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Poland: New stringent thin capitalisation rules will have substantial impact for Polish businesses

Wednesday, 10 September 2014   (0 Comments)
Posted by: Author: Slawomir Krempa
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Authors: Slawomir Krempa and Magdalena Zasiewska (PwC Poland)

The 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.

It is already clear that these new regulations may substantially affect the tax reconciliations of Polish companies financed through loans received from related parties.

The 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).

We 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’ rules? 
  • How the new loans should be structured and what solutions should be introduced to mitigate the impact of the new ‘thin capitalisation’ 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. 

The proposed regulations will:

  • 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. 

Change in the existing ‘thin capitalisation’ rules

In 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.

The 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).

New optional method

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.

Additionally, 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 profit.

PwC observation:

The 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.

Due 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

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