PSI – Traps of applying zonal relief

It should be borne in mind that the use of Polish Investment Zone preferences, in addition to the tax benefits in the form of exemption from CIT or PIT, is associated with the listed risks that each investor should consider before deciding to take advantage of the preferences.

Recognition of eligible costs
We would like to point out that, according to the Explanation of the Minister of Finance dated March 6, 2020, costs incurred for a new administration building, a personal car for board members or an on-site employee canteen – do not affect the production process, and therefore do not constitute eligible investment costs.

Thus, there is a risk that the elimination of qualified costs that do not directly affect production may lead to a failure to meet the quantitative criteria of the investment, which will result in the inability to benefit from the tax exemption under the relief in question or the need to return the benefit.

Not eligible for simplifications in TP documentation
We would like to point out that related parties using the Polish Investment Zone exemption are not eligible for simplifications under the exemption from preparing transfer pricing documentation for domestic entities with no tax loss under Article 11n of the CIT Law. Which should also be taken into account when deciding whether to use the described preference.

Revocation of the support decision
Failure to meet the conditions indicated in the support decision may result in the revocation or cancellation of the support decision.

The Minister of Economy shall revoke the decision on support if the entrepreneur:

has ceased to conduct business activities and on the area indicated in the decision on support
grossly violated the conditions specified in the decision on support, or
has not removed the deficiencies found in the inspection conducted, within the time limit for their removal.
If the decision is revoked, there will be an obligation to repay the public aid. The reimbursement of public aid is barred by the statute of limitations of 10 years, counting from the end of the year in which the taxpayer benefited from the aid, while tax liabilities are barred by the statute of limitations of 5 years, counting from the end of the year in which the deadline for tax payment expired. Therefore, repayment can take two forms:

an increase in the amount of tax due to be paid;
the necessity to reimburse on the basis of receipt of a decision;

It should be noted that in the case of the taxpayer’s obligation to repay public assistance, a new decision on support may not be issued until the date of repayment of such assistance. If the decision on support is revoked, the tax is payable on the due date for payment of advance income tax for the next tax period. If the loss of the right to exemption occurs in December, the tax must be paid by the due date of the return. You should also bear in mind the need to pay interest on tax arrears.

Small tax avoidance clause
In the case of the exemption resulting from the assumptions of the Polish Investment Zone, it is possible to apply the so-called small tax avoidance clause contained in both CIT and PIT regulations, thus the exemption is not available if:

  • the sequence of legal actions was made primarily for the purpose of obtaining income tax exemption or;
  • the actions indicated above are not of a real nature or;
  • the taxpayer performs a legal act or multiple legal acts leading to tax avoidance or evasion.

The loss of the right to exemption, however, has no retroactive effect, and does not refer to the entire tax exemption used as is the case with the revocation of the decision on support.