Polish CIT regulations have provided tax preferences for entities accumulating profits for several years. This instrument is the recognition of the amount of “hypothetical” interest on own financing (notional interest deduction) as tax deductible costs.
According to Article 15cb sec. 1 point 2 of the Polish CIT Act the tax deductible cost is also the amount corresponding to the product of the reference rate of the National Bank of Poland applicable on the last working day of the year preceding the tax year, increased by 1 percentage point and the amount of profit transferred to the company’s reserve or supplementary capital.
What is however important, according to Article 15 cb sec. 5 of the CIT Act, this provision applies if the return of the additional payment or the division and payment of the profit takes place not earlier than after 3 years from the end of the tax year in which the additional payment was made to the company or a resolution on retaining the profit in the company was adopted.
Although it does not result directly from the Polish CIT Act, according to the standpoint of the Polish tax authorities, in the event of an earlier payment of such an amount from the supplementary capital, tax revenue should be recognized “on an ongoing basis” (apply an analogy to the return of the additional payment): “If the return of the additional payment is made in violation of the above deadline, then the value of the previously made deductions (the value of the notional interest cost) or its part constitutes taxable income. In other words, the effect of breaching the 3-year deadline is the need to >>return<< the value of the deductions made pursuant to the provisions of Article 15 cb of the CIT Act by recognizing the tax income on this account on an >>ongoing basis<< in the amount corresponding to the deducted tax payments equal to interest on equity. Therefore, there will be no need to retrospectively correct tax settlements. The above mechanism also applies to the payment of profit to shareholders before the end of the 3-year period.” (Response of the Minister of Finance to parliamentary question No. 1075 on notional interest deduction)
In practice, however, it was emphasized that if the amount of the payment does not come from the profit covered by the settlement of costs, but from other profits (e.g. earlier ones), it can be argued that there is no need to recognize taxable income.
This position was presented in the individual interpretation of the Director of the National Tax Information of 1st September 2021 (file reference number 0111-KDIB1-3.4010.262.2021.1.JKT):
“Regarding the Applicant’s doubts of question No. 2, it should be indicated that in the case of payment in 2021 or later of profits accumulated in the supplementary capital, while indicating in the resolution of the shareholders that the payment is made from the supplementary capital from a year other than 2019 (from which this increase was used in 2020 from the preferences under Article 15cb of the CIT Act) – the Company will not be required to recognize the revenue specified in sections 5, 7 and 8 of Art. 15cb.”
However, what if the profit for which financial year the funds come from is not determined?
Here, arguments were raised (in the author’s opinion, correctly) to claim that income does not arise – if it can be indicated that the funds distributed come from earlier years in the first place (in practice, the application of the FIFO principle – “first in first out”).
Historically, this approach was first confirmed in the individual interpretation of the Director of the National Tax Information of 5th November 2021 (file reference number 0111-KDIB2-1.4010.340.2021.1.AR). The authority accepted the position of the taxpayer there, who indicated that: “… the FIFO method allows the most appropriate way to achieve the objectives of introducing the solution specified in Art. 15cb of the CIT Act”.
Importantly, such a position was finally confirmed in the situation of the payment from the profit of previous years.
It was done in the individual interpretation of the Director of the National Tax Information of 17th March 2023 (file reference number 0111-KDIB2-1.4010.98.2023.1.DD), which was reported in yesterday’s edition of “Dziennik Gazeta Prawna” (https://podatki.gazetaprawna. pl/cit/articles/8688651,tax-relief-profit-hypothetical-interest-cit-relief-interest.html).
There, in particular, the following position of the applicant was assessed as correct: “The company applies the FIFO valuation method to settle dividend payments or cover losses, i.e. >>first in – first out, first in, first out<<, i.e. settles paid dividends and funds allocated to cover losses with the earliest profits, i.e. the profits that were achieved first.”
Nevertheless, for greater security, it is worth noting in the resolution of the company’s governing bodies from which year the distributed profit comes from.