The principles of recognising debt financing expenses as tax deductible costs are being changed. Until the end of 2021, taxpayers are obliged to exclude from tax deductible costs debt-financing expenses in their part in which the debt-financing surplus exceeds 30% of tax EBITDA1. Where debt-financing costs for a given year exceed 30% of EBITDA1 (calculated in accordance with the formula in the footnote), the taxpayer will be obliged to recognise the part exceeding the set limit as non-deductible costs. Those limitations do not apply to the surplus of debt-financing costs in its part that does not exceed 3 million złotys in the given tax year.
The costs in question exclude simple interest paid in connection with the loan received as well as all costs connected with its receipt from other (including unrelated) entities.
This provision raises the question of how to determine the relationship between the limit of 30% of EBITDA and the 3 million złotys – whether the limit should be construed as 30% of EBITDA plus 3 million złotys, or only 30% of EBITDA, or only 3 million złotys.
Read literally, the provision should be understood as the sum of 30% of EBITDA and 3 million złotys. However, the tax authorities view this limit as 30% of tax EBITDA or the value of costs not exceeding 3 million złotys, depending on which of those values is higher. Nevertheless, administrative courts in such situations in a vast majority of cases have been agreeable to taxpayers. Accordingly, the legislator decided to clarify the provision wording to the effect that from 1 January 2022, the limit of debt-financing costs constitutes either 30% of EBITDA or PLN 3 million.
In addition, no transitional provision has been implemented, which means that also debt-financing costs arising from to-date loan agreements will be subject from 2022 onwards to the new limits.
The new wording of article 15c of the CIT Act, and consequently the change in the method of determining debt financing costs should be assessed negatively. The change may hit new projects, which at the initial investment stage use debt financing but do not generate any income.
Limitations on recognising capital transaction expenses as costs
Since 1 January 2022, a new exclusion from tax deductible costs has been in place, being an absolute prohibition to tax-settle the costs of debt financing acquired from related entities and intended directly or indirectly for capital transactions, such as the acquisition of stocks or shares. Interest paid on a loan received from a related entity to acquire shares in a special-purpose vehicle will be considered as non-tax costs and, thus, will not be deductible. The change will cause taxpayers to obtain financing for such transactions from external lenders. This may undermine the rationale for the existence of group financial centres, where one designated group entity acquires financing and then extends loans further on to particular group companies. Taxpayers who will most suffer from the change should consider amending or remodelling their group’s financing policy.
Tax on shifted income, including costs of financing
Another solution closing tax loopholes is the introduction of a tax on shifted income. According to new article 24aa of the CIT Act, the tax on shifted income due from companies being Polish tax residents (article 3 section 1 of the CIT Act) is 19%. Shifted income will be deemed costs, including costs of financing, incurred directly or indirectly on behalf of a related entity and constituting the related entity’s receivable, provided that:
- the tax actually paid by that entity for the year during which it received the receivable is lower in general by at least 25% than the income tax amount that would be due if the income was taxed with the CIT basic rate (at present lower than 14.25%)
- those costs were subject to recognition in any form as tax-deductible costs (or were distributed as dividend) and constituted at least 50% of the related entity’s revenues (determined in accordance with CIT or accounting regulations)
This means that the said provision may also cover Polish companies being CIT payers which apply a lower CIT rate of 9%, on behalf of which such costs are incurred. Importantly, shifted income is not combined with the taxpayer’s other income.
Costs that will generate a tax on shifted income will include:
- debt financing costs (including penalties and fees for delays)
- costs of intangible services (advisory, advertising, management and control, data processing, guarantee and suretyship services, as well as services of a similar nature)
- fees and charges for using, or for the right to use, specific intangible assets
- transferred risk of a debtor’s insolvency,
- remuneration for transferring functions, assets and risks
- providing the sum of those costs incurred in the tax year on behalf of the aforesaid entities (including unrelated ones) constitutes at least 3% of the sum of tax-deductible costs incurred in any form during that year. The regulations will not apply to payments on behalf of taxpayers carrying out actual operations in the EU/EEA.
Consequently, whenever those costs – including interest – are paid, the regulations in question should be checked for applicability. Especially, interest paid to UK, US, Switzerland and other non-EU/EEA countries may be subject to those regulations. The same situation is if payments are made to EU countries which have a relatively low CIT rate, such as: Cypriot entities (CIT rate of 12.5%) or Hungarian entities (CIT rate of 9%).
We will be discussing other matters in subsequent articles.
1Tax EBITDA is a difference between tax revenues from all the sources save for revenues having the nature of interest (that is interest revenue, including compound interest revenue, as well as revenue equivalent in economic terms to interest and corresponding to debt financing costs) and the sum of all the tax-deductible costs save for tax depreciation/amortisation and debt-financing costs.