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Equity for the purpose of thin capitalization

2016-11-03

When determining equity for the purpose of thin capitalization, a taxpayer has to leave out from the calculation e.g. the value of revaluation capitals or equity from subordinated loans received. Proper determination of equity for those purposes has an impact on tax deductible expenses in connection with interest paid on loans advanced by related companies.

Pursuant to Article 16.1.60 and 16.1.61 of the CIT Act, the following interest is not treated as tax deductible expenses:

  1. on loans advanced to a company by an entity holding, directly or indirectly, no less than 25% of that company’s shares or advanced together by entities holding together, directly or indirectly, no less than 25% of that company’s shares, if the amount of the company’s debt to entities holding, directly or indirectly, no less than 25% shares, including also debt under loans, exceeds in aggregate the company’s equity
  2. on loans advanced by another company, if in each of the both companies the same entity holds, directly or indirectly, no less than 25% of shares, and the amount of the borrowing company’s debt to the lending company and to entities holding, directly or indirectly, no less than 25% of the borrowing company’s shares, including also debt under loans, exceeds in aggregate the borrowing company’s equity

- in such proportion in which the amount of debt exceeding the company’s equity is to the aggregate amount of debt towards such entities, determined as at the last day of the month preceding the month of payment of interest on the loans.

And pursuant to Article 16.7h of the CIT Act, the equity referred to above shall be determined as at the last day of the month preceding the month of payment of interest on loans, without taking into account revaluation capitals and a portion of equity originating from subordinated loans received. Such value is to be decreased by the company’s equity which:

  • has not been actually paid towards equity or
  • has been covered with receivables under loans and interest on such loans owed to the shareholders by that company, as well as
  • has been covered with intangible assets on which no amortisation charges are made in accordance with Articles 16a to 16m.

As confirmed by Director of the Fiscal Chamber in Warsaw in the individual binding ruling issued on 14 October 2016 (ref. no. 1462-IPPB6.4510.506.16.1.AM), the above events do not trigger an obligation to decrease other equity items, such as e.g. supplementary capital, if for example a portion of supplementary capital has been covered with receivables under loans or intangible assets on which no depreciation charges are made.

The exclusions contained in Article 16.7h were implemented by the legislator in order to make more real the value of equity presented by entities in their financial statements. The restrictions implemented by the regulation under analysis do not apply, however, to company equity items other than share capital.