Cash pooling may be subject to thin capitalisation restrictions

Until recently, the prevailing approach of the Polish tax authorities, expressed in numerous individual tax rulings, was that interest paid within a cash pooling structure should not be subject to thin capitalisation restrictions. So far, the tax authorities were confirming taxpayers’ standpoint that cash pooling agreement should not be treated as a loan agreement. In consequence, lack of loan characteristics in cash pooling agreements meant that there was no limitation of tax deductibility of interest. The tax authorities’ approach has, however, changed recently. It is reflected in the newest individual tax rulings issued by directors of the tax chambers.

According to the new approach presented more and more often by the tax authorities, provisions regarding thin capitalisation – Art. 16 Item 1 Point 60 and Point 61 of the Polish Corporate Income Tax Law (CIT Law) may be applicable to cash pooling agreements. In view of the tax authorities, cash pooling agreements have features of loan agreements defined in Art. 16 Item 7b of the Polish CIT Law, because there is a transfer of funds, together with an obligation to repay them, as well as there is remuneration paid by the cash pooling participants in a form of interest.

What does it mean in practice?

Recent rulings constitute a breakthrough in a well-established approach of the tax authorities, according to which transfer of funds within a cash pooling structure could not be treated as a loan in the meaning of Art. 16 Item 7b of the Polish CIT Law. For entities which have not received appropriate (positive) individual tax ruling in this respect, the application of the new approach by the tax authorities during tax control proceedings may lead to recognition of corporate income tax arrears stemming from interest paid within cash pooling included in tax deductible costs over the limits provided by the thin capitalisation restrictions. The change of the Polish tax authorities’ approach in respect of applying thin capitalisation restrictions to cash pooling may lead to a change of their view on other aspects related to participation in cash pooling. In particular, we point out the possibility of changing the tax authorities’ approach in respect of the following issues:

• An obligation to prepare transfer pricing documentation for cash pooling participants, according to Art. 9a of the Polish CIT Law (first negative tax rulings in this respect have already been issued);
• Applying the stamp duty to cash pooling agreements, according to the same rules as in respect of loan agreements.