Introduction of the Equalization Tax Act

Introduction of the Equalization Tax Act

As of early 2025, the Act of November 6, 2024, on the Equalization Tax for Constituent Entities of International and Domestic Groups (hereinafter: “Equalization Tax Act”) has come into force. This legislation is a response to Council Directive (EU) 2022/2523 on the global minimum tax.

The primary objective of the directive and the resulting Act is to prevent profit shifting to low-tax jurisdictions. The new regulations aim to ensure that international and domestic corporate groups pay a minimum level of income tax, regardless of where they conduct their business activities.

The equalization tax constitutes an additional tax burden alongside corporate income tax. The regulations apply to entities that are members of large corporate groups with annual consolidated revenues exceeding EUR 750 million in at least two of the four preceding years. These entities are generally required to pay an equalization tax if their effective tax rate (ETR) falls below 15%, thereby preventing tax base erosion and ensuring fair competition.

Effective Tax Rate (ETR)

Entities belonging to corporate groups with revenues exceeding EUR 750 million must determine their effective tax rate (ETR) to assess whether they are subject to the equalization tax. ETR is not solely based on the entity’s corporate income tax rate but is calculated as the ratio of the sum of adjusted qualifying taxes paid by constituent entities within a jurisdiction to the jurisdictional qualifying net income. Qualifying taxes include corporate income tax, withholding tax, controlled foreign corporation (CFC) tax, real estate tax, and minimum tax.

It is crucial for taxpayers to note that tax reliefs such as R&D tax credits, IP Box, investment support decisions, and special economic zone (SEZ) permits may lower their effective tax rate below the 15% minimum threshold.

In certain cases, if a company qualifies for the so-called safe harbor mechanism, it will not be required to pay the equalization tax even if its ETR is below 15%. This applies particularly to companies with low revenues and profits despite being part of a large corporate group.

Types of Equalization Tax

The Equalization Tax Act introduces three categories of equalization taxes:

• Income Inclusion Rule (IIR) – a global equalization tax paid by the parent company on the income of its subsidiaries that are subject to low taxation in other jurisdictions.
• Qualified Domestic Minimum Top-up Tax (QDMTT) – a domestic equalization tax levied in Poland on low-taxed income reported by Polish entities within a corporate group, ensuring that income generated in Poland is taxed appropriately, even if the group’s parent company is based abroad.
• Undertaxed Payments Rule (UTPR) – an equalization tax imposed on group entities when the ultimate parent entity is located in a country that does not implement the global minimum tax mechanism.

To facilitate accurate tax calculations, accounting systems must be adapted to process and store relevant data effectively.

Equalization Tax Payment Deadlines

Entities subject to the equalization tax must fulfill additional reporting obligations, including:

• Submitting an equalization tax information report to the relevant tax office by the end of the 15th month following the end of the fiscal year.
• Filing a tax return for the due equalization tax, applicable to global (IIR), domestic (QDMTT), and undertaxed profit (UTPR) equalization taxes, by the end of the 18th month following the end of the fiscal year.

Although the equalization tax regulations take effect in Poland on January 1, 2025, taxpayers can submit a declaration for retroactive application of the equalization tax for 2024. This allows them to pay the equalization tax in Poland rather than in another country that implemented the regulations earlier.

Preparation for Compliance

To ensure proper compliance with the Equalization Tax Act, companies must conduct an in-depth analysis at both the entity and corporate group levels. Close collaboration between subsidiaries and parent companies is essential. Maintaining proper records and seeking professional tax assistance at an early stage will help minimize tax risks associated with the new requirements.