Changes to regulations on borrowing costs limitation are yet to come

The Finance Ministry announced some time ago that its bill to amend the Corporate Income Tax Act, the Personal Income Tax Act, the Act on Flat-Rate Tax on Certain Incomes of Natural Persons and certain other acts, would include measures resolving uncertainty as to the limitation of exceeding borrowing costs.

However, those turned out to be nothing more than announcements because the actual bill contains no such provisions.

What does the law say?

By Article 15c(1), taxpayers are forbidden to deduct borrowing costs for tax purposes to the extent their exceeding borrowing costs are more than 30% of tax EBITDA, being the amount by which total gross income from all sources less interest income exceeds total tax costs less depreciation and amortisation expense deducted for tax purposes during the year and less the non-capitalised cost of debt incurred to fund tangible or intangible assets.

However, in accordance with Article 15c(14)(1), the 30% EBITDA limit under sub-paragraph 1 does not apply to exceeding borrowing costs to the extent they are at or below PLN 3 million during the tax year (safe harbour).

The crux of the problem with this law is how to determine the limit which caps the borrowing costs that are deductible for tax purposes.

What is the approach of tax authorities?

According to tax authorities (see, e.g., rulings by Director of National Revenue Information dated 26 August 2020, ref. 0111-KDIB1-3.4010.270.2020.1.JKT, 16 April 2019, ref. 0111-KDIB2-3.4010.90.2019.1.LG and 2 July 2018, ref. 0111-KDIB2-3.4010.56.2018.2.AZE), what a taxpayer may deduct is either the amount defined by the limit on exceeding borrowing costs under sub-para 1 (30% of tax EBITDA), or the amount defined by the PLN 3M safe harbour, whichever is higher.

What is the approach of courts?

However, courts take a different view. For example, the Provincial Administrative Court in Szczecin held in case no. I SA/Sz 542/19 (judgment of 14 November 2019) that because the law expressly disapplies Article 15c(1) with respect to exceeding borrowing costs that are at or below PLN 3M, it is not appropriate to conclude that the amount of deductible borrowing costs is the higher of that defined by the deductibility limit of 30% tax EBITDA or that defined by the PLN 3M safe harbour.

In other words, the court took the view that the PLN 3M limit and the 30% tax EBIDTA limit should apply in combination, i.e. that the deductibility of exceeding borrowing costs is capped by the sum of the two (PLN 3M + 30% EBITDA).

With that said, note that the issue is yet to reach the Supreme Administrative Court.

If these issues pertain to your business and you are interested in our assistance, please contact your WTS&SAJA consultant.

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