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Michał Gosek

Tax adviser (Poland)
Associate Partner
Phone: +48 61 624 49 39
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Agnieszka Szczotkowska

Tax adviser (Poland)
Phone: +48 616 24 49 22
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tax-deductible cost in Poland

Tax authorities continue to claim that where exceeding debt financing costs amount to more than PLN 3 million, they are deductible up to 30% of EBITDA, and the amount of the exceeding debt financing costs accounted for in the calculation should not be reduced by PLN 3 million. Even the taxpayer-friendly rulings of provincial administrative courts do not convince tax authorities.

The limit on tax-deductibility of debt financing costs which was added to the Polish CIT Act on 1 January 2018 still sparks a number of doubts as to its interpretation. Problems begin with calculating the amount of debt financing costs which can be included in tax-deductible costs.

Exceeding debt financing costs

Pursuant to Article 15c(1) CIT Act, taxpayers established or managed in the Republic of Poland have to exclude from tax-deductible costs a part of the debt financing costs above the threshold of 30% of the amount corresponding to the excess of the total revenues from all revenue sources (less interest income) over the total of tax-deductible costs (less depreciation/amortisation charges recognised in the fiscal year as tax-deductible costs referred to in Articles 16a–16m CIT Act) and costs of debt financing not included in the initial value of a tangible or an intangible asset. The exceeding debt financing costs mean the amount by which the debt financing costs incurred by the taxable person (tax-deductible in a given tax year) exceed the interest income achieved in the tax year.

At the same time, in Article 15c(14)(1) of the act, the lawmakers exclude the application of that provision stating that the provisions of item 1 do not apply to the exceeding debt financing cost up to PLN 3 million in the fiscal year.

As long as the exceeding debt financing costs do not cross the threshold of PLN 3 million, the profit(loss) of the company is irrelevant. Assuming that 30% of EBITDA is PLN 1 million, the threshold value binding upon the taxpayer is still PLN 3 million.

Calculations

What if 30% EBITDA is PLN 4 million and the exceeding debt financing costs total PLN 6 million? In their applications for advance tax rulings taxpayers claim that the exceeding debt financing costs of PLN 3 million should be included in tax-deductible costs and the remaining amount should be subject to the limitation calculated on the basis of 30% EBITDA. This interpretation can be illustrated with the following formula:

Limit = 30% x [(R - Ii) - (C - Am - DFC)] + 3,000,000

where:

   – total revenues from all sources
Ii    – interest income
   – total of tax-deductible costs,
Amdepreciation/amortisation charges referred to in Articles 16a–16m CIT Act, recognised in the fiscal year as tax-deductible costs,
DFCdebt financing costs not included in the initial value of a tangible or an intangible asset.

Tax authorities consider the above viewpoint incorrect and in their tax rulings they hold that the taxpayer is entitled to one of the limits: either the PLN 3 million or the amount calculated on the basis of 30% EBITDA – if the exceeding debt financing costs are more than PLN 3 million. In the latter case the formula should be as follows:

Limit = 30% x [(R - Ii) - (C - Am - DFC)]

If the solution proposed by taxpayers is adopted in the example described above, it will be possible to recognise the total expenditure as tax-deductible costs as the limit is PLN 7 million. However, if we use the formula proposed by the Head of the National Tax Information Service, PLN 2 million will not be classified as tax-deductible costs.

Although unfavourable to taxpayers, this approach is consistent and was presented, among other things, in the following advance tax rulings:

  • advance tax ruling of the Head of the National Tax Information Service of 16 April 2019, file no.: 0111-KDIB2-3.4010.90.2019.1.LG,
  • tax ruling of the Head of the National Tax Information Service of 2 July 2018, file no.: 0111-KDIB2-3.4010.56.2018.2.AZE,
  • tax ruling of the Head of the National Tax Information Service of 2 July 2018, file no.: 0114-KDIP2-2.4010.226.2018.1.AM,
  • advance tax ruling of the Head of the National Tax Information Service of 27 June 2018, file no.: 0114-KDIP2-2.4010.218.2018.1.AM.

Even taxpayer-favourable rulings of Provincial Administrative Courts (PAC) leave tax authorities adamant. In its ruling of 12 December 2018, the PAC in Poznan (file no. I SA/Po 699/18) stated explicitly that if a taxpayer's debt financing costs exceeded PLN 3 million, the amount of debt financing costs which the taxpayer could include in tax-deductible costs, calculated on the basis of EBITDA, referred only to the excess over PLN 3 million and not to the total. A similar approach was presented by the PAC in Wroclaw in its ruling of 13 November 2018, file no. I SA/Wr 833/18.

Advance rulings vs teleological interpretation

The bone of contention is the correct interpretation of the wording used by the lawmakers in Article 15c(14)(1) CIT Act, namely: the provisions of item 1 do not apply to the exceeding debt financing cost up to PLN 3 million in the fiscal year. A literal interpretation of the provision indicates clearly that the taxpayer may include PLN 3 million in tax-deductible costs, and in the case of an excess  over PLN 3 million – the amount calculated on the basis of 30% EBITDA. However, tax authorities invoke the teleological interpretation of that article and quote the regulations of the directive whose implementation introduced the regulations discussed here.

The above-described changes in thin capitalisation laws entered into force on 1 January 2018 (under Article 2(16) of the Act amending the Personal Income Tax Act, the Corporate Income Tax Act and the Act on Flat Income Tax on Certain Revenues Earned by Natural Persons – Journal of Laws of 2017, item 2175). They implement the provisions of the Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market (OJ L 193, 19.7.2016, p. 1–14).

The directive does not preclude the application of domestic or agreement-based provisions aimed at safeguarding a higher level of protection for domestic corporate tax bases (Article 3 of the directive 2016/1164). Pursuant to Article 4(1) of the directive, exceeding borrowing costs (debt financing costs) shall be deductible in the tax period in which they are incurred only up to 30% of the taxpayer's earnings before interest, tax, depreciation and amortisation (so-called EBITDA). However, pursuant to Article 4(2)(a) of the directive, by derogation from paragraph 1, the taxpayer may be given the right to deduct exceeding borrowing costs up to PLN 3 million.

Therefore, regulations included in the directive clearly indicate that only the amount calculated on the basis of 30% EBITDA is tax-deductible.

National or EU legislation?

For Polish taxpayers, however, the priority law will be a national provision which is not the same as the EU provision. Therefore, it is completely unfounded for Polish tax authorities to quote the interpretation of the EU directive whose wording is not the same as that of the corresponding national law. That is because pro-EU interpretation of tax law is restricted by general principles of law, in particular by the principle of legal certainty. That principle limits the obligation to interpret the regulations in accordance with EU law to the extent in which the pro-EU interpretation leads to the interpretation in accordance with the national law contra legem, that is, against the law.

Therefore, in our opinion the PAC was right to conclude that if a taxpayer's debt financing costs exceeded PLN 3 million, the ratio calculated on the basis of EBITDA should have been applied only to the surplus over the PLN 3 million. The above interpretation is the only interpretation which fits the hierarchy of the rules of interpretation of tax law. Unclear expression of the lawmakers' intention when laying down tax laws must not be rectified by the opinion of the tax authorities expressed in advance tax rulings as this leads to upsetting the rules of law-making.

If you are interested in this topic, please contact our experts available in our offices in Cracow, Gdansk, Gliwice, Poznan, Warsaw and Wroclaw.

Michał Gosek,

Agnieszka Szczotkowska,

06.06.2019