"The Brand New Heavies”- changes to thin cap rules in Poland

Thursday 12 April 2018 - 09u46

Before undertaking any investment in the new location, one of the most crucial decision to be made concerns the financing scheme to be applied. Of course in the most cases there is “no new land” to discover, but to use the most appropriate existing scheme. Thus, it is absolutely necessary for all investors to be well informed constantly about the tax law changes, as some of so-far trustworthy tools may not be valid any longer.

Due to the changes implemented as of 1.01.2018 to the CIT Law in Poland in the area of financing of the investments area, currently there are more factors to be taken into consideration . The changes are not an sole idea of the Polish government, but should be viewed as quite restrictive implementation of EU solutions indicated in ATAD (Anti-Tax Avoidance Directive, (EU) 2016/1164). 

The thin capitalisation rules  were not properly phrased in the Polish CIT Law from the very beginning. After the last significant changes within this Law in 2015, two methods of interest calculation (in brief  the first method based on the comparison of debt-to-equity toward defined related parties, possessing at least directly or indirectly 25% of the taxpayer’s shares, the second method refers to the defined percentage of the tax value of possessed assets). The effort taken to absorb and implement these methods to  the existing financing schemes have been  wasted as the new regulations are quite revolutionary comparing to the rules binding to this date (both, before and after 2015).

The changes in the CIT Law referred  to all factors that should take into consideration while structuring financing of the investment

  • new extensive definition of debt financing (including also initial payments, bonuses, commissions, interest on lease instalments),
  • more complex mechanism for calculation of the part of the debt financing which may be tax deductible (based on the limit of 30% the operating profit increased by depreciation write-offs (“tax” EBITDA); 
  • broader scope of “defined lenders”, as debt financing should be monitored also towards  non-related parties;  
  • new to Polish CIT rules, but much more restrictive then EU recommendations – the “safe harbour” for incoming financing is set at PLN 3m(according to the EU recommendations it could be up to EUR 3m..

Namely, it should be stated that  the thin capitalisation rules in Poland not only have been changed, but actually they have been reinvented.   

Based on the intermediary rules the abovementioned “new order” should be applied to the interest on loans (or rather debt financing) actually paid to the borrowers after 1.01.2018. Consequently, it is highly recommended to review in depth the on-going and  future financing directed to Polish entities in order not to fall within new thin cap restrictions. 

Author: Piotr Kwasny – ASB Poland’s Head of Tax,  Warsaw