PwC Webinar. Changes in thin "capitalization rules" stemming from the amendments of the Corporate Income Tax Law in Poland

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Tyrone Richard
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1 Webinar Changes in thin "capitalization rules" stemming from the amendments of the Corporate Income Tax Law in Poland Dr Sławomir Krempa Mieczysław Gonta Marcin Jaworski Business Tax Consulting Team

2 Thin capitalization regulations current rules tax deductibility limitation of interest paid on debt financing received by taxpayers from their related parties Current rules: the regulations concern entities related directly ("mother company") or entities having the same shareholder ("sister company") so-called "qualified lenders" [min. 25% of shares], " thin capitalization " limit relating to so-called "qualified lenders" is based on a 3:1 debt-to-share capital ratio, when exceeding the above limit interest on related-party loans proportionally does not constitute tax deductible cost. 2

3 Evolution or revolution proposed changes in detail According to the most recent wording of the draft Act amending the CIT law, new regulations will come into force starting from 1 January Choice of the method of calculating the thin capitalization limit Provisions of the draft Act allow for a choice between: - modified version of the rules that are currently binding or - new optional method. Taxpayers must inform the head of the relevant tax office about choice of the new optional method: - till the end of the first month of the tax year or - 30 days from concluding a loan agreement (if taxpayers were not subject to thin capitalization restrictions so far). 3

4 Evolution or revolution proposed changes in detail Changes in the existing rule: expanding the range of "qualified lenders" by including also indirectly related parties (shareholding relations at the minimum level of 25% of shares), the interest on loans from "qualified lenders" is tax deductible only if the debt to these entities is not higher than the equity of the borrower [1:1 ratio] equity is not just the share capital (it includes other capitals as well), loans given to the "qualified lenders" lower the amount of debt to these entities, The system is getting more complex 4

5 Who will be subject to the new rules? Loans from which entities may be affected by the thin capitalization rules? Existing rules New rules Ultimate Parent Company Ultimate Parent Company Grandparent Company Company 3 Parent Company Company 3 Company 1 Company 2 Company 1 Company 2 Company 4 Parent Company Sister Company Borrower Subsidiary Borrower Sister Company Shareholding relations at the minimum level of 25% of shares Subsidiary Subsidiary 5

6 Evolution or revolution proposed changes in detail New optional method - rules: it is available for entities receiving financing from related entities, it is tax deductibility limitation of interest on loans received both from qualified lenders and unrelated entities, Only the amount of interest on loans that does not exceed the tax value of assets (excluding intangible assets) multiplied by the reference rate of the National Bank of Poland increased by the index of 1.25% constitutes tax deductible costs for CIT purposes, loans granted (their nominal value) are considered as a part of the above assets, additional limitation only interest not exceeding 50% of operating profit can be deducted in a given tax year, Interest that was not deducted in a given tax year can be carried forward in the consecutive 5 tax years, if chosen, the new optional method must be applied for at least 3 tax years. 6

7 What should I do? Transitional provisions If the loan s (credit s) amount is actually transferred before the day of the amending Act coming into force, the existing thin capitalization rules apply. The new "thin capitalization" rules will concern the interest on loans (credits) if the loan s (credit's) amount is actually transferred to the taxpayer after the new regulations enter into force. It is a revolutionary change of rules, however, thanks to the transitional provisions, the taxpayers will have time to prepare for the changes. 7

8 What should I do? Based on the actual business data analysis, calculations, simulations and forecasts based on data expected in the future tax years, the taxpayers should consider whether: financing should be speeded up (or delayed), loans which are currently repaid should be restructured, in regard to loans granted after 31 December 2014: o which method is more beneficiary? o what changes should be implemented in the capital group s structures, financing rules and the business activities? 8

9 Summary The changes are significant for a broad range of taxpayers The changes aim at tightening the tax system in Poland The planned regulations are more complex and restrictive Every entity receiving debt financing from the group should consider the impact of the new regulations on its business and decide if, when and in what scope actions aimed at changing the group/financing structure should be made The new regulations will most likely enter into force starting from 2015 Thanks to the intermediary provisions, the new regulations will not impact the existing structures 9

In case of any questions dr Sławomir Krempa Partner Tax and Legal

PricewaterhouseCoopers Sp. z o.o. +48 22 746 4907 mieczyslaw.

10 In case of any questions dr Sławomir Krempa Partner Tax and Legal Department PricewaterhouseCoopers Sp. z o.o slawomir.krempa@pl.pwc.com Mieczysław Gonta Director Tax and Legal Department PricewaterhouseCoopers Sp. z o.o mieczyslaw.gonta@pl.pwc.com Marcin Jaworski Manager Tax and Legal Department PricewaterhouseCoopers Sp. z o.o marcin.jaworski@pl.pwc.com 10

11 Thank you! This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers Sp. z o.o., its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers Sp. z o.o. All rights reserved. "PricewaterhouseCoopers" refers to PricewaterhouseCoopers Sp. z o.o. (a limited liability partnership in Poland) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. 11

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