On 31 December 2018 the Polish Ministry of Finance (MoF) published an announcement stating the “safe harbour” interest rate applicable to taxpayers in loan agreements with related parties.
When the “safe harbour” interest rate can be applied
The regulations enter into force on 1 January 2019 and apply to loan transactions carried out in the year starting after 31 December 2018.
The interest rate level published by MoF should not be considered as the market level of interest rate but as the level of interest rate which is acceptable to the tax authorities in specific cases. The purpose of the „safe harbour” interest rate is to discourage high interest rates in loan agreements with related entities. From a practical perspective, this new tool gives the taxpayer certainty that interest rates falling within the published range will not be questioned and furthermore, they will not be subject to a benchmarking requirement. However, the new regulations may also give the tax authorities justification for challenging interest rates which are set outside the indicated range.
The “safe harbour” interest rate may apply solely to taxpayers which meet together all the following conditions defined under the art. 11g part. 1 of the Corporate Income Tax Act (CIT):
- interest rate as at the date of concluding the loan agreement is set based on the reference interest rate e.g. WIBOR, LIBOR or EURIBOR and margin published in the announcement of MoF applicable on the date of conclusion the loan agreement,
- apart from the interest rate, the loan agreement does not include any additional remuneration connected with granting or maintaining the loan, especially any commissions and bonuses,
- repayment period of the loan is shorter than 5 years,
- during the financial year the total value of liabilities or receivables of a taxpayer resulting from loans with related entities (loans received and loans granted are counted separately) amounted no more than PLN 20.000.000 or the equivalent of PLN 20.000.000,
- tax residence of the lender is not in a tax haven.
Base interest rate level and suggested margin
- the “safe harbour” interest rate comprises the base interest rate and the margin,
- the base interest rate is determined based on type of the reference interest rate for loans with a three-month maturity on the interbank market (WIBOR, LIBOR, EURIBOR depending on the currency applied in the loan agreement),
- the maximum margin for the borrower and the minimum margin for the lender is 2% above the base interest rate,
- the base interest rate and the margin will be updated and announced by MoF not less than once a year.
How ASB Tax can support you
The “safe harbour” interest rate is not obligatory and higher rates may be justifiable and deductible for tax purposes under the arm’s length principle. However, taxpayers should have a strong benchmarking analysis to defend the use of rates outside the safe harbour range.
If you plan to sign a loan agreement with a related entity applying an interest rate different level to that published by the MoF, we recommend preparing justification and comparable analyses to support the applied rate. ASB Tax can assist further on your request. Please do not hesitate to contact our tax department.