A customer that MDDP Outsourcing has been providing services for since 2017 conducts business activity involving investments in the segment of high street retail commercial properties.
From the beginning of its operations, the company focused solely on the market in Warsaw (Poland). So far, the said strategy allowed for reaching a rental ratio of over 95% and achieving high returns on investments. Consequently, the Customer is constantly growing, continuously expanding their resources by acquiring new, attractive commercial properties in Warsaw.
At the beginning of 2022, the company decided to change the form of taxation of its income to flat rate on income of companies, the so-called Estonian CIT.
Before it happened, the Customer (in cooperation with MDDP Outsourcing) had do carry out a detailed analysis in order to determine whether they are entitled to choose the said form of taxation. The verification involved checking whether the Company meets all the necessary conditions allowing it to apply flat rate on income of companies.
The verification process of the possibility of choosing Estonian CIT as the preferred form of taxation in Poland
Pursuant to the Polish Act on corporate income tax, in its applicable version as of 1 January 2022, the flat-tax rate can be utilized by a taxpayer who meets all of the following conditions:
The Customer has a registered office in Poland and is subject to corporate income tax on all of their income, regardless of the location of its generation. As a result, the said condition is met.
With the support of MDDP Outsourcing, the company analyzed their revenue in 2021 and more than 50% was constituted by revenue on operating activities i.e., real estate trade and rental. Thus, those do not constitute the so-called passive revenues mentioned above. Consequently, the condition specified in this point is fulfilled. In the upcoming years, the Company along with MDDP Outsourcing will verify, whether the condition is still being met.
In the said period, the Customer employed 3 people under a contract on employment on a full-time basis for over 300 days in the fiscal years (both in 2020 and 2021). The calendar years equals to the fiscal year of the Company which means that the above-mentioned condition is met. The company should continue the employment of 3 employees under the rules described above for the period in which the flat rate is applied or meet the a/m condition in a different way. The monitoring of the said condition is carried out in parallel both by the Customer and MDDP Outsourcing.
Our Customer’s Company conducts business activity in form of a limited liability company with only two natural persons as the partners. The said persons do not have any property rights related to receiving a benefit as the founder or beneficiary of a foundation, trust or another entity or a legal relationship of fiduciary nature. Thus, the above-mentioned condition is met. In the upcoming years, it will be necessary to verify whether the said condition is still being fulfilled.
The Company does not own shares (stocks) in other companies, participation units in an investment fund or an institution intended for mutual investments, all rights and obligations in a company that is not a legal person or other property rights related to receiving a benefit as the founder or beneficiary of a foundation, trust or another entity or a legal relationship of fiduciary nature. Thus, the above-mentioned condition is fulfilled. In the upcoming years, it will be necessary to verify whether the said condition is still being met.
The Company draws up financial statements under the Polish Accounting Act. It is in line with the above-mentioned condition. Throughout the period of applied flat rate, the Company will not be able to prepare financial statements based on the IAS.
With the support of MDDP Outsourcing, the Company fulfilled its notification duty and timely prepared and filed to the tax office the notification, required by provisions of law, on selection of flat rate on income of companies.
The analysis of entities’ exemptions – continued preparations for the change of taxation form
Before making the decision on the choice of the Estonian CIT as the form of taxation, it was necessary to conduct an analysis regarding the entities’ exemptions referred to in Art. 28k of the Polish Act on CIT.
It was necessary because the flat-rate taxation does not apply to:
The Company is not a financial undertaking pursuant to the Polish Act on CIT or a lending institution in light of the Polish Act on consumer credit. Thereby, the entities’ exemption indicated in the above-mentioned provision does not apply to the Company.
The Customer does not generate income on business activity conducted within the territory of Special Economic Zones or the Polish Investment Zone. The entities’ exemption indicated in the above-mentioned provision does not apply to the Company.
The Company is not declared bankrupt or put into liquidation. In the end, the above-mentioned exclusions do not apply to the Company’s situation.
The Customer’s Company was established in 2006 so in a period longer than 24 months from the planned choice of flat-rate taxation. Thus, the above-mentioned exclusion does not apply to the Company. The Company did not participate in the a/m reorganizations. When under flat-rate taxation, one needs to pay attention to the restrictions in scope of possible reorganizations.
In the last 24 months, the Company has not been subjected to division by spin-off and it has not made a contribution to another entity. As a result, the above-mentioned exclusion does not apply to the Company.
Bearing in mind the above, the Customer’s Company met the conditions provided for in the Polish Act on CIT for the application of flat-rate taxation. Moreover, the analyses proved that no entities’ exempts applied within the scope of flat rate indicated in the Polish Act on CIT.
Based on such a detailed verification, the Customer decided to shift to flat rate on income of companies i.e., the Estonian CIT starting from 1 January 2022.
System modifications after the implementation of Estonian CIT
The Customer’s decision on the change of form of taxation required certain modifications in the accounting records of the Customer. It was also necessary to fulfill additional settlement obligations connected with the flat rate.
So, the team of specialists of MDDP Outsourcing was obligated:
The said obligation results from Art. 7aa section 1 of the Polish Act on CIT and involves preparation of information on the income on transformation, in the amount that corresponds to the sum of surpluses of individual assets, determined for the net financial results in accordance with accounting regulations, as of the date of transformation, beyond their tax base determined for that date, along with the information on tax due.
The said information was drawn up as Attachment CIT/KW to the CIT 8 declaration for 2021.
The modifications also needed to include the company account plan. Due to the special categories of income subject to taxation i.e., expenditures not related to economic activity or hidden profits, the Company withdrew from the use of temporary accounts dedicated to expenditures that did not constitute tax-deductible costs and they were replaced with off-balance sheet accounts corresponding to the said two special categories of income for the needs of flat rate on income of companies.
The said operation facilitates the calculation of the advance income tax payments.
In the end, the whole complicated process of change of the taxation form ended successfully. It was achieved mainly thanks to the effective preparation and in-depth analysis conducted by the Experts of MDDP Outsourcing. The new procedures had also to be reflected in the Customer’s accounting and financial systems but the necessary modifications were carried out seamlessly under the supervision of our Team. This was quite a challenge and we immediately knew that we would need to delegate additional resources for some time. Nevertheless, we are happy about the success and newly acquired experience. At the same time, we would like to thank our Customer for trusting us.
Author: Agnieszka Bojar, Accounting Department Manager at MDDP Outsourcing.