Acquisition of Polish companies used to be structured via an acquiring Polish entity (limited liability company or a joint stock company) which was debt financed. Both before and after the merger of the acquisition and the target the interest on debt was tax deductible. It was limited with debt to equity thin capitalisation that applied only to selected related party debt. Interest on non-related party debt (bank loans) was fully tax deductible.
If the draft becomes law, from 2018 interest on debt financing for the acquisition of shares of the merged company will no longer be tax deductible against the profits of the merged company.
No transition period regulations have been provided, so the restriction will also apply to debt from previous years/past acquisitions and mergers.
Another type of cost that is expected to be non-tax deductible is any interest that exceeds approx. €680,000 ($806,000) per year and exceeds 30% of the company earnings before interest, taxes, and amortisation (EBITA). It will apply to both related and non-related party interest on a very broadly understood debt. Debt to equity ratio will not matter any longer. However, loans received before the end of 2017 will continue to benefit from the previous treatment for one more year. Companies with a tax year different from the calendar year can continue the previous approach until the end of the tax year which starts before the end of 2017.
Interest on profit participating loans will be never tax deductible for the borrower.
The €680,000 threshold is expected to apply to fees for intangible services (like advisory services, market research services, advertising services, management services and controlling, data processing as well as insurance, guarantees, and similar) but also payments for intellectual property rights acquired from related parties. Any such fees exceeding that threshold will be non-tax deductible for the part that exceeds 5% of EBITDA. What is important is that such costs will be fully tax deductible if they constitute a direct production cost of product/service or are recharged.
Some types of services (even if required from related parties, like accounting) are expected to be excluded from the limitations, but one should wait for the final version of the law and its formal interpretation.
Payments (royalties) for the intangible assets (like trademarks) will be not tax deductible if in the past the taxpayer was the owner of these assets, if part the royalties exceed the income achieved in the past from the disposal of the assets. This would mean that popular past structures of keeping intangibles separately from the operations may appear very inefficient for the company paying the royalties. Moreover, the owner of the intellectual property asset (if it is a Polish taxpayer) will not be allowed to treat as tax deductible the depreciation deductions from such value of the intellectual property assets that were previously owned by the taxpayer or the entity in which the taxpayer participated and which were disposed, in the part which exceeds the income from the disposal of the intellectual property assets.
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Monika Dziedzic |
Monika Dziedzic (monika.dziedzic@mddp.pl)
MDDP
Tel. +48 22 322 68 88
Website: www.mddp.pl