On 24 April 2020. Director of National Treasury Information issued an individual interpretation (ref. 0111-KDIB1-1.4010.47.2019.2.MF), as to whether interest paid by the Company to the New Creditor, after subrogation, will be deductible for the Applicant.
This individual interpretation concerns the subrogation agreement. The subrogation agreement was regulated by the Polish Civil Code Act of April 23rd 1964, under Art. 518.1.3, according to which “A third party, which repays the creditor, acquires the repaid claim up to the amount of the payment made if it acts with the debtor’s consent in order to join the creditor’s rights; the debtor’s consent should be null and void in writing”. Therefore, there are three parties to the subrogation agreement, namely the debtor, the creditor and a third party.
The parties involved in this case are as follows: “Applicant” or “Company”, “Current Creditor” and “New Creditor”.
The Applicant (Company) is a capital company established in accordance with Polish law, has its registered office in the territory of Poland and is a Polish tax resident, subject to taxation in Poland on its entire income, regardless of the place where it is earned. It is engaged in the acquisition, construction/investment, management and rental of commercial real estate, intended for commercial and retail operations. It belongs to an international capital group, conducting business activity in a sector focused on retail trade. The applicant is a company registered as an active taxpayer of value added tax (VAT).
The current Creditor is a Dutch capital company that is liable in the Netherlands to tax on all its income, regardless of where it is earned. The Existing Creditor does not conduct business activity through a company located in Poland. It belongs to an international capital group – that of the Applicant. All shares in the Company currently belong to the Current Creditor.
The New Creditor is a capital company established in accordance with Polish law, which has its registered office in the territory of Poland and is a Polish tax resident, subject to taxation in Poland on its total income, regardless of the place where it is earned. The New Creditor is engaged in the acquisition, construction/investment, management and rental of commercial real estate for commercial and retail operations. Nowy Creditor also belongs to the group of the Company and the current Creditor. New Creditor is registered as an active taxpayer of value added tax (VAT). In connection with the planned ownership changes in the group, in the future Nowy Creditor is to acquire 100% of shares in the Company.
The actual state of affairs concerns the Company’s receipt of a loan from the current Creditor in order to obtain funds for the purchase of real estate and its subsequent lease in connection with the Company’s business activity.
The loan includes the principal (capital) and interest, which is accrued, unpaid and not yet due. Due to the fact that Nowy Wierzyciel is to acquire 100% of shares in the Company, it is planned that Nowy Wierzyciel will also become a creditor by virtue of receivables, on the basis of a subrogation agreement.
Under the subrogation agreement, Nowy Wierzyciel, with the Company’s consent, will repay the current Creditor and acquire the repaid debt up to the amount of the payment made. The above means that the New Creditor will acquire the Claim in the amount of the principal amount of the loan and all interest accrued until the date of conclusion of the subrogation agreement, and as a consequence, it will become the rights of the satisfied creditor arising from the acquired claim. As a result of the above, the current Creditor will cease to have a claim on the Company, and the New Creditor will acquire the claim and become a new creditor of the Company on this account. As a result, the Company will repay to the New Creditor both the principal amount of the loan granted and the interest due resulting from the claims, acquired by the New Creditor as a result of the subrogation agreement.
Pursuant to Art. 15.1 of the Corporate Income Tax Act of 15 February 1992, tax-deductible costs are the costs incurred in order to obtain revenue from a source of income or in order to maintain or secure a source of income, except for the costs listed in Art. 16.1.
Pursuant to this provision, a taxpayer may deduct for tax purposes any expenses, provided that it proves their connection with its business activity and their incurrence has or may have an impact on the amount of income earned. In view of the above, for the expenditure incurred by a taxpayer to be deductible, the following conditions must be met:
– it has been incurred by the taxpayer, i.e. it must ultimately be covered from the taxpayer’s assets (expenses which have been incurred by persons other than the taxpayer for its activities by persons other than the taxpayer are not deductible),
– is definitive (real), i.e. the value of the expenditure incurred has not been reimbursed to the taxpayer in any way,
– is related to the business activity conducted by the taxpayer,
– is related to the business activity conducted by the taxpayer,
– was incurred in order to obtain, retain or secure a source of revenue or may affect the amount of revenue generated,
– has been properly documented,
– shall not be included in a group of expenses which, in accordance with Article 16(1) of uCIT, shall not be regarded as a deductible expense.
According to art. 16 par. 1 point 11 of uCIT is not considered to be deductible costs of accrued but unpaid or cancelled interest on liabilities, including loans (credits). However, interest paid on loans which at the same time have a causal and consequential relationship with the taxpayer’s income from the business activity may be recognized as tax deductible costs, and such interest should be recognized as tax deductible costs on the date of their actual payment/capitalization.
Therefore, the Applicant is entitled to recognize as tax deductible costs the interest on the loan repaid to the present Creditor, as these expenses are causally and effectively related to the Company’s revenues. Thus, in the event of the transfer of receivables to the New Creditor by way of subrogation, the Company will also be entitled to recognize the interest repaid as tax deductible costs, taking into account the limitations resulting from the provisions on thin capitalization and regulations concerning transactions between related parties.
Author: Anna Michalak – Tax Assistant