 35% of the tax base;
- for 1999 - 30% of the tax base.

Investment expenditure incurred in a given tax year which is not deducted (exceptions have been specifically listed in the Act) will not be deductible from the tax base in later years.

4.14. The limit for other investment relief due to the taxpayer:
- for 1997 - 20% of the tax base;
- for 1998 - 15% of the tax base;
- for 1999 - 10% of the tax base.

4.15. New principles for deducting donations have been introduced, comparable to those for natural persons. The change concerns the strict definition of entities to which donations may not be made. These include natural persons and entities engaging in commercial activities in the scope of the manufacture of products with an alcohol content of over 1.5% as well as tobacco, petroleum and electronic products.

4.16. A principle has been introduced which states that in the case of the disposal, exchange, change of use etc. of a residential building or flats, in connection with which deductions have been made, where the disposal occurs within 10 years from the time it is first used, the taxpayer should make a correction comprising an increase of income by an appropriate percentage of the amount deducted.

4.17. The legislation granting special investment relief and corporate income tax reductions for entities whose seat is located in an area of high structural unemployment remains in force until 31 December 1998. Privileges granted may in some cases remain in force after this date.

5. Changes to the Tax Control Act and Fiscal Penal Act

5. 1. Where Treasury Control Inspectors formerly issued a control result, against which the taxpayer could appeal, following a tax control they will now issue a decision outlining the tax arrears which are payable within 14 days.

An appeal may be lodged with the Tax Chamber against the Treasury Control Inspectors decision by the taxpayer, however this does not suspend payment.Where the taxpayer does not pay the arrears, the tax office may begin collection proceedings.

5.2. The tax control authorities will be able to directly demand information from banks in respect of the bank's client's accounts in connection with control proceedings which have been started. Such a demand may only be made once the taxpayer has refused to grant such information.


5.3. Tax Control Inspectors may immediately begin fiscal penal proceedings against taxpayers where they have reasonable suspicion that a fiscal offence (infringement) has taken place. Previously, they were obliged to initiate control proceedings first.
The difference lies in the fact that the Tax Control Inspector may immediately commence fiscal-penal proceedings and apply such enforcement procedures as the Penal Proceedings Act allows (including temporary arrest), although only with the public prosecutor's agreement.

5.4. In the Fiscal Penal Act, art. 106 has been changed in respect of the fiscal penal liability for impeding a control, e.g. refusing to make the company's books available for inspection, from 1 250 zl. to 25 000 zl (i.e. the fine has been increased).

6. The new Customs Code

The new Customs Code which will take effect from 01.07.97 introduces a number of new regulations concerning the basis and timing of imports and exports to/from Polish customs territory, including the rights and duties of both persons engaging in foreign trade and the customs authorities. Some of the key changes include:

6.1. A major change has taken place in the introduction of goods into the Polish customs territory. Imported goods will remain under customs supervision until their customs status has been established. However, the person importing the goods will be obliged to deliver these goods to the customs clearance office via a pre-assigned route (a customs route).

6.2. In respect of persons trading goods regularly and on a large scale, who do not have an outstanding customs duty liability and who submit collateral to cover import duties, the customs authorities may grant permission to carry out a simplified procedure of customs declaration. This would remove the obligation of the applicant to present the goods at the customs office.

6.3. Changes to temporary importation will allow the importation of goods into Polish customs territory which are designated for re-export without carrying out any modification/enrichment etc. Permission to temporarily import goods will be granted on application by the persons who will use the goods or organise their use. However, re-export must take place within 2 years of the acceptance of the customs declaration.

6.4. Goods which were re-imported, which were previously classified as domestic goods, are not subject to customs duty where such re-import (including release for trading) takes place within three years. A condition for effecting this type of re-import is that the goods have to be in the same condition as when they were exported, and it is possible to verify the identity of the goods.

6.5. The customs authorities will have wider powers in respect of customs controls, which may be carried out at any place and time, and include the right to check on the status of bank accounts.

6.6. In customs warehouses, under economically justified situations, the customs authorities will permit enriching processes as well as customs supervised production to take place in areas of the customs warehouse.

There will be no limit to the length of time goods may remain in a customs free zone.

6.7. Processing under customs supervision: this allows the use of imported goods on Polish customs territory. Permission to carry on this kind of activity will be granted by the customs authorities upon application by the domestic person which will carry on or organise such a process.

6.8. Import tax, which was 3% in 1996, has now been abolished.

7. Changes to the VAT Law and Fiscal Penal Act

7.1. Despite planned changes, VAT on the import of services is to remain non-deductible. For the importer, it will remain output VAT.

7.2. Penalties:
  • Where it is ascertained that the taxpayer has declared a lower tax liability than is due in a tax return, the tax office or tax control office shall define the amount of the liability at the correct amount and assess an additional liability at the equivalent of 30% of the amount of the reduced liability.
  • Where it is ascertained that the taxpayer has overclaimed the amount of the refund of input tax or the claim for input tax in a filed tax return, the tax office shall define the amount of the return correctly and shall establish an additional tax burden amounting to 30% of the overstatement. This also applies to the amount of tax specified in art. 21 para. 1.

7.3. Some changes have taken place in respect of the application of fiscal cash registers:

  • If, for reasons beyond the taxpayers' control, the recording of turnover and the amount of output tax cannot be effected by means of a fiscal cash register, the taxpayer is obliged to register turnover and output tax by using a spare fiscal cash register. If the recording of turnover and the amount of output tax cannot be effect by means of a spare fiscal cash register, the taxpayer may not engage in the selling of goods.
  • Taxpayers who do not use fiscal cash registers when making sales to persons not engaged in registered business activities lose the right to reduce output VAT by 30% of the amount of input VAT on purchases of goods and services.

7.4. A list of goods has been made, including certain medicines, pharmaceutical products and materials, and services in the scope of selling the above products under certain circumstances, to which the following VAT rates will be applied: 0% from 1997, 2% from 1998, 4% from 1999 and 7% from 1 January 2000.

7.5. The sale of organised parts of enterprises which are separately organised establishments (branches) is no longer exempt from VAT.

7.6. In the Tax Penal Code, the following changes have been introduced:
  • If a person breaches the regulations of the VAT Act or the Tax Obligations Act, by not issuing an invoice or bill for services rendered, refusing to issue an invoice or bill or not keeping copies of invoices or bills issued, they will be liable to a fine of 10 000 zloties;
  • Persons who issue an invoice or bill for rendering goods or services which contains details which do not reflect reality, or who use such an invoice or bill, are liable to the same fine;
  • Whoever breaches the regulations of the VAT Act by not keeping records of turnover and the amount of output tax by using fiscal cash registers is liable to a fine of 10 000 zloties;
  • Persons who carry out sales without using a fiscal cash register or who do not give the document from the fiscal cash register confirming the effected sale are liable to the same fine.

Tax laws and practise are constantly being revised and, whilst every effort is made to ensure that the information is accurate and timely, no decision should be taken on the basis of the information herein without first consulting with KPMG Polska.

Should you have any questions in relation to the above issues, please contact:

Oliver Sinton
KPMG Polska
LIM Center - Marriott Hotel - IX floor
Al. Jerozolimskie 65/79
00-697 Warsaw, POLAND
Tel. +48 (22) 630 7236
Fax. +48 (22) 630 6355