New Polish thin capitalization rules

02 November 2014
Avatar

Substantial changes to the Polish thin capitalization regime will come into force on 1 January 2015.

The new thin capitalization regulations will cover also loans granted by companies indirectly related to the taxpayer, i.e. via indirect shareholders (grandmother company, great-grandmother company, etc.) and related companies in which the same direct or indirect shareholder holds no less than 25% of shares. The shareholding threshold remains at the level of 25% (based on the number of voting rights).

The rules concerning the 3:1 debt/equity ratio will not apply anymore. According to the new rules, the restrictions shall apply if the amount of debt towards related parties exceeds the amount of the company’s equity capital. The amount of non-deductible interest shall be determined using a ratio based on the amount the debt towards related parties exceeding the company’s equity to the company’s overall debt towards related parties.

The new rules will apply to the loans granted after 31 December 2014.

Moreover, taxpayers will be entitled to choose an alternative regime of interest deduction which will apply also to loans granted by non-related parties.

In line with these rules, the amount of deductible interest cannot exceed the value based on:

reference rate of the National Bank of Poland from the last day of the year preceding the fiscal year increased by 1.25 percentage points

X

the tax value of assets within the meaning of the accounting provisions (i.e. the value of assets for calculation of deferred tax), excluding intangible assets, as of the last day of the tax year. 

The above provision creates the first limit of the amount of interest to be treated as tax deductible costs. The second limit is based on the operating profits - the total value of deductible interest cannot exceed 50% of operating profit of the taxpayer.

For many Polish taxpayers using financing from the group, the new rules may cause negative tax consequences. Hence, it is recommended to analyze the structure of the company’s debt and, if, necessary, take a new loan. Preferably, from a grandmother.