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9% CIT rate - pitfalls, problems, risks

February 6, 2024
Author Filip

Despite the fact that the regulations governing the 9% CIT rate have been in force since January 1, 2019, their application in practice still causes a lot of problems. It must be admitted that the task is not made easier by the legislator, who has regulated the conditions for the use of the preferential CIT rate in an extremely complicated way..

What are the conditions for the application of the 9% CIT rate?.

According to the regulations, the application of the reduced 9% CIT rate is possible, provided that the following conditions are met together:
1) the income of the taxpayer in a given tax year does not exceed the equivalent of €2,000,000. This refers to the total income earned by the taxpayer in a given tax year (including CIT-exempt and income from capital sources), excluding the VAT due;

2) The taxpayer has the status of a so-called small taxpayer, so its "sales revenue" for the previous tax year does not exceed the equivalent of €2,000,000 (including the VAT due).

For the purpose of calculating the taxpayer's revenue for the tax year (item 1), the euro exchange rate on the first business day of the tax year in question must be taken into account. In turn, to determine the status of a small taxpayer (point 2), the euro exchange rate on the first working day of October of the previous year should be taken into account.

For example, in order to determine whether a particular limited liability company (whose tax year matches the calendar year) is entitled to apply the 9% rate in 2024, it is necessary to analyze whether its revenues for 2024 will not exceed the equivalent of €2,00,000 (excluding output VAT), converted at the exchange rate of January 2, 2024. It is also necessary to determine whether its "sales revenues" (with output VAT) will not exceed this threshold at the euro exchange rate of October 2, 2023.

In practice, a very common problem in applying the conditions for applying the 9% CIT rate is to determine when an entity is entitled to small taxpayer status (point 2).

Although the concept of "sales revenue" is not clear, it seems that for the purposes of determining this limit, the concept of sales in the VAT Act should be taken into account. This would mean that revenue from paid delivery of goods and paid provision of services within the country, export of goods and intra-Community delivery of goods would be counted here. However, it would be a mistake to rely solely on the VAT definition. For the purposes of the VAT Act, sales are not services, which undoubtedly are taxable income in CIT such as, for example, sales of services outside the country (i.e., sales of services in the B2B model). It is also necessary to bear in mind some specific rules for accounting for sales in VAT such as regulations on adjustments. Thus the precise determination of the value of "sales revenue" can be troublesome in some cases.

At the same time, the consequences of a mistake in this regard can be very severe, since the loss of the right to apply the 9% CIT rate means that a given taxpayer is obliged to apply the standard 19% CIT rate to the total income earned in a given tax year.


9% CIT rate and reorganization/restructuring events.

A separate condition that may limit the right to apply the 9% CIT rate is the occurrence of certain reorganization / restructuring events. Fortunately, such circumstances exclude the right to apply the 9% CIT rate only temporarily.

The events in question are primarily: the conversion of a partnership into a corporation, the conversion of a sole proprietorship into a corporation, the in-kind contribution of an organized part of an enterprise/business as part of the incorporation of a CIT company or in the first or second year of operation of such a company. In these types of cases, the entities created as a result of these events (the entities to which the in-kind contribution was made) cannot apply the 9% CIT rate in the year of commencement of operations and the year immediately following.

In addition, it should be noted that the provisions limiting the right to apply the 9% CIT rate for reorganizations (item 3) apply to a broad category of entities and cover not only those entities that are "beneficiaries" of a given reorganization (i.e., take over assets/assets), but sometimes exclude the right to a lower rate also for entities that, as a result of a given reorganization, dispose of assets/assets. For example, a 9% CIT rate may not be applied by an entity that contributed in-kind a business or an organized part of a business run by itself - with this restriction applying only to the year in which the contribution was made and the following year.

Analyzing the restrictions on the application of the 9% CIT rate, it is easy to see that certain otherwise quite common ways of reorganizing companies are not taken into account by the regulations. For example, the common method of transferring a sole proprietorship's business by transferring key components related to the business to a newly established limited liability company does not, at first glance, result in disqualification from applying the 9% CIT rate. However, this method - attractive at first glance - can prove disastrous in its consequences. Why? Because it should be borne in mind that the failure to structure such events as in-kind contributions of an organized part of an enterprise/business in practice usually means taxation on income tax and VAT grounds (in-kind contributions other than those having as their object an organized part of an enterprise/business are generally taxable). This may derail the possible advantage of (legally) circumventing the restrictions on the application of the 9% CIT rate.

Another option is to purchase an existing limited liability company, where at least two tax years have already passed. In this case, it is possible to simultaenously make an in-kind contribution of an enterprise / organized part of an enterprise and benefit from the preferential 9% CIT rate in a limited liability company. However, it should be borne in mind that in certain circumstances such action creates the risk of application of the general clause against tax avoidance. However, this risk can be minimized by skillfully building a business case for the reorganization.

Finally, it is worth noting that tax regulations allow a limited liability company to shorten its tax year under certain circumstances. If the decision to reorganize the business is made in the second half of the year, then naturally (and in accordance with the regulations) there may be a shortened grace period in limiting the application of the 9% CIT rate by the newly established limited liability company. For example, if a limited liability company is established in November 2024 and its first tax year ends on December 31, 2024, then it will be possible to make an in-kind contribution of an organized part of an enterprise or business as early as January 2026 without risking the loss of the right to apply the 9% CIT rate to the limited liability company.

Application of the 9% CIT rate versus the general anti-avoidance clause (GAAR) and reporting of tax schemes (MDR).

The application of the 9% CIT rate by itself (i.e., considered as a right of the taxpayer, without "reorganization" activities) is undoubtedly not a prohibited tax avoidance and is not subject to MDR reporting. Nevertheless, it must be remembered that in certain situations the exercise of this right creates the risk of application of both unfavorable regulations. This will be the case, for example, in a situation where related parties operating in the same industry make "flip" tax revenues by invoicing a certain supply of goods or provision of services by an entity other than the original party to the agreement (e.g., as a result of an assignment of the agreement made at the end of the tax year) in order for the entity not to exceed the equivalent of 2 million euros in revenues / not to lose the status of small taxpayer.

Given the level of complexity of the regulations governing the application of the 9% CIT rate, it is recommended to exercise far-reaching caution when determining whether a given CIT taxpayer is entitled to it.

Filip Biegun
Tax advisor
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