Reinvestment in the Polish Investment Zone – What You Need to Know
The Polish Investment Zone (PSI) is an instrument that has supported the development of entrepreneurship in our country for years. A key element of this mechanism is obtaining a support decision, which entitles the holder to a corporate income tax exemption (CIT or PIT). It is worth remembering a fundamental rule, however: the tax exemption always applies to a new investment.
In today's article we take a closer look at what the term new investment actually covers, and focus on the term „reinvestment". Although it is commonly used by the Ministry of Development and Technology and by the special economic zones (SEZ), its definition is not as obvious as it might seem.
Where to look for a definition of reinvestment?
Interestingly, we will not find a definition of „reinvestment" directly in the Act. The term appears in the Regulation of the Council of Ministers on state aid granted to certain entrepreneurs for the implementation of new investments, but mainly in the instructions for completing the application.
Instead, the law operates with a precise definition of a new investment, which can be found in Art. 2 of the Act on supporting new investments. According to it, a new investment is:
- a) an investment in tangible fixed assets or intangible assets related to:
- setting up a new establishment,
- increasing the production capacity of an existing establishment,
- diversifying the establishment's production by introducing products not previously produced there,
- a fundamental change in the production process of an existing establishment;
- b) the acquisition of assets belonging to an establishment that has been closed or would have been closed had the purchase not taken place.
A curiosity: reinvestment in the instructions, but not in the glossary
It is worth noting a certain legislative inconsistency, which best illustrates the nature of this term. Although the Act on supporting new investments is silent on the definition of „reinvestment", the Regulation itself, in the instructions for completing the application (point 3.4), expressly requires the entrepreneur to provide:
„a description of the business conducted to date (specifying the business conducted within the voivodeship and, in the case of reinvestment – additionally within the establishment)".
We are therefore dealing with a situation in which the official form requires us to state whether we are carrying out a reinvestment, even though the term has not been officially defined in the glossary of statutory terms. This is further proof of how important the practical interpretation of the provisions applied by the SEZs and the Ministry is, as described above.
Reinvestment, i.e. a new investment in an existing establishment
Now that we know the statutory definition, we can move on to how reinvestment is understood in practice. The aforementioned regulation contains an important provision concerning eligible costs:
„The eligible costs of a new investment (...) are reduced by 50% – in the case of an investment (...) related to increasing the production capacity of an existing establishment, diversifying the establishment's production (...) or a fundamental change in the production process of an existing establishment".
In market practice, as well as in the instructions of the SEZs and the Ministry, it has become accepted that reinvestment is any new investment that is not the setting up of a new establishment, but concerns the development of an already existing one.
Why is this concept so important? A numerical example
Understanding whether your project qualifies as a reinvestment is of great strategic importance. The most important consequence of classifying a project as a reinvestment is a 50% reduction of the quantitative criteria (minimum investment costs).
Example:
Let us assume that an entrepreneur plans an investment in a municipality where the minimum eligible costs threshold for the size of its company is PLN 10 million.
- If it builds a new establishment from scratch – it must invest at least PLN 10 million.
- If, however, it carries out a reinvestment (e.g. increases the production capacity of its current factory) – the minimum threshold is halved and amounts to only PLN 5 million.
For many companies, it is precisely this mechanism that opens the door to using the tax relief for smaller modernisation projects.
Reinvestment and employment – what must you remember?
When opting for a reinvestment, particular attention should be paid to employment matters. In the case of an expansion of an existing establishment, the support application states the so-called average annual employment from the last 12 months.
As a rule, in order to benefit from support, the entrepreneur must:
- Create at least one new job (related to the new investment).
- Maintain the current level of employment (the 12-month average) increased by the newly created jobs.
This total level of employment must be maintained for a specified period:
- 3 years – for micro, small and medium-sized enterprises (SMEs),
- 5 years – for large enterprises.
This is a key condition, and failure to meet it may result in the obligation to return the state aid granted.
Summary
The concept of reinvestment has become a permanent part of the vocabulary of specialists, state aid calculators and special economic zones, and even of the Ministry of Development and Technology. Although formally it is a „new investment in an existing establishment", it is precisely under the name „reinvestment" that the preferential conditions of entry into the programme are found.
If you are planning to develop your establishment, it is worth checking whether your plans fit these definitions – it may turn out that, thanks to reinvestment, the path to the tax exemption is considerably easier.