Poland: Is 7.2% Really the Maximum Interest Deduction?


Under Polish law, the maximum interest rate on loans (from March 2021) cannot exceed 7.2% per annum. The rule applies in Poland regardless of the applicable law and the jurisdiction of the lender. Although the maximum interest rate rule was initially implemented to combat usury and other forms of predatory lending to consumers, its impact on regulations within multinational companies operating in Poland is significant.

According to the Polish Civil Code (CC), the maximum interest rate resulting from a transaction cannot annually exceed twice the amount of legal interest (maximum interest). The statutory interest is calculated as a reference rate of the National Bank of Poland plus 3.5 percentage points. Due to the series of cuts, the benchmark rate stands at 0.1%, a historic low.

The approach to monetary policy resulted in rather dynamic changes in maximum interest in Poland, as the rates were as follows:

  • 7.2% since May 28, 2020;
  • 8% between April 9, 2020 and May 28, 2020;
  • 9% between March 18, 2020 and April 9, 2020; and
  • 10% before March 18, 2020.

Despite the growing risk for lenders, especially in connection with COVID-19, the maximum rates are falling. According to the formula, the maximum interest cannot fall below 7%.

The provisions of the PC provide that if the interest rate resulting from a legal arrangement exceeds the maximum interest rate, only the maximum interest is due.

It is important to note that contractual provisions cannot exclude or limit maximum interest provisions, even when non-Polish law has been chosen as the applicable law. In such a case, the legal provisions will be applied as expressed directly in the CC.

Excess interest can be paid to the lender if the borrower wishes to do so, but a borrower may face significant consequences, such as a potential violation of bank covenants on senior debt or tax consequences.

The difference between the interest rate resulting from the loan agreement and the maximum interest rate may not be tax deductible for the borrower. Since the debtor is not legally bound to pay such interest, the tax administration can claim that the interest is not paid for the purpose of generating income, maintaining or protecting sources of income.

Such a defensible point of view was presented in one of the tax rulings in this area. It should be noted, however, that tax case law is still very limited (both with regard to tax rulings issued by Polish tax authorities and court rulings) – simply because interest rates have never been so low. and therefore Polish taxpayers have not suffered the negative impact on tax regulations of low interest rates.

The key question is whether interest exceeding the maximum interest rate can still be recognized at arm’s length. If the interest rate applied to a given loan was recognized by the tax authorities as exceeding the market level, in the corresponding part, it would not be recognized as tax deductible.

In addition, an exemption from withholding tax (WHT) under the Polish Corporate Income Tax Act (CIT) is conditional on the level of market interest. Similar requirements are provided for in double taxation treaties specifying the conditions for reduced rates or exemptions from the WHT. Accordingly, to interest exceeding the market level, a regular WHT rate should be applied (20%) rather than a WHT exemption or reduced WHT rates under the relevant double tax treaties.

There are arguments to claim that the fact that the applied interest rate exceeds the maximum interest rate should not prevent that interest not being fixed at arm’s length. First of all, many agreements have been made in the past. Some loan agreements would not be concluded if the maximum Polish interest rate were to be applied without any reservations.

From the lender’s point of view, a determined interest level below the breakeven point (just to match the maximum Polish interest) would jeopardize the assumed profitability. This could obviously lead to unfavorable tax and transfer pricing consequences in the lender’s country of residence. It should be noted that the 7.2% interest rate may not even cover the costs of external financing (which may in particular be the case with German or British lenders, for example).

Tax authorities may not be willing to readily accept such arguments, which mainly result from a tight state budget. Loan agreements can be modified to provide greater flexibility in terms of repayment or alternative forms of financing that are not limited by maximum interest rates can be applied.

One thing is certain, Polish borrowers are about to face serious disputes with the tax authorities in this regard. As a result, it may be the last call to review the group’s funding structure.

Justyna Bauta-Szostak

Partner, MDDP

Piotr Paśko

Senior Director, MDDP

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