Hypothetical interest treated as a deductible cost

Małgorzata Ziemek, Tax Specialist
According to the current regulations, CIT taxpayers may achieve tax savings by including hypothetical interest in their tax deductible expenses. On what conditions can such solution be used?

In 2019, the Corporate Income Tax Act of February 15, 1992 ("CIT Act") introduced provisions concerning additional relief for taxpayers who decide to retain profit in the company and not to pay dividends, and thus accumulate their own capital. The main reason for the introduction of the new regulations was willingness to equate the tax consequences of financing with equity and external capital (i.e. loans, credits).

Pursuant to Article 15cb of the CIT Act, taxpayers may recognise as tax deductible cost the cost of hypothetical interest calculated as 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 additional payments contributed to the company or the profit transferred to the company's reserve capital. These rules shall not apply in the case of additional payments or retained profits intended to cover a balance sheet loss.

When can hypothetical interest be included in tax costs?

Hypothetical interest may be included in tax costs in the year in which the additional payments or increase in the reserve capital was made and in two following tax years, provided that the additional payments or increase in the reserve capital is not reimbursed or paid out within that period. If, within 3 years, the taxpayer returns the additional payments or distributes the profit transferred to reserve capital, it will be obliged to recognize income in the amount equal to the hypothetical interest included in the tax deductible costs.

What amount of hypothetical interest can be included in tax costs?

The total amount of hypothetical interest included in tax costs in a tax year may not exceed PLN 250,000, which means a maximum tax saving of PLN 47,500 for taxpayers.

In general, these provisions may be applied in the tax year commencing after 31 December 2019, however, they also cover additional payments and profits transferred to reserve capital after 31 December 2018. In such a case, the year of the additional payments/transfer shall be deemed to be the tax year starting after 31 December 2019. 

The so-called anti-avoidance clause is to apply to the above relief, the purpose of which is to limit the relief in question only to economically justified situations. The clause is to apply from 1 January 2021. The provisions in this respect have already been adopted and are awaiting the President's signature.

Contact our expert

Agata Nieżychowska
Agata Nieżychowska
Tax Director

Tax advisory