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How to reduce your tax liability with notional interest

What is notional interest?

If the company used an external funding source (e.g., a loan or credit) to finance its operations, it could recognize the interest paid as a tax-deductible cost. On the other hand, in a situation where the company decides to use its own profits or additional capital contributions for this purpose, then it can calculate the so-called notional interest, which may ultimately reduce its tax liability.

 

How to calculate notional interest?

Notional interest

=

NBP reference rate (as of the last working day of the year preceding the tax year) plus 1 percentage point

            x    

the amount of additional capital contributed to the company or profit transferred to the company's reserve/supplementary capital*

* this does not apply to profit transferred to cover a loss.

YEAR

NBP REFERENCE RATE

INDEX (NBP REF. RATE + 1PP.)

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%

 

 

What are the rules for using this preference?

  1. The company must adopt a resolution on:
  • making an additional capital contribution or
  • transferring of the generated profit to the company's reserve or supplementary capital.
  1. The company may recognize notional interest as tax-deductible costs in the year of making the additional capital contribution or increase in reserve or supplementary capital and in the following two tax years.
  2. The total amount of notional interest recognized as tax-deductible costs in one year may not exceed PLN 250 000.

After using the discussed preference, the additional capital contribution or the profit transferred to the supplementary/reserve capital cannot be returned or distributed sooner than 3 years (starting from the end of the tax year in which the additional capital contribution was made or the resolution to keep the profit in the company was adopted). Otherwise, the company will lose the right to recognize the notional interest as tax-deductible costs and will have to recognize revenue in the amount corresponding to the tax-deductible costs deducted.

 

Important!

If up until now your company has not recognized notional interest as tax-deductible costs, nothing is lost! The company can recognize notional interest as a tax-deductible costs by submitting a correction of the CIT-8 return.

 

And how does it look like in practice?

In 2020 X Sp. z o.o. generated a profit in the amount of PLN 5 000 000.

In 2021, the Company's shareholders adopted a resolution to transfer the amount of PLN 2 500 000 from the profit generated in 2020 to the supplementary capital.

The company is entitled to recognize notional interest costs in:

  • 2021 in the amount of PLN 27 500 (1,1% x PLN 2 500 000)
  • 2022 in the amount of PLN 68 750 (2,75% x PLN 2 500 000)
  • 2023 in the amount of PLN 193 750 (7,75% x PLN 2 500 000)

In this case, the sum of notional interest recognized as tax-deductible costs in 2021-2023 would be PLN 290 000. Assuming that the Company is not a small taxpayer and taxes its income at a 19% tax rate, the Company's tax savings over 3 years would amount to PLN 55 100 (PLN 290 000 x 19%).

 

Notional interest can be recognized as tax-deductible costs starting January 1, 2020. Pursuant to the transitional provision, in 2020 additional capital contributions made in 2019 and the profit from 2018 transferred to the company's capitals in 2019 can also be recognized as tax-deductible costs.

 

 

Natalia Lasik, Tax Consultant, ATA Tax Sp. z o.o.

Interested in the topic?

natalia.lasik@atatax.pl