Interest charged by the parent company as a tax-deductible expense of a Polish branch – Polish Supreme Administrative Court (NSA) ruling
The question of whether interest charged by a parent company can constitute a tax-deductible expense for a foreign company’s branch has long been a source of interpretative doubts and uncertainty among entrepreneurs and tax advisors. This makes the final judgment of the Supreme Administrative Court (NSA) of 30 July 2025 (II FSK 1423/22) all the more important, as it unequivocally resolves the dispute in this case in favour of the taxpayer and provides an important point of reference for similar situations.
The Supreme Administrative Court confirmed that for income tax purposes, a branch of a foreign entrepreneur should be treated as an independent enterprise, which leads to the conclusion that interest charged by the parent company may be recognised as a tax cost of the branch, provided that it meets the general conditions set out in Article 15(1) of the Corporate Income Tax Act (CIT).
In this article:
The essence of the dispute – interest charged by the parent company and tax costs of the branch
The case decided by the Supreme Administrative Court concerned a German company that took out a bank loan and then used part of the funds obtained to finance the operations of its Polish branch. This financing was internal in nature – the parent company made the funds available to the branch and charged it interest. The company requested an individual interpretation to confirm that the Polish branch was entitled to include the interest charged by the parent company in its tax-deductible costs, pointing out that both the bank loan and the internal financing of the branch were provided on market terms.
The Director of the Polish National Revenue Information Service (KIS) considered the taxpayer’s position to be incorrect, arguing that settlements between the parent company and its branch are internal in nature and therefore, in the opinion of the authority, cannot generate tax costs. Consequently, he concluded that the interest charged by the parent company could not be treated as a tax-deductible expense for the branch.
The taxpayer appealed against this interpretation to the Provincial Administrative Court (WSA) in Warsaw, which ruled in his favour and overturned the interpretation. The Director of the Polish National Revenue Information Service, disagreeing with the WSA’s ruling, lodged a cassation appeal with the Supreme Administrative Court, but the SAC dismissed the appeal. This means that the administrative courts of both instances confirmed the admissibility of including interest on financing granted to a branch by its head office in tax costs, provided that the conditions set out in the CIT regulations and the double taxation agreement are met, which in practice confirms the admissibility of including such interest in tax costs in similar circumstances.
getsix® provides comprehensive tax advisory services for foreign companies operating in Poland, including support in the correct accounting of branches and ensuring compliance with applicable regulations.
Why interest accrued by the parent company may be a cost of the branch – interpretation of regulations according to the Supreme Administrative Court
Tax status of a branch and its significance in settlements
The starting point for the Supreme Administrative Court’s reasoning is to determine the legal and tax status of a foreign company’s branch. The court pointed out that Article 3(2) of the CIT Act does not create a separate tax entity for the branch. The taxpayer remains the foreign company, which is subject to so-called limited tax liability in Poland – only on income earned in the territory of the Republic of Poland.
At the same time, a branch of a foreign company constitutes a so-called ‘permanent establishment’ under double taxation agreements. The Supreme Administrative Court referred to Article 7 of the agreement between Poland and Germany, according to which the profits of an enterprise of one country may be taxed in the other country only to the extent that they can be attributed to a permanent establishment located in that other country. The wording of Article 7(2) of the DTA is relevant here: the profits of the permanent establishment should correspond to the profits that the permanent establishment would have made if it were an independent enterprise carrying on the same activities under the same conditions.
The Supreme Administrative Court emphasised that this is a legal fiction typical of international tax law: although a branch is not a separate taxpayer, for the purposes of attributing income and costs to it, it is treated as if it were a separate, independent entity. The effect of this fiction is the need to simulate a situation in which the establishment operates as an independent enterprise.
How Article 7 of the DTA affects the settlement of branch interest
A key element of the judgment is the interpretation of Article 7(2) of the DTA in conjunction with the concept of a permanent establishment. The Supreme Administrative Court pointed out that, according to the Commentary on the OECD Model Convention, this provision also covers so-called internal transactions, i.e. settlements between a permanent establishment and other parts of the same enterprise. This means that such settlements should be treated for tax purposes as if they had taken place between independent entities.
Consequently, if the parent company makes funds available to a branch and charges it interest, then under Article 7 of the DTA, the situation should be assessed as if the branch had taken out a loan from an independent entity. Thus, the interest charged by the parent company should be treated as a typical external financing cost which, provided that it meets the general conditions for a tax cost, may be included in tax-deductible costs.
The Supreme Administrative Court clearly stated that Article 7 of the DTA imposes an obligation to attribute to the establishment such profits (and corresponding costs) as it would have achieved if it had operated in full independence from the parent company. Therefore, if the branch uses financing, the costs of such financing, in particular interest, should also be attributed to it.
No prohibition on including interest in costs
The Director of Polish National Revenue Information Service (KIS) claimed that interest on financing granted to a branch by its head office was ‘internal’ in nature and therefore, in his opinion, could not be treated as a tax-deductible cost. He referred to Article 7(3) of the Tax Ordinance Act. The Supreme Administrative Court unequivocally rejected this argument.
The court pointed out that Article 7(3) of the DTA does not establish any prohibition on interest, but only allows the allocation of costs incurred by the head office to the establishment, even if they were not incurred directly by the establishment. This provision therefore opens the way for the recognition of expenses functionally related to the branch’s activities, including interest charged by the parent company, provided that the financing serves the branch’s activities.
When can interest be a tax-deductible expense for a branch (CIT)?
The Supreme Administrative Court confirmed that interest paid by a branch to its parent company meets the general criteria for tax deductible costs under Article 15(1) of the CIT Act, as it is directly related to its operations. The dispute concerned the application of Article 16(1)(11) of the CIT Act. This provision excludes from costs only unpaid or cancelled interest, and not interest actually paid.
In the case under analysis, the branch paid interest to the head office, which recognised this as revenue and paid interest to the bank. The Supreme Administrative Court therefore ruled that there were no grounds for excluding this interest from costs. It also emphasised that the approach presented by the authority would lead to an illogical result – the branch would never be able to recognise financing costs, because the parent company is always a party to the loan agreement.
What does the Supreme Administrative Court’s ruling mean for foreign companies’ branches in Poland?
The Supreme Administrative Court’s ruling II FSK 1423/22 has very specific practical significance for foreign entrepreneurs operating in Poland through a branch. It explicitly confirms that interest charged by the parent company on financing made available to the branch may constitute a tax-deductible cost for that branch, provided, of course, that it meets the standard conditions for a tax cost.
In particular, the ruling states that:
- the internal nature of settlements within a single enterprise (head office–branch) does not preclude their effects from being considered relevant for tax purposes,
- when allocating revenues and costs to a plant, the fiction of an ‘independent enterprise’ resulting from Article 7 of the DTA must be consistently applied.
From the entrepreneur’s point of view, this means that it is possible to shape the branch’s tax result in a more realistic way, so that it takes into account the actual costs of financing the business conducted in Poland. At the same time, the ruling emphasises that consistency is necessary between:
- the accepted financing structure within the group,
- documentation confirming the market nature of the interest rate,
- the method of allocating interest to the branch’s activities.
The fact that interest charged by the parent company may constitute a tax cost does not exempt the taxpayer from the obligation to demonstrate the relationship between this interest and the branch’s income and, in practice, from complying with the rules applicable to intra-group settlements, in particular the requirement for market-based financing terms.
getsix® supports foreign companies operating in Poland in the correct settlement of transactions with their head office, including intra-group financing and the allocation of costs to the branch. We help to ensure compliance with CIT regulations and DTAs. Contact us.
Summary – main points of the Supreme Administrative Court ruling
The ruling of the Supreme Administrative Court II FSK 1423/22 clarifies the approach to settling interest in the head office–branch relationship and confirms several key principles:
- for income tax purposes, a branch of a foreign company (establishment) is treated as an independent enterprise,
- the consequence of this fiction is the possibility of recognising costs arising from settlements with the head office on the part of the branch, including interest on financing made available,
- Article 7(3) of the DTA does not prohibit the inclusion of interest on loans or financing granted by the parent company in tax-deductible costs,
- Article 16(1)(11) of the CIT Act excludes from costs only unpaid or written-off interest – it does not prevent the recognition of interest actually paid in costs,
- as a result, interest charged by the parent company may constitute a tax cost for the branch if it is actually paid, relates to the branch’s activities in Poland and meets the general criteria set out in Article 15(1) of the CIT Act (connection with revenue, the purpose of achieving, maintaining or securing a source of revenue).
For entrepreneurs, this means that properly documented and market-based financing from the head office can effectively reduce taxable income in Poland, provided that due diligence is exercised in terms of documentation and the structure of intra-group settlements.
Legal basis:
- Judgment of the Supreme Administrative Court of 30 July 2025, ref. no. II FSK 1423/22.
- Act of 15 February 1992 on corporate income tax.
- Agreement between the Republic of Poland and the Federal Republic of Germany for the avoidance of double taxation with respect to taxes on income and on capital, signed in Berlin on 14 May 2003.
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