The Polish Investment Zone
Enterprises operating in Poland, irrespective whether are local firms or the foreign ones, may benefit from various state aid programs for new investments being carried out in Poland and as such may obtain tax exemptions in Corporate Income Tax (CIT) or Personal Income Tax (PIT).
When considering a new investment it is worth to assess the possibility of including it in the Polish Investment Zone program which may result in a tax benefit (in form of an income tax exemption being calculated as certain percentage of so-called qualified investment costs). Even though the Polish Investment Zone program came into force in mid-2018, still based on the market observations, it seems that is not well known and thus not so popular among entrepreneurs (both operating in production sector as well as business services sector).
According to the official data, at the end of 2019, 432 decisions were issued under the Polish Investment Zone program for the new investments of a total value (declared by entrepreneurs) of c. PLN 20.9 bn. These new investments should also contribute to approx. 8.5 ths of new work places (in production and business services sector).
The Polish Investment Zone program was introduced based on the Act on supporting new investments dated 10 May 2018 and is aimed at: (i) economic and social growth of the state as well as particular regions in which the new investment are to be carried out, (ii) promotion and support of innovative business and technology solutions, and (iii) creation of new work places. In the Polish Investment Zone program the new investment does not have to be carried out in specific location (in contrary to Special Economic Zones, which determine location of investments) but may be carried out in the location where the enterprise currently runs its business operations or intends to operate.
What is the definition of the new investment used for Polish Investment Zone program purposes? The new investment is defined as an investment into tangible and intangible assets associated with (i) building of a new plant/factory/place of business (setting-up a new enterprise) or (ii) increase in production volume of an existing enterprise or (iii) products portfolio diversification by introducing new product(s) not being produced so far or (iv) material change in the production process within existing enterprise.
The above definition seems to be more relevant for production sector than business services (e.g. shared service centers), still in practical terms is it applicable to the latter as well. This is due to the fact that qualified investment costs (their amount determines the amount of tax exemption) include among the others two-years costs of employment of new employees being hired as a result of the new investment. Consequently, in order to be able to benefit from the tax exemption it is required that new employees keep their jobs for at least 5 years (in case of so-called "big entrepreneurs") and 3 years in case of micro, small and medium range businesses. It should be noted that costs of new employees cannot be regarded as new investment as such, which means that in each case new employment would have to be connected with some investment into tangible and/or intangible (software, IP licenses, etc.) assets. Still, there is no formal indication what the proportion of these costs should be.
Importantly, in order to be in a position to apply for tax exemption under the Polish Investment Zone program certain minimum threshold (being set for each specific location and depending on the size of the business and also specifically for the entrepreneurs in business services sector) of the qualified investment costs has to be met. In practical aspects, when considering a new investment the minimum threshold for a particular location and viability for enterprise to apply for the tax exemption under Polish Investment Zone program should be checked.
The amount of the potential tax exemption is determined by the amount of the qualified costs of the new investment and so-called aid intensity (being also set per given location). For example, for Lublin location the minimum qualified costs threshold is PLN 4m and the aid intensity ranges from 50% to 70% (depending on the size of the business) which translates into tax exemption of between PLN 2m to PLN 2.8m. Please note that the tax exemption is effectively tax that would not be paid, which means in practical terms that a taxable income of between PLN 10.5m and PLN 14.7m would effectively not be taxed. Such tax exemption is granted for a period from 10 to 15 years (depending on location).
Apart from certain spending that is required to qualify for Polish Investment Zone program also an entrepreneur has to meet some other criteria – so-called "qualification" criteria (e.g. certain % of new employees to be hired under standard employment contract, new employees to be offered with some special benefits – like healthcare package, certain amount of costs would be spent on R&D, eco-friendly solutions to be implemented, etc.). For each criterion being met a special points are granted and (depending on location) certain minimum threshold of points is required to qualify for the Polish Investment Zone program. Based on my experience, in vast majority of cases entrepreneurs are capable to obtain required number of points (especially that some of them are not required to be obtained when the new investment process starts) and qualify for Polish Investment Zone program.
It should be underlined that the potential tax exemption resulting from the Polish Investment Zone program would be connected with the new investment (so the tax exemption would not be applicable to taxable income generated by other parts of the enterprise). Still, in practice, depending on the nature of the investment and its link (so-called "strict link") to other parts of the enterprise, it may be possible to effectively apply granted tax exemption to the income generated to others parts the enterprise. Looking back at investments qualified for Polish Investment Zone program, the range of the tax exemption and link between the new investment and other parts of the enterprise is the most crucial and sensitive part, especially having in mind that once the tax exemption is granted, the tax authorities will start a tax audit to verify the above aspects. So, this part has to be well prepared and should have solid grounds.
If you plan to carry out a certain investment, it is worthwhile to spend some time to investigate whether it would be feasible to qualify for the Polish Investment Zone program and obtain a tax exemption and what would be its amount. This may be even more important nowadays, when as a result of recent changes in the tax law the level of taxation increases and obtaining the said tax exemption may be a good solution to manage effective tax rate of an enterprise.
Author: Michał Maj, Tax Advisor, Baker McKenzie
