One of the tax changes from 2019 is the introduction of “safe” interest rates on loans from related parties. If a loan meets specific conditions, tax authorities will not challenge the settlement rules adopted. What are these conditions and what is the “safe” interest rate on a shareholder loan?
Loan interest rate – only at arm’s length!
Tax regulations require all contracts and transactions with related parties to be concluded at arm’s length. Arm’s length terms are terms on which an independent contractor would enter into a transaction with us.
NOTE: If a shareholder grants a loan to the company, the interest rate should be at arm’s length. It should therefore, de facto, be as determined by a bank granting a loan.
If the terms of a given contract deviate from the arm’s length terms, tax authorities may verify the market relevance of the interest rate applied and challenge the expenses. For tax authorities, an interest rate may be determined at any level as long as it is an arm’s length rate.
How to determine arm’s length terms for a loan?
How is that interest rate determined in practice? Several selected banks are asked for quotes and these are used as a basis to determine the interest rate to be included in the agreement with the shareholder. Official industry-specific analyses or indicators of the Central Statistical Office of Poland are frequently used as well.
However, the interest rates and other terms of loans are often challenged by tax authorities.
Safe interest rate
1 January 2019 marks the introduction of provisions regulating the tax interest rate not to be challenged by tax authorities. It is the so-called safe harbour principle, which guarantees that tax authorities do not challenge adopted interest rules.
What is the safe interest?
For loans granted after 1 January 2019, such “safe” interest is calculated according to the formula: Index + 2%.
The index is:
- WIBOR 3M – for loans in PLN
- LIBOR USD 3M – for loans in USD
- EURIBOR 3M – for loans in EUR
- LIBOR CHF 3M – for loans in CHF
- LIBOR GBP 3M – for loans in GBP
If the index is negative, we assume 0.
Also, to avoid a margin so determined being challenged by tax authorities, the agreement must meet the following conditions:
- the loan is granted for a maximum of 5 years;
- the maximum level of debt owed to shareholders and other related parties must not exceed PLN 20,000,000;
- there are no additional payments or bonuses for granting a loan.
How to determine the interest rate in an agreement with a shareholder?
Now, we have two options in determining the interest rate on loans with a shareholder:
- applying the interest rate arising from the law (the so-called safe harbour), i.e. index + 2% (assuming that we meet the other conditions); or
- applying our own interest rate – previously confirmed by obtaining several quotes from banks for the company (as this will confirm the rate’s “market relevance”).
The introduced “safe interest rates” surely offer a feeling of safety. Another thing is that the interest rate proposed by the Ministry of Finance is low. Not everybody will want to enter into agreements on such terms.
Wishing to know more about the rules of settlement between related parties? In need of a loan agreement? Contact me!
You can read more on the safe harbour rules and the transfer prcining in Poland in this article “Transfer Pricing Documentation for 2019 in Poland“.