FinMin's addition to thinly capitalized law eagerly awaited
The law limits the amount of interest that is tax deductible for loans that are given to a company as share capital. The government wanted to prevent companies from using these loans to transfer profit.
When the amendments to the Corporate Income Tax Law were adopted on Nov. 20 by the Sejm, they said that the changes would apply only to loan agreements concluded after the law became effective on Jan. 1, 1999. However, the grandfather clause was omitted from the official announcement of the amendments, meaning the changes could apply to previously concluded loan agreements.
Inarda Bielinska, senior tax manager at Deloitte & Touche, said Finance Ministry officials have indicated that the grandfather clause will be affirmed in the near future.
A Finance Ministry official said changes to the amendments were in the works, but could not comment further. An announcement is expected by the end of the year, however.
The lack of a grandfather clause would cause further problems for the amendments, which some tax professionals said were already too vague.
"It's dead easy to avoid," said Eva Doyle, tax manager at KPMG Poland.
Under the current tax system, companies can inject capital into subsidiaries with loans, creating what are known as thinly capitalized companies. There is no interest on the amount that can be lent and the interest is deductible, lowering the subsidiary's profit for tax purposes. This is usually done by foreign companies who would rather pay taxes that are often lower in their home countries.
As a result of this practice, debt-to-equity ratios at subsidiaries have reached levels as high as 297 to one, said Peter Ferrigno, tax manager at Arthur Andersen. Since interest payments on loans are tax-deductible, the loan payments in effect become dividends paid out to foreign holding companies, he added.
The amendment to the Corporate Income Tax Law lowers the allowable debt-to-equity ratio for tax purposes to three-to-one. Only interest on debt that falls within this ratio will be deductible. Interest on debt that surpasses this limit will have to be paid from net profit, Janusz Fiszer, an attorney who specializes in tax matters at White & Case wrote in a recent memo to clients.
But some accountants said the provisions merely provide a loose framework that will have to be rewritten next year. "It will not particularly change the way people carry on business," Doyle said. "The provision is full of holes, and it is not difficult to get around."
The law dictates that loans from parent companies or sister companies within a group must fall within the three-to-one calculation. But other companies can contribute above this level.
However, back-to-back loans are excluded from the debt-to-equity ratio limitations, said Camiel van der Meij, tax partner with PricewaterhouseCoopers. Back-to-back loans are typically extended by a parent company to a bank with the understanding that the sum will then be lent out to a subsidiary.
Some also argued that compliance with the new regulations will be difficult, prompting companies to seek loopholes. The definition of equity used by the law is excessively narrow and therefore lowers the admissible amount of debt under the three-to-one provision, accountants said.
Among the excluded types of equity are additional payments, share premium and retained profit, they added. "The definition of equity is unfair," Doyle said. "It's not true equity of a company."
If the grandfather clause is announced by the Finance Ministry, companies will have 30 days from the law taking effect to present a list of all loan agreements to their local tax office, Fiszer's memo said. If these agreements are not disclosed, they will be subject to the new law.
Other regulations included in the November package involve loss carry forward provisions and tax calculations, among others. Under the current regulations, companies that post losses in a given year can divide the loss into three equal tranches and offset them against profit during the following three years.
The new regulations allow companies to offset up to 50% of their losses during any of the next five years, Doyle said. As a result, companies will have greater flexibility in planning to obtain the best tax benefits. "People will have less unusable losses," she explained.
Meij added that the current system is overly restrictive, and its overhaul is likely to attract additional foreign investment.
In addition, companies that paid taxes through installments computed monthly will now be able to pay taxes based on the average profit from the first six months of the previous year, according to Ferrigno. Tax payments will be reconciled at the end of the six-month period to reflect actual profit.
The amendments also lowered the corporate tax rate to 32% from 34%.
When the amendments to the Corporate Income Tax Law were adopted on Nov. 20 by the Sejm, they said that the changes would apply only to loan agreements concluded after the law became effective on Jan. 1, 1999. However, the grandfather clause was omitted from the official announcement of the amendments, meaning the changes could apply to previously concluded loan agreements.
Inarda Bielinska, senior tax manager at Deloitte & Touche, said Finance Ministry officials have indicated that the grandfather clause will be affirmed in the near future.
A Finance Ministry official said changes to the amendments were in the works, but could not comment further. An announcement is expected by the end of the year, however.
The lack of a grandfather clause would cause further problems for the amendments, which some tax professionals said were already too vague.
"It's dead easy to avoid," said Eva Doyle, tax manager at KPMG Poland.
Under the current tax system, companies can inject capital into subsidiaries with loans, creating what are known as thinly capitalized companies. There is no interest on the amount that can be lent and the interest is deductible, lowering the subsidiary's profit for tax purposes. This is usually done by foreign companies who would rather pay taxes that are often lower in their home countries.
As a result of this practice, debt-to-equity ratios at subsidiaries have reached levels as high as 297 to one, said Peter Ferrigno, tax manager at Arthur Andersen. Since interest payments on loans are tax-deductible, the loan payments in effect become dividends paid out to foreign holding companies, he added.
The amendment to the Corporate Income Tax Law lowers the allowable debt-to-equity ratio for tax purposes to three-to-one. Only interest on debt that falls within this ratio will be deductible. Interest on debt that surpasses this limit will have to be paid from net profit, Janusz Fiszer, an attorney who specializes in tax matters at White & Case wrote in a recent memo to clients.
But some accountants said the provisions merely provide a loose framework that will have to be rewritten next year. "It will not particularly change the way people carry on business," Doyle said. "The provision is full of holes, and it is not difficult to get around."
The law dictates that loans from parent companies or sister companies within a group must fall within the three-to-one calculation. But other companies can contribute above this level.
However, back-to-back loans are excluded from the debt-to-equity ratio limitations, said Camiel van der Meij, tax partner with PricewaterhouseCoopers. Back-to-back loans are typically extended by a parent company to a bank with the understanding that the sum will then be lent out to a subsidiary.
Some also argued that compliance with the new regulations will be difficult, prompting companies to seek loopholes. The definition of equity used by the law is excessively narrow and therefore lowers the admissible amount of debt under the three-to-one provision, accountants said.
Among the excluded types of equity are additional payments, share premium and retained profit, they added. "The definition of equity is unfair," Doyle said. "It's not true equity of a company."
If the grandfather clause is announced by the Finance Ministry, companies will have 30 days from the law taking effect to present a list of all loan agreements to their local tax office, Fiszer's memo said. If these agreements are not disclosed, they will be subject to the new law.
Other regulations included in the November package involve loss carry forward provisions and tax calculations, among others. Under the current regulations, companies that post losses in a given year can divide the loss into three equal tranches and offset them against profit during the following three years.
The new regulations allow companies to offset up to 50% of their losses during any of the next five years, Doyle said. As a result, companies will have greater flexibility in planning to obtain the best tax benefits. "People will have less unusable losses," she explained.
Meij added that the current system is overly restrictive, and its overhaul is likely to attract additional foreign investment.
In addition, companies that paid taxes through installments computed monthly will now be able to pay taxes based on the average profit from the first six months of the previous year, according to Ferrigno. Tax payments will be reconciled at the end of the six-month period to reflect actual profit.
The amendments also lowered the corporate tax rate to 32% from 34%.
