Changes to the rules of recognition of debt financing costs as tax-deductible costs
On 28 June 2022, the Ministry of Finance published a bill amending the act on corporate income tax and certain other statutes containing inter alia a proposal for alleviation of the restrictions on the financing of capital transactions and a clarification of the threshold under Art. 15c of the CIT Act.
The threshold of debt financing
The changes apply to the rules of recognition of debt financing costs as tax-deductible costs in connection with the wording of Art. 15c (1) of the CIT Act as introduced by the act of 29 October 2021 (the so-called ‘Polish Deal 1.0’).
The legislator has decided to clarify the contents of the above provision in order to eliminate the doubts concerning its interpretation. Although the Polish Deal was supposed to dismiss all the taxpayers' doubts concerning the threshold for debt financing, it failed to do so definitively. The amendments, which came into force at the beginning of the year, determined – despite favourable rulings of administrative courts – that the taxpayer can recognise as tax-deductible costs the surplus of debt financing over the threshold as determined by the value of 30% of the EBITDA for a given fiscal year or PLN 3 million. Given the exact wording of the provision in question, a doubt arose as to the whether the higher or lower of the above amounts constitutes the threshold. The upcoming amendments are to clarify the issue by incorporating into Art. 15c (1) of the CIT Act a stipulation that the higher of the amounts is to be taken into account.
Financing capital transactions
Another change proposed by the bill concerns Art. 16 (1) (13f) of the CIT Act whereby the costs of debt financing obtained from a related entity and utilised for capital transactions do not constitute tax-deductible costs. The new wording of this provision aims to exclude the application of the regulation in question where the financing entity is a bank or savings and credit union having its registered seat on the territory of an EU Member State or another state belonging to the European Economic Area.
Moreover, the limitations under Art. 16 (1) (13f) of the CIT Act will be excluded where the debt financing is obtained for the purposes of acquisition or taking-up of shares or the totality of rights and obligations in entities unrelated to the taxpayer and where debt financing is obtained by companies or partnerships that are not legal entities.
As part of the proposed new wording, the reference has been abandoned to the financing being dedicated “directly or indirectly” to capital transactions as well as amending the grammar of the current wording of the provision in question.
In summary, both proposed amendments should be assessed as positive. It is worth noting here that as regards the threshold, a similar approach has been adopted before, e.g. in a tax ruling of 30 June 2022, ref. no. 0111-KDIB1-2. 4010. 216. 2022. 1. MZA, whereby the tax authority confirmed that the higher amount will constitute the threshold for the costs of debt financing. Hence, it can be assumed that the proposed amendments have already been reflected in the practice of the tax authorities, which gives the green light to taxpayers for following this approach.
Quite importantly, the amendments are to enter into force retroactively, i.e. since 1 January 2022. In order to comply with the principle of acquired rights , the threshold under Art. 16 (1) (13f) will not apply to the debt financing disbursed to the taxpayer by 31 December 2021 to the extent to which such financing was utilised for capital transactions carried out by 31 December 2021.
Kinga Duszna, Tax Consultant, ATA Tax Sp. z o.o.
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