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Notional Interest Deduction (NID) – is it worth it?

2018-11-19

The Parliament adopted late October a new law amending inter alia CIT regulations. The new law only requires the President’s signature and promulgation in the Journal of Laws in order to be effective.

The solutions envisaged in the amendment include a Notional Interest Deduction (NID) mechanism enabling one to record as tax deductible costs the costs of raising external capital where a company is funded by way of additional contributions made by the shareholders or by way of profits allocated to the reserve or surplus capital.  

According to the statement of reasons for the bill, the changes aim to encourage taxpayers to retain capital in their respective companies by making own financing more attractive fiscally. Under the current CIT regulations, taxpayers find raising external capital, whether in the form of a loan or other forms of credit, more favourable as the interest paid on such credit is a tax deductible cost.

Under the newly added Article 15cb of the CIT Act, it will now be possible to record as a tax-deductible cost an amount calculated as a product of:

  • the reference rate of the National Bank of Poland (currently 1.5%) plus 1 percentage point, and
  • the amount of additional contribution made to the company in accordance with the KSH (Company and Partnership Code) or of the profit allocated to the reserve or surplus capital.

The cost can be deducted in the year in which an additional contribution is made or profit allocated to surplus capital, or during two subsequent years. However, where an additional contribution is returned, or profit paid out, within 3 years of the end of the fiscal year in which such additional contribution was made, or resolution on the retention of profit in the company adopted, revenue will arise equal to the previously deducted costs. A company being taken over, divided or transformed into an unincorporated business within such 3 years would bring out a similar result.

The new law provides that the aggregate amount of tax deductible costs deducted in a given fiscal your must not exceed PLN 250,000. This means that – given the current NBP referential rate – it will be fiscally advantageous to make additional contributions or retention of profits of up to PLN 10 million. This will allow for an annual reduction in tax liabilities of PLN 47, 500.

Quite importantly, the proposed relief will not be applicable in the event that such additional contributions or profits are used to cover a balance-sheet loss.

Will the new incentive bring about the expected results? As early as at the public consultations stage it was pointed out that the threshold set by the Ministry of Finance is too low to constitute a genuine incentive for own financing, as business loans are actually taken out for amounts considerably greater than PLN 10 million. The proposed threshold of tax deductible costs is also significantly lower than those in other European Union Member States which have adopted similar solutions, and which are mentioned by the Ministry of Finance in its statement of reasons.

The new regulations will first apply in the fiscal year beginning after 31 December 2019. The solution will only be applicable to the additional contributions or profits allocated to reserve or surplus capital following 31 December 2018. In this case, it is assumed that such contributions were made, or profit retained, in the fiscal year beginning after 31 December 2019.

 

Anna Skórska, Tax Consultant, ATA Tax Sp. z o.o.

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