Foreign loans and tax consequences
July 4, 2023
Polish entrepreneurs often finance their activities through loans or credits. Often, such financing has its source abroad. Both in banks operating outside Poland, as well as in foreign entities belonging to the same capital groups as Polish taxpayers. It should be remembered that foreign loans, i.e. borrowing from an entity not established in our country, has certain tax consequences. Below we present the most important of them.
Foreign loan and VAT
When signing a loan or credit agreement with a foreign entity, we must remember to properly record this transaction for VAT purposes. In the case of VAT, the issue of interest is crucial. The capital received and then repaid is somewhat neutral for VAT purposes. On the other hand, interest on loans requires recognition of the so-called “import of services”, in other words, a Polish taxpayer (being a borrower) must settle for VAT purposes the interest he/she pays to a foreign lender. Granting a loan is treated under the VAT Act as a financial transaction, and due to the fact that it takes place between entities based in two different countries, pursuant to Art. 28b of the VAT Act, the place of taxation of this service is in Poland. It should be remembered that this transaction must be reported for VAT purposes within a specified period, i.e. at the time of actual payment of interest. This is due to the Art. 19a sec. 5 point 1 lit. e of the VAT Act. The tax base will be – pursuant to art. 29a sec. 1 of the VAT Act – the amount of interest paid.
What about the VAT rate? In the case of interest, it is possible to apply an exemption from VAT pursuant to Art. 43 sec. 1 point 38 of the VAT Act. That is, interest paid to a foreign entity is taxed at the same VAT rate as in the case of loans concluded between Polish entities. Therefore, they do not involve any additional financial burdens on the basis of VAT.
Foreign loan and withholding tax
When taking out a loan from a foreign entity, you should always keep in mind the issues regarding the so-called withholding tax, i.e. flat-rate income tax to which foreign entities’ income earned in Poland is subject (Article 21 of the CIT Act). The actions that the Polish taxpayer must take depend on whether the loan agreement was concluded with the so-called related party or independently operating bank or other financial institution.
Loan agreement with a related party
In the event that our lender is the so-called related party (usually a company belonging to the same capital group), then it is crucial to monitor the limit of payments to this entity, which currently amounts to PLN 2 million. How should this limit be controlled? The threshold of PLN 2 million applies to the sum of payments we make to a given entity in one tax year. But beware: it’s not just interest! In addition to interest, it should include both dividends, royalties and fees for know – how. However, it does not include fees for intangible services that we purchase from a foreign entity, i.e. management fees, IT or HR services. It is also important to remember that this limit should be considered per counterparty, and not in total for all payments made to related parties.
- The sum below PLN 2 million in a given tax year
If the sum of the above-mentioned parts that we pay to our foreign related party has not yet exceeded PLN 2 million in a given tax year, then we have the right not to collect withholding tax or apply a reduced tax rate resulting from the relevant double taxation agreement. There are two conditions: we have a current certificate of tax residence of the recipient of interest and we have verified that the entity to which we pay interest is the so-called actual recipient/beneficial owner.
- The sum above PLN 2 million in a given tax year
If the sum of the amounts paid to our foreign related party exceeds PLN 2 million in a given year, it is not possible to apply the exemption from the so-called withholding tax. Polish taxpayers are – as a rule – obliged to collect and transfer the tax to the account of the Polish tax office (pursuant to Article 26(2e) of the CIT Act). The deadline for paying this tax is the 7th day of the month following the month in which we paid the interest.
- Withholding tax exemption
Polish tax regulations provide for two options that exempt the Polish taxpayer from the collection of the so-called withholding tax, namely:
- submission by the Polish taxpayer’s management board of a statement that, to the best of his/her knowledge, all the conditions for applying the exemption from withholding tax or the preferential tax rate provided for in the double taxation agreement are met,
- applying to the tax office for the so-called opinion on the application of preferences. The tax office will confirm – in the form of a decision – our right to apply the withholding tax exemption or the rate provided for in the double taxation agreement.
The latter solution is particularly useful if we know that the threshold of PLN 2 million for interest, dividends or royalties will be exceeded every year. This opinion is issued for a period of 3 years.
Important! In the case of concluding a financing agreement with a related foreign party, the obligations regarding the preparation of documentation of transactions with related parties should also be taken into account – it may turn out that the loan agreement will have to be included in the documentation prepared for a given tax year.
Loan agreement with an independent foreign bank or other insitution
The situation is different if the loan agreement was signed with an independent foreign bank or other financial institution. Then the threshold of PLN 2 million does not apply – the condition for applying the exemption from withholding tax or applying the preferential rate from the double taxation agreement will be the possession of a valid certificate of tax residence, as well as verification whether the bank or financial institution to which we make the interest payment is beneficial owner.
