How will loans concluded in 2021 differ from those in previous years in terms of taxation?
Significant changes in tax law regulations that come into force at the beginning of each new year no longer surprise anyone. Practice shows that the changes concern many aspects, and their main principle is a “spot” intervention in order to seal identified leaks in the tax system.
Therefore, we would like to propose a slightly different approach to changes in taxes – instead of focusing on listing the amended regulations, we will indicate how these changes will affect individual transactions or events for taxpayers. In addition to the changes themselves, we also take into account the perspective resulting from day-to-day practice.
It should be noted that from 2021, the Polish CIT Act will contain provisions preventing the benefits resulting from the so-called hybrid structures. These provisions are another element of counteracting tax avoidance. They were implemented on the basis of the EU ATAD directives, based e.g., on the BEPS anti-tax avoidance plan by the OECD.
The regulations are intended to prevent benefits from being classified as tax-deductible costs if another party to this transaction includes the same benefit in another state as tax costs, or if such a benefit is treated by the other party as exempt from income tax. Failure to counteract this structure would lead to unjustified tax benefits. This regulation applies to related entities.
It is therefore worth assessing whether the loan agreements we conclude will fall within the scope of these regulations.
A special case of “hybrid” loans is a so-called profit participation loan (PPL), i.e. a loan where the interest rate depends on the borrower’s profit. An unjustified tax benefit will arise when the borrower includes the amount of interest as tax-deductible costs (settling the transaction as a loan) and the lender applies a tax exemption, recognizing these means as dividends. These types of benefits are counteracted by the analyzed provisions, in particular by the refusal to settle the expense as tax-deductible.
The loan interest rate is an important issue in settlements with related parties. The CIT Act requires related entities to apply such transaction conditions as would be established by unrelated entities (the arm’s length principle).
For some time, the Polish CIT Act provisions have provided for the possibility of a certain simplification, known as “safe harbor”. This solution consists in the fact that the tax authority will not question the income / loss on the loan if the taxpayer determines the interest rate (base interest rate and margin) based on the data indicated in the announcement of the Minister of Finance.
In the announcement of December 17, 2020, the Minister of Finance specified, among others, that the margin for the borrower is a maximum of 2.3 percentage points, and for the lender it is at least 2.0 percentage points. The announcement also states that when the base value is negative, in practice it is taken as zero. This means that a negative value will not effectively reduce the commission.
It is worth noting that in order to use this option, it is necessary to meet additional conditions, such as no additional fees, loan period no longer than 5 years, a debt / debt threshold in the scope of the principal amount towards related entities in the amount of PLN 20 million, or that the lender it must not be based in a country applying harmful tax competition.
Loans in “Estonian” CIT
The “Estonian” CIT is a new tax regime dedicated to taxpayers performing investments.
Does it have to do with loans? Yes, and in several respects.
Firstly, a taxpayer who would like to use this form of settlement cannot declare 50% or more of income from passive sources, which also includes interest.
Further, the granting of a loan by an “Estonian” taxpayer to a shareholder or related party may be considered a taxable distribution of hidden profit.
Due to the fact that in this model the tax base is generally determined based on accounting regulations, the recognition of loan settlements may be different than before, e.g. with regard to taxation of accrued but unpaid interest.
Documentation obligations – “tax havens”
The provisions of the Polish CIT Act provide for the obligation to document transactions (local transfer pricing documentation) if the counterparty is located in a country that uses harmful tax competition. Here, the documentation threshold is 100,000. PLN per year. From 2021, this obligation applies to a situation where not the contractor itself, but its actual owner, is located in such a country. Here, the documentation threshold is 500,000. PLN. There is no requirement of relationship with a contractor.
The “withholding tax”
It is worth mentioning that the Ministry of Finance has once again postponed – this time until the end of June 2021 – the entry into force of the modified (it is difficult to call them “new”) “withholding” tax collection regime. When planning loans, however, we should take into account that this regime will eventually enter into force. This may mean the need to collect tax when paying interest, even if exemptions or reduced rates apply.
Debt financing limit
The year 2020 was marked by disputes as to whether the debt financing limit should be calculated in such a way that the limitations only apply above PLN 3 million, and there are no such limits. Taxpayers and some administrative courts take this position. For example, the judgment of the District Administrative Court in Warsaw of September 8, 2020, sign. III SA / Wa 2591/19 The Polish tax authorities are of the opposite opinion.
The year 2021 may bring us the development of the jurisprudence in this area, in particular on the part of the Supreme Administrative Court. Taxpayers would appreciate its positive direction.