Tax on shifted income vs. double tax treaties: Is Poland playing dirty?

The tax on shifted income was intended to protect the Polish tax base from transfers income to tax havens. Initially, the regulations covered both domestic and cross-border payments, but after one year of being in force, the scope of the tax was limited to payments to non-residents only. This change has effectively become a time bomb for businesses – not only through complex obligations administrative, but also the risk of breaching double taxation treaties (DTTs). From the perspective of taxpayers, the issue is becoming more pressing as the deadline for the 2024 tax return (31 March 2025) approaches imminently.

For many companies, this means not only an additional financial burden, but also the risk of disputes with the tax authorities in Poland and abroad.

What is the problem with tax on shifted income?

This tax does not apply to the income of foreign companies, only to the costs of Polish taxpayers. If a Polish company incurs high costs to a related non-resident (e.g. for consultancy services or licenses) and its income is taxed at a low effective tax rate (<14.25%), the Polish resident must add these costs to its tax base and pay 19% CIT on it.

Conflict of tax on shifted income with international law

Article 24(4) of the OECD Model Convention (the basis for most of the DTT) contains a non-discrimination clause which states:

“interest, royalties and other costs incurred by an enterprise of a Contracting State […] shall be deductible under the same conditions as if they had been paid to a person resident in the first-mentioned State.”

Meanwhile, the tax on shifted income:

• leads to a different treatment of cross-border transactions compared to domestic transactions,
• does not benefit from exemptions from discriminatory clauses as WHT does (DTTs explicitly regulate withholding tax and exclude it from the scope of non-discriminatory clauses).

Example:

A Polish company pays PLN 1 million per year for consulting services to a foreign supplier. If the supplier has an effective tax rate of 10%:

• The Polish taxpayer must add these costs to his base and pay PLN 190 000 in additional CIT,
• As a result, in practice these costs become non-deductible – which would not be the case if the supplier were a Polish entity.

This is precisely discrimination: cross-border transactions are treated less favourably than analogous domestic transactions, despite the fact that DTTs are supposed to protect against such practices.

A constitutional solution

According to Article 91(2) of the Polish Constitution, international agreements take precedence over national laws. This means that taxpayers making payments to countries with which Poland has a DTT may have strong legal arguments against the application of this tax.

Figures from the Ministry of Finance show that the tax has limited scope, with only nine entities paying the tax in 2023 and 14 taxpayers in 2022.

Tax on shifted income: risks in a nutshell

1. Double taxation: cost not deducted in Poland + taxed abroad,
2. Disputes with tax authorities: Foreign companies can challenge the legitimacy of the tax,
3. Image costs for Poland: DTT violations can damage Poland’s reputation as a business partner.

What next for tax on shifted income?

If the Polish government does not change the legislation, expect high-profile litigation and MAP procedures. A separate issue remains the potential violation of EU law, in particular on the freedom to provide services and the freedom of establishment, which could lead to further proceedings at EU level.

With the tax deadline approaching, it is worthwhile:

• Check whether the foreign counterparty is based in a country with which Poland has signed a DTT,
• Remember that the burden of proof is on the taxpayer – it is necessary to actively demonstrate that tax is not due.

The tax on shifted income carries serious legal consequences in light of Poland’s international obligations. Before paying this tax, taxpayers should analyse whether  DDTsoffer them effective protection.