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Finance & related services

Polish tax regulations regarding debt-financing costs in the era of Anti-Tax Avoidance Directive

By Accreo Sp. z o.o.
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Since 2018, as a result of the implementation of the Anti-Tax Avoidance Directive (ATAD), new rules have been introduced regarding debt-financing costs.

The previous regulations of Polish Corporate Income Tax Act regarding thin capitalisation proved to be, in the opinion of the European Commission and the Ministry of Finance, insufficient in fighting tax evasion. The old regulations consisted of the inability to take interest, after exceeding a certain ratio, into tax deductible costs.

The new regulations introduce new rules regarding reduction of debt financing, the so-called earnings stripping rules. These state that taxpayers who have their registered office or management board in Poland are obliged to exclude from debt financing costs the part in which the surplus of debt financing costs exceeds 30% of the taxpayer's EBIDTA*.

Initially, Polish tax authorities interpreted the new regulations in such a way that the 30% EBITDA ratio would apply to the entire amount that exceeds 3,000,000 zlotys. However, in administrative courts the case-law established itself quite quickly, indicating that the ratio will apply to any surplus above 3,000,000 zlotys (I SA/GD 287/19; I SA/WR 14/19; I SA/Po 699/18). However, each of these judgments was appealed by the tax authorities, so ultimately the dispute will be settled by the Supreme Administrative Court. The amount that taxpayers will have to exclude from tax-deductible costs now depends on the position taken by the Supreme Administrative Court. To better explain this, here’s an example of the reasoning of tax authorities vs. administrative courts:

A company has 100 million zlotys in revenues; 1 million zlotys of interest income; 85 million zlotys of tax deductible costs; 6 million zlotys of amortisation charges and 30 million zlotys of debt financing costs. Given the above formula, we have the following calculations:

The position of the courts is much more favourable for taxpayers, and it seems correct due to the fact that, according to the CIT Act, interest rate deduction does not apply to the excess of debt financing costs in the part not exceeding the amount of 3,000,000 zlotys.

According to the ATAD definition, debt financing costs should be understood as all kinds of costs related to obtaining funds from other entities, including unrelated entities, and the use of these funds. As a consequence, the new regulations will limit the possibility of deducting interest on a loan granted even by banks and other financial institutions.

The above-mentioned indicator refers to costs exceeding 3,000,000 zlotys and hence, debt financing costs below this amount can be 100% included in tax deductible costs. For taxpayers with a tax year less or longer than 12 months, the amount of this threshold is calculated by multiplying the amount of 250,000 zlotys by the number of active months of the taxpayer's tax year.

The new regulations are particularly applicable to tax-capital groups, which the Ministry of Finance has long considered an instrument for aggressive corporate income-tax optimisation. For example, the amount of 30% EBITDA above 3,000,000 zlotys will apply to the entire tax-capital group, which in consequence may lead to unequal treatment, due to the fact that a single company within the group may include the entire amount, that is 3,000,000 zlotys as tax-deductible costs, while the tax-capital group, which by its nature consists of at least two companies, will have to take into account the above mentioned ratio across the entire tax-capital group.

However, regarding costs incurred for consultancy services, fees for the use of copyright and related rights and the transfer of the risk of the debtor's insolvency from loans  not granted by banks, cooperative savings or credit unions, incurred directly or indirectly for the benefit of entities related (and independent in the part in which these costs in total exceed 5% above PLN 3,000,000 in a tax year), a particular company from a tax-capital group will have to exclude these costs from tax-deductible costs.

These restrictions do not apply to the costs incurred by the company forming the tax-capital group for the benefit of other companies from this tax-capital group. Consequently, each individual company from a tax-capital group will be calculated separately for each of these companies.

The Polish Corporate Income Tax Act also provides for an exception to the reduction of debt-financing costs – income resulting from long-term public infrastructure projects serving the supply, modernisation, operation or maintenance of a significant asset that is in the general public interest is not taken into account in the calculation of revenues and costs of debt financing. For example, the Administrative Court in Warsaw decided that the construction of electricity generating equipment is a public investment, which in consequence means that it is not affected by the limit of debt-financing costs (III SA/WA 2493/18).

Due to the limitation of the debt financing limit, there may be a situation when loss cannot be included in the tax-deductible costs. In such a situation, the Polish legislator allows for the possibility of settling the loss resulting from the reduction of debt financing costs in the subsequent five tax years following this year.
When assessing new footnotes in the scope of limiting debt-financing costs, it should be noted that the Polish legislator, when implementing regulations regarding the limitation of debt financing, adopted a very restrictive position. For example, failure to make use of the optional exemption for "independent entities" foreseen in the ATAD will have a negative impact on entities with low profitability which use financing from unrelated entities.
However, the final assessment of the new regulations will require more time.

* This surplus is calculated as follows: 30% x [(∑ revenues - interest income) - (∑ costs – amortization charges - debt finances)]

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