New regulations on shareholders debt financing

First reading of a governmental bill to amend Corporate Income Tax law passed the Polish parliament on the 7^th May, 2014. One of the most relevant amendments affects shareholders debt financing with a new approach to restrict deductibility of interests. So far it is clear that the new law will have large impacts on the tax reconciliation statement of Polish companies that are financed by loans of related parties. The new regulations could affect the financial stability and profitability of your business in Poland.

Furthermore, your current shareholder structure could be affected (included indirect ownership of shares that so far was an instrument to reduce the impact of limitations of the deductibility of financial costs regarding shareholders debt). We have analysed a range of scenarios that will fit with the introduced amendments. But in our opinion, it is absolutely necessary to analyse the impacts of your specific business in Poland.

In practice the amendments could increase your burden of Corporate Income Tax. The new regulation will:

• change the current approach of calculating the amount of deductible financial costs;
• expand the range of companies affected by the regulation of shareholders debt financing;
• introduce a new option to determine the limit of the deductibility of interests, not only for the debt within a given group of companies but also regarding the debt against related parties.

Amendments of the current law of shareholders debt financing

According to the bill (Art. 16, section 1, chapter 60 and61 of the Polish Corporate Income Tax) the limitations of deductibility regarding shareholders debt financing will be influenced by a much broader range of creditors, who will be considered related parties of the company (simplified, currently only parent companies and subsidiary companies are included). If the bill will become law this group will be extended to indirect related parties.

Furthermore, the draft will limit the deductible interests considerably, because the limitation of shareholders debt financing will change from an equity ratio (not only registered capital) of 3:1 to 1:1.

New optional approach

According to the new law taxpayers who received loans from so called ‘qualified creditors’ can apply a new optional approach calculating shareholders debt financing. This approach is based on the taxable value of assets, as well as on the reference rate of the National Bank of Poland. This rate applies to loans from related and not related parties. Under this rule interests (included interests payable to not related parties) could be considered deductible, that do not exceed the value of taxable assets multiplied by a certain interest rate (reference rate of the National Bank of Poland plus 1.25 %).

Applying this approach in each fiscal year deductibility of interests are limited to 50% of the companies operating profit.

What should you do?

As the current rules are applying loans that are paid this year, you should take into account what your options are and as soon as possible you should perform analyses and calculations in order to estimate whether and how the new regulations will affect the effectively of your financing. After that you should be able to decide, whether you have to initiate steps to minimise the additional tax burden. As well you should bear in mind which of the new options are favourable in the specific situation of your company. This decision should be made in early 2015.

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Wieslawa Ksycka, Telefon: +48 71 356-1161