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Companies Face Investment Hurdle to Qualify for Polish Tax Breaks

Reproduced with permission from Daily Tax Report. International. 16 TMIN (Jan. 24, 2018). Copyright 2018 by The Bureau of National Affairs, Inc. (800-372-1033) <https://www.bna.com>

 

By Jan Stojaspal

 

Snapschot

  • High investment minimums may curtail reinvestment activity, shift spending

  • Proposed changes expected to take effect in March or April

 

Large enterprises looking for investment tax breaks in the most developed parts of Poland will have to commit at least 100 million zloty ($29.35 million) as well as score highly against a broad range of qualitative criteria, according to local tax practitioners.

In fact, they may find themselves shut out of state aid altogether should the government decide to exercise its right to suspend new applications for budgetary reasons, they added, referring to details of proposed changes to Poland's tax incentives regime.

The changes emerged just before the holidays, built on an earlier proposal published in September. To be sure, investors large and small will benefit from the lifting of territorial restrictions on tax incentives, which largely confined state aid to investment projects in one of the country's 14 special economic zones.

And the proposed changes guarantee that, once granted, state aid will be available for between 10 and 15 years—a major improvement on special economic zones, which are set to expire by 2026 along with state aid that had been granted.

Still, the criteria are “very high for large enterprises” and could be “the biggest showstopper of the whole program,” Jacek Zimoch senior manager, innovation, R&D, grant and incentive team, PwC Poland, told Bloomberg Tax Jan. 19.

The proposed changes—a combination of a government act setting out the general framework and a government decree with details on which investments are permissible and how they are scored—are expected to come into force in March or April, he added.

Investment, Then State Aid

According to Zimoch, there is currently only one criterion for investment projects applying for state aid as part of a special economic zone: at least 100,000 euro ($122,500) must be invested.

“100,000 euro is not an obstacle for anyone,” he said. “The new approach will be different. You will be able to invest anywhere, but on the government's terms. And if you would like to invest in a large city with a low unemployment rate, it's OK for us, but then you need to make the investment valuable.”

And that value will no longer be just monetary—at least 100 million zloty for large enterprises investing in areas where unemployment is lower than 60 percent of the national average, he said. In November, the official unemployment rate was 6.5 percent.

Qualifying Criteria

Large enterprises will also need to score at least six points against a range of qualitative criteria. According to the government decree, whose draft was publicized Dec. 22, these criteria—each worth one point—include, among others:

  • creation of high-paying jobs;
  • cooperation with R&D or scientific units;
  • activities to develop sectoral clusters;
  • investing in areas of high unemployment;
  • supporting employees in advancing their education or professional qualifications;
  • offering additional employee benefits, such as medical care, and
  • investing in sectors that are in line with Poland's strategy for responsible development.

These sectors include aviation, automotive, biotechnology, chemicals, electronics, machinery, medical devices, pharmaceuticals and information technologies. According to Zimoch, 100 million zloty is easy to spend on new factories or large machinery sets. “In some industries like steel you can buy a painting shop for 18 million euro, which is like 80 million zloty,” he said.

Reinvestment Challenge

The problem is most investments in Poland are reinvestments, and they involve smaller amounts.

“Normal reinvestments are purchasing a production line for five million euro, seven million euro, and under the new regulations, you need to incur 20 million euro, which, to be honest, I am a bit afraid that it may significantly decrease the amount of investment going into those areas,” Zimoch said.

He cited suppliers to the companies involved in the molding of plastics or white goods production as examples of companies making these kinds of reinvestments.

As a result, companies may be forced to look to the less-developed east of the country, where criteria for tax incentive are more relaxed, according to Piotr Wyrwa, a tax consultant at RSM Poland.

“I think entrepreneurs will look for those regions where the unemployment rate is the biggest so that they can get bigger public aid,” he told Bloomberg BNA in a Jan. 19 telephone interview. “I think this can attract them to eastern Poland.”

For example, in counties with unemployment between 160 percent and 200 percent of the national average, qualifying investments by large enterprise is only 20 million zloty.

Also part of the proposed changes, the government now reserves the right to suspend new aid applications for up to four years, as opposed to one year which was proposed in the previous draft, Wyrwa said.

And although details on the qualifying criteria are now available, some of them lack precision and may lead to confusion as to how to apply them, he added.

“I think they are concrete enough to come into force,” Wyrwa said. “But some are hard to understand. For example, one of the criteria is that you grant some educational services for your employees. This is hard to say what it means in practice. Maybe if you send one employee for a course it's OK, or maybe you have to finance a whole university course.”

Another example is providing additional benefits to employees, such as medical care, which allows employees to visit private clinics. Once again, the wording of the decree does not specify what exactly qualifies, he said.

And unless changes are made now, the general practice of the tax authorities will have to be studied for clues. “The problem is that this practice will be available next year, not now when applying for public aid should start,” he said.

For More Information

Draft of the government act setting out the general framework is available, in Polish, at https://legislacja.rcl.gov.pl/docs//2/12304253/12465053/dokument326727.docx

Draft of the government decree with details on which investments are permissible and how they are scored is available, in Polish, at https://legislacja.rcl.gov.pl/docs//2/12304253/12465053/dokument322796.doc

 

To contact the reporter on this story: Jan Stojaspal in Prague at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com