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Notional Interest Deduction in Polish corporate income tax (CIT)
Starting from 2020, Poland introduced into its tax system the institution of Notional Interest Deduction (NID), sometimes also referred to as Allowance for Corporate Equity (ACE).
This solution enables companies subject to Polish CIT to deduct from the taxable base notional interest calculated on the basis of the increase in company’s equity. It is intended to encourage taxpayers to retain capital in companies in order to support their grow. Another aim of this incentive is to mitigate the different tax treatment applied to companies funded with debt (which are generally allowed to deduct interest on debt) and companies funded with equity.
How to calculate notional interest?
The amount of the deduction corresponds to the increase in the company’s qualifying equity, multiplied by a reference rate of the National Bank of Poland (as applicable on the last day of the preceding calendar year), increased by 1 percentage point.
The qualifying equity includes additional capital contributions made to the company by the shareholders as well as any profit contributed to the company’s reserve capital or supplementary capital, except for contributions and profits allocated for covering a balance-sheet loss.
The reference rate of the National Bank of Poland amounted to 1,5 per cent at the end of 2019 and 0,1 per cent at the end of 2020. It means that the profit allocated to reserve/supplementary capital or the contributions made in 2020 may generate notional interest of 2,5 per cent and the profit allocated to these capitals or the contributions made in 2021 may generate notional interest of 1,1 per cent.
In which settlement periods notional interest may be deducted?
Notional interest may be deducted in the year in which the additional contribution is made or in which the reserve or supplementary capital is increased as well as in the next two consecutive fiscal years. However, the total amount of deduction shall not exceed the amount of PLN 250,000 (around EUR 55,000 or USD 67,000) in a fiscal year.
Since when the notional interest deduction may be applied?
The notional interest may be deducted from the taxable base since the first tax year which began after 31 December 2019. However, notional interest may be calculated also on the basis of additional contributions made or profits retained in 2019 (in this case it is assumed that the additional contributions has been made or the profits have been retained in 2020).
In which cases taxpayers lose the right to notional interest deduction?
Taxpayers that have made notional interest deduction should not repay the additional contribution or distribute the retained profit for 3 years counting from the end of the fiscal year in which that contribution was made or in which the resolution on the retention of the profit in the company was adopted.
If the additional contribution is repaid or the profit is distributed and paid before the end of the 3-years period mentioned above, taxpayers are obliged to increase their taxable revenue with a value corresponding to the notional interest deducted from the taxable base.
Taxpayers lose the right to notional interest deduction also in the case of being acquired by another entity as a result of a merger, division or transformation into a partnership that is not a CIT taxpayer before the end of the 3-years period referred to above.