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Taxation of a Polish Limited Liability Company (spółka z ograniczoną odpowiedzialnością, sp. z o.o.)

In the previous article, you learned what a Polish limited liability company (spółka z ograniczoną odpowiedzialnością, hereinafter: sp. z o.o.) is and how to register it. Before you decide to incorporate such an entity in Poland, it is advisable to familiarize yourself with the basic principles governing the taxation of its income.

1. Corporate Income Tax (CIT) at the level of the company

Firstly, income tax arises at the level of the company itself (CIT), which is levied on the entirety of the company’s income, regardless of the place of its generation.

There are two statutory corporate income tax rates in Poland:

a) 19% – the standard rate,

b) 9% – a reduced rate applicable to income derived from the company’s operating activities, available to:

small taxpayers (i.e., entities whose gross turnover in the preceding tax year did not exceed EUR 2 million),
newly established companies – during their first tax year.

The company’s taxable income may be reduced by deductible expenses, i.e., expenses incurred for the purpose of generating revenue, maintaining, or securing the source of revenue. However, it should be emphasized that not all expenses qualify as tax-deductible (e.g., representation expenses).

In addition, taxpayers may benefit from numerous tax reliefs and deductions, including development-related allowances such as the R&D relief, prototype relief, and automation relief. These may further reduce the tax due, in some cases even down to zero.

If, in a given tax year, a company records a tax loss, such loss may be carried forward and offset against taxable income in the following five tax years.

A sp. z o.o. is obliged to make monthly advance payments of corporate income tax (or quarterly, in the case of small taxpayers and newly incorporated entities). The annual tax return must be filed within three months following the end of the company’s tax year (as a rule, by 31 March). By the same deadline, any balance of tax exceeding the amount of advances already paid must also be settled.

2. Taxation at the level of the shareholders (PIT / WHT on dividend distributions)

Secondly, income tax arises at the stage of profit distribution to the shareholders of a sp. z o.o. (dividend payment). Where the shareholder is a natural person, this constitutes personal income tax (PIT).

In Poland, shareholders of a sp. z o.o. are, as a rule, subject to a flat-rate capital gains tax of 19% on dividends received. This tax is withheld by the company at the time of the dividend payment, and the company is obliged to remit the tax to the competent head of the tax office. The company is also required to file an annual return declaring the total amount of tax withheld in the given tax year.

Shareholders are not entitled to deduct any expenses in connection with dividend income.

Where the shareholder is a non-resident, the company is obliged to withhold withholding tax (WHT). The statutory rate is 19%, but it may be reduced (e.g., to 15%, 10%, or even 5%) under an applicable double taxation treaty, provided that the shareholder presents a valid tax residency certificate and satisfies the treaty conditions (such as being the beneficial owner of the dividend).

Further details concerning when an individual may qualify as a Polish tax resident and how dividends are taxed in the case of non-residents are set out in our article “On Tax Residence.”

3. Effective tax burden

* DTT – Double Tax Treaty

In summary, from the perspective of an individual shareholder, the effective tax burden on profits generated by a sp. z o.o. amounts to approximately 26.29% in the case of a small taxpayer benefiting from the reduced 9% CIT rate, and 34.39% in all other cases.

4. Alternative regimes

The Polish tax system also provides for legal mechanisms enabling the deferral of taxation until the moment of profit distribution. One such regime is the so-called Estonian CIT, which we discuss in detail in our article “A Few Words on the Estonian CIT.

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