Limits of revenue generating costs on account of debt financing

On 27 June 2018, the Director of the State Tax Information Office issued interpretation no. 0114-KDIP2-2.4010.218.2018.1.AM on the manner of calculation of the limit of revenue generating costs on account of debt financing, referred to in Art. 15c of the CIT Act.

As of the beginning of this year, new principles concerning so-called thin capitalization were introduced into Art. 15 of the CIT Act. According to this new regulation, any surplus of the costs of debt financing, in a part exceeding 30% of the EBITDA of a given taxpayer (calculated for tax purposes), is excluded from the revenue generating costs. This limit, however, is not applied in respect of any surplus of the costs of debt financing not exceeding three million zlotys in a given tax year.

In connection with this regulation, a doubt has arisen as to whether the above limit should be calculated as the amount of three million zlotys plus 30% of the EBIDTA tax, or whether the 30% of the EBIDTA has already been taken account of in the amount of three million zlotys.

The Director of the State Tax Information Office, in the aforementioned interpretation (as well as in the previous interpretation dated 4 June 2018, no. 0114-KDIP2- 2.4010.138.2018.1.AM) shared the latter line of interpretation which is disadvantageous for taxpayers. In the situation where the amount of the surplus of the cost of debt financing does not exceed the limit of three million zlotys, the entire amount of this surplus is not excluded from the revenue generating costs, based on the calculated limit of 30% of the taxable EBIDTA. On the other hand, should the amount of the surplus of the cost of debt financing exceed the aforementioned threshold of three million zlotys, then the costs of the debt financing are excluded from the revenue generating costs to the extent that the surplus of the costs of debt financing exceed 30% of the taxable EBIDTA.

For example, if the 30% of EBIDTA of a given taxpayer amounts to 4.5 million zlotys, then each case of exceeding the amount of the surplus of the cost of financing over that amount results in the exclusion of the value of the surplus from the revenue generating costs. In this situation, it would be incorrect to assume that the limit of revenue generating costs amounts to three million zlotys (tax-free amount) plus 4.5 million zlotys (the amount of 30% of the EBIDTA). On the other hand, if 30% of the taxable EBIDTA amounted to, for example, two million zlotys, then a potential surplus of the costs of debt financing of up to three million zlotys would be regarded as revenue generating costs.

Consequently, according to the tax authority, the limit of inclusion of the costs of debt financing in the revenue generating costs will not take place: (i) where the surplus of the costs of debt financing in a single tax year does not exceed three million zlotys, or (ii) where the surplus of the costs of debt financing exceeds three million zlotys, but does not exceed the 30% of the taxable EBIDTA.