Poland: New stringent thin capitalisation rules will have substantial impact for Polish businesses
10 September 2014
Posted by: Author: Slawomir Krempa
Authors: Slawomir Krempa and Magdalena Zasiewska (PwC Poland)
Polish Parliament has finalised the act amending the Corporate Income Tax (CIT)
Law. One of the most significant changes to be implemented as of January 1, 2015,
relates to the ‘thin capitalisation’ rules including introduction of a new method of determining interest deductibility limit.
is already clear that these new regulations may substantially affect the
tax reconciliations of Polish companies financed through loans received from
regulations could also affect currently operating shareholder structures
(including indirect ownership which was treated so far as a means of reducing
the impact of ‘thin capitalisation’ restrictions).
have analysed a set of possible scenarios that might materialise with the
introduction of the amendments but in our view it is imperative to perform an
impact analysis of the legislation in the specific situation of the Polish
operations, in particular:
- Whether the current wording / character of
the loan agreements concluded by a Company will not increase
liability in CIT from the perspective of the new ‘thin capitalisation’
- How the new loans should be structured
and what solutions should be introduced to mitigate the impact of the new ‘thin
rules on tax deduction limitation of interest?
- What steps might be considered in case of tax
rulings relating to the provisions of the ‘thin capitalisation’ rules? Will
these tax rulings
secure a Company’s tax position after December 31, 2014?
- What are the chances for obtaining a positive
tax ruling, e.g. relating to the application of the new
‘thin capitalisation’ rules to cash pooling structures? In practice,
the draft regulations may result in increased CIT burdens for taxpayers.
- Change the current method of determining
the amount of interest to be recognised as tax deductible costs.
- Expand the range of companies where
‘thin capitalisation rules’ will apply.
- Introduce a new, optional method of
determining the limit of interest tax deductibility that takes into account not
only intra-group debt but also debt to non-related parties.
in the existing ‘thin capitalisation’ rules
line with the draft versions of the existing rule (Art. 16 sec. 1 p. 60 and 61
of the Polish CIT Law), ‘thin capitalisation’ restrictions will apply
to loans granted by a much broader group of related parties (currently,
in simplified terms, this method relates to only ‘parent’ and ‘sister’
companies). If the legislation is introduced with the proposed wording, the
group of ‘qualified lenders’ will be expanded to indirectly related parties.
proposed rules may also significantly limit the interest recognised as tax
deductible due to the fact that instead of a 3:1 debt-to-share capital ratio,
now the ‘thin capitalisation’ limit will be 1:1 but with respect to debt vs.
equity (instead of share capital).
Based on the newly introduced provisions,
taxpayers that received loans from ‘qualified lenders’ can decide to apply the
new method of ‘thin capitalisation’ calculation. The method will be based on
the tax value of assets, as well as reference rate of the National Bank of Poland and will apply to costs of loans received from
both related and unrelated entities. Based on this rule, interest on loans
(including loans from unrelated entities) in the amount not exceeding the tax
value of assets multiplied by a specific interest rate (the reference rate of
the National Bank of Poland increased by the index of 1.25%) can be recognised
as a tax deductible cost for CIT purposes.
in this method, during a given tax year, a taxpayer can only
treat as tax deductible cost only interest on loans not exceeding 50% of operational
new regulations are much more stringent and will be of substantial
impact for Polish businesses with group financing. Long term it will mean in
many cases an increase of ETR (Effective Tax Rate) in Poland.
to the fact that existing rules will apply to loans granted and loans
actually transferred this year, we encourage our clients to consider the
available options and carry out the respective analysis and
calculations as soon as possible to estimate if and how the new regulations
impact the effectiveness of the financing. As a result, entities
should be able to decide whether to introduce steps aimed at
mitigating the possible additional tax burdens.
It should be also considered which of
the new methods will be more beneficial in the individual situation
of your company - the decision has to be made at the beginning of 2015.
This article first appeared on pwc.com.