The Polish Deal: Consolidation Relief and Changes in the Tax Treatment of Debt Financing Costs
The tax changes proposed under the Polish Deal program enshrine in law a method of calculating the limit on debt financing costs that is disadvantageous to taxpayers. They offer a carrot to buyers of shares in the form of a deduction from the tax base of qualifying expenditure on the acquisition of shares as part of the consolidation relief, but also a stick in the form of a total ban on treating interest on debt financing obtained from related parties for the acquisition of shares as a tax deductible cost.
An unfavorable method of calculating the limit on debt financing costs
The Corporate Income Tax Act currently provides that CIT taxpayers cannot recognize debt financing costs as tax deductible costs as long as the debt financing costs to be recognized in interest income earned in that fiscal year by more than 30%. tax EBITDA.
In accordance with the CIT Law, excess debt financing costs not exceeding PLN 3,000,000 in a fiscal year are not excluded from tax deductible costs.
“Tax” EBITDA is the excess of total income from all sources of income, less interest income, over total deductible expenses, less the value of depreciation write-offs and non-debt financing costs. included in the initial value of tangible or intangible assets recognized as deductible during a fiscal year.
Thus, it is the amount of the excess of the debt financing costs incurred during the tax year (considered as deductible expenses) over the interest income received during the year, and not the amount of debt financing costs as such, which is the benchmark for excluding debt financing costs.
In tax practice, there are currently two interpretations of how the ceiling on debt financing costs is calculated.
Depending on the tax administration, which takes a position unfavorable to taxpayers, in a given fiscal year, excess debt financing costs can be classified as tax deductible costs up to:
- 3,000,000 PLN, or
- 30% of fiscal EBITDA,
the one who is the highest.
On the other hand, the case law of administrative courts reflects a taxpayer-friendly approach, based on a literal interpretation of the provisions in force, according to which:
- The excess debt financing costs not exceeding PLN 3,000,000 in a fiscal year do not apply at all to the limit of recognition as tax deductible costs.
- When in a given fiscal year the excess debt financing costs exceeds PLN 3,000,000, the taxpayer may include up to PLN 3,000,000 and 30% of fiscal EBITDA as tax deductible expenses.
The position adopted by administrative courts is of great importance for taxpayers, as in practice it allows them to include in tax deductible costs during a fiscal year up to PLN 3,000,000 more in debt financing costs only under the unfavorable approach of the tax authorities.
The proposed tax changes aim to enshrine in the CIT law the interpretation of tax administration that is disadvantageous for taxpayers.
According to the bill, taxpayers will have to exclude debt financing costs from tax-deductible costs to the extent that the debt financing costs in a fiscal year exceed PLN 3,000,000. Where 30% of fiscal EBITDA.
There is no doubt that these changes would generate additional tax burdens for businesses.
Prohibition to deduct as tax costs the costs of financing the debt of related parties for the acquisition of shares vs the possibility of deducting from the tax base the expenses qualified for the acquisition of shares
The proposed rules provide for:
- A total ban on deducting financing costs from related party debt, allocated directly or indirectly to operations on the capital, in particular acquisition or subscription of shares, acquisition of all rights and obligations in a partnership (not a legal person), increases on shares, capital increases or share repurchase of the company in order to redeem them.
The proposed regulation aims to thwart the tax practice of capital groups, where a taxpayer reduces income by recognizing interest on loans from related parties as tax deductible costs and allocates the proceeds of the loan to finance another. related party (for example by making a cash contribution), which results in the reclassification of the loan as equity financing and, therefore, does not generate income for the taxpayer.
- Consolidation relief, which would allow taxpayers receiving income other than capital gains to deduct from their tax base the expenses eligible for the acquisition of shares in companies, up to the amount of the taxpayer’s income during a financial year. taxation other than capital gains.
Not only could qualifying expenses be tax deductible under the CIT Act, but they could also (in addition) be deducted from the tax base in the tax year in which the shares are purchased. This deduction could not exceed PLN 250,000 in a fiscal year.
Expenses qualifying for the acquisition of shares would include expenses directly related to the share purchase transaction, incurred for:
- Legal services for the purchase or valuation of shares
- Notary fees, court fees and stamp duty
- Taxes and other public and legal taxes paid in Poland or abroad.
Eligible expenses would not include the price paid for the shares or the debt financing costs associated with such an acquisition.
If, within 36 months of acquiring the shares:
- The taxpayer or his legal successor disposes of or redeems the shares
- The taxpayer or his legal successor is put into liquidation or is declared bankrupt, or
- There are other circumstances provided for by law in which the taxpayer or his successor in title ceases to exist
the taxpayer or his legal successor will be obliged to increase the tax base by the amount of the deduction made during the tax year in which the above event occurred.
The deductibility of eligible expenses would be subject to the following preconditions:
- The company whose shares are acquired is a legal person and has its registered office or board of directors in Poland or in another state with which Poland has concluded a tax treaty containing a legal basis for the exchange of tax information .
- The principal object of the business of the company is the same as that of the taxpayer, or the activities of the company can reasonably be regarded as activities supporting the activities of the taxpayer (but the activities of such a company cannot constitute fundraising activities).
- The taxpayer and the company have exercised this activity for at least 24 months before the date of acquisition of the shares.
- In the two years preceding the date of acquisition of the shares, the company and the taxpayer were not related entities.
- In a single transaction, the taxpayer acquires shares in the company for an amount representing the absolute majority of voting rights.
The simultaneous introduction of consolidation relief and the ban on deducting interest on financing debts from related parties is a sign of inconsistency on the part of the promoter of the amendment. On the one hand, it encourages taxpayers to acquire shares in other companies and, on the other hand, it makes it difficult to obtain financing for the acquisition of such shares from related parties.