When a company finances its operations using external sources (e.g., a loan or credit), the interest paid on these sources can generally be deducted as business expenses. However, if a company decides to use its own profits or capital contributions for this purpose, it can calculate so-called hypothetical interest, which can ultimately help reduce its tax liability.
How to Calculate Hypothetical Interest?
The formula for calculating hypothetical interest is as follows:
Hypothetical Interest = NBP reference rate (applicable on the last working day of the year preceding the tax year) plus 1 percentage point × the amount of the capital contribution made to the company or the profit transferred to the company’s reserve/capital fund.
Note: This does not apply to profits transferred to cover a loss.
| Year | NBP Reference Rate | Indicator (NBP Ref. Rate + 1% Point) |
|---|---|---|
| 2019 | 1.5% | 2.5% |
| 2020 | 0.1% | 1.1% |
| 2021 | 1.75% | 2.75% |
| 2022 | 6.75% | 7.75% |
| 2023 | 5.75% | 6.75% |
Conditions for Using this Preference:
The company must adopt a resolution to:
Make a capital contribution or
Transfer profits to the company’s reserve or capital fund.
The company can deduct hypothetical interest as business expenses in the year the contribution is made or the reserve/capital fund is increased, as well as in the next two consecutive tax years.
The total amount of hypothetical interest deducted as business expenses in one year cannot exceed PLN 250,000.
After benefiting from this preference, the contribution or profit transferred to the reserve/capital fund cannot be returned or paid out within 3 years (counting from the end of the tax year in which the contribution was made or the profit retention resolution was adopted). Otherwise, the company will lose the right to recognize hypothetical interest as an expense and must treat the amount as income corresponding to the previously deducted expenses.
Important!
If your company has not yet recognized hypothetical interest as business expenses, it is not too late! The company can still deduct hypothetical interest by filing an amended CIT-8 return.
How Does It Work in Practice?
Let’s look at an example:
Company X Ltd. made a profit of PLN 5,000,000 in 2020.
In 2021, the shareholders of the company adopted a resolution to transfer PLN 2,500,000 from the 2020 profit to the company’s reserve capital.
The company can recognize hypothetical interest expenses as follows:
2021: PLN 27,500 (1.1% × PLN 2,500,000)
2022: PLN 68,750 (2.75% × PLN 2,500,000)
2023: PLN 193,750 (7.75% × PLN 2,500,000)
Thus, the total hypothetical interest recognized as business expenses in 2021-2023 would be PLN 290,000. Assuming the company is not a small taxpayer and applies the 19% tax rate, the tax savings over three years would amount to PLN 55,100 (PLN 290,000 × 19%).
Hypothetical interest can first be recognized as business expenses starting from January 1, 2020. Based on the transitional provision, contributions made in 2019 and profits transferred in 2019 from 2018 profits to the company’s capital can also be deducted in 2020.
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