The company is a holding company, i.e. holds shares in subsidiaries, and is publicly listed. The company inquired whether interest paid on a liability to one of the subsidiaries resulting from a dividend set-off may be recognised as a tax deductible in the month in which the set-off was performed. The company was of the opinion that it could be recognised as such. The tax authorities did not confirm such standpoint. They stated that it was possible to recognise tax deductible connected with specific income only to the extent in which the taxpayer recognises tax income in the amount of the remuneration received in a transaction of debt takeover. The expenses borne to repay a debt taken over are closely related with this very transaction against which a remuneration may be due. Therefore, the expenses borne to repay the debt may be settled in accordance with Article 15 Section 4, 4b and 4c of the CIT Act only at the time when the remuneration for the debt takeover is received. Up to now, the company has not received income on the amount received equivalent to the interest accrued as of the date of the debt takeover. Therefore, according of the tax officers is it not possible to treat such interest as costs at the time of set-off against the dividend due.

The company challenged the interpretation and the Province Administrative Court admitted the complaint. The Court recalled that the complainant had taken the debt of a company resulting from a borrowing provided by another company. In consequence, the company undertook to repay the borrowing. In the court’s opinion, the important thing is that the complainant is a shareholder of both companies. As at the set-off date, the CIT Act did not contain specific provisions on tax deductible relating to set-off of mutual liabilities. Taking into account the effect of set-off in the form of expiry of mutual liabilities, the remission of a given amount receivable by way of set-off is decisive for the deductible within the meaning of Article 15 Section 1 of the CIT Act. It follows also from the case-law that the set-off does not change the legal nature of the benefits due to the taxpayer.

The Court underlined that the settlement of the liability by the complainant by means of set-off entails, with respect to CIT, the same tax effect as the settlement in the form of payment. Interest on the debt taken over, waived through set-off, may be recognised as an expense borne in order to receive, maintain or secure income, because the complainant is a holding company, possessing shares both in the company which took the debt over and the creditor company. According to the Province Administrative Court, expenses borne in order to recapitalise companies in which the complainant holds shares are related with the securing of the source of income in the form of revenue under shares in profits.

Also, the Court analysed the regulations regarding set-off of accrued costs as well as income and debt takeover in accordance with the Civil Code. The Court emphasised that the expense in the form of interest waived by means of set-off was not a cost directly related with the specific income. The complainant will be entitled to recognise the value of interest due, waived by means of set-off of mutual liabilities, as costs at the time of set-off. Nevertheless, in view of the Court, the matter requires further clarification whether the limitations as provided for in Article 16 Section 1 Point 61 of the CIT Act do apply. In the course of another proceedings the tax authorities must also determine whether the subject of the complaint consists solely in the issue of deductibility of tax costs or also the issue of ability to recognise costs in connection with the set-off of interest due against dividend due. The judgement of the Province Administrative Court in Poznań of 18 December 2015 (I SA/Po 969/15).

EXPERT COMMENTARY: Marta Ignasiak, tax consultant at FKA Furtek Komosa Aleksandrowicz

A dispute between the taxpayer and the tax authorities pertained to whether interest on the debt taken over may be recognised as tax deductible at the time of set-off against the amounts due under the dividend. The tax authorities were of the opinion that the expenses borne to repay the liabilities taken over constituted costs directly related with the income under remuneration for the debt takeover and thus it would be possible to set-off the cost only when the related income is received (e.g. the remuneration is received). The court’s standpoint seems to be more favourable to the tax payer. The interest cost does not need to be directly related with specific income (e.g. remuneration for debt takeover), but may result from the very fact of taking action in order to maintain or secure income. In particular, in the case of a holding company which receives both from the lender and from the initial borrower revenue under shares in profits of legal persons, revenues under financing and under services provided, the costs borne may be applied to secure such sources. One should also agree that in the case of the receivables set-off, an expense to cover interest is actually and definitively borne which gives the right to recognise a tax deductible. However, one should remember that the court did not finally recognise the interest borne by the taxpayer as tax costs but pointed out to the necessity to perform another analysis of Article 15 and Article 16 of the Act on CIT. Although it is justified to believe that the debt takeover which mitigates the risk of bankruptcy of a related company may secure the source of income of the holding company, one should consider whether this will l be source of taxable income and take into account the thin capitalisation restrictions as indicated by the Court. One should also remember that such transfer of economically significant functions or assets or risks among related companies may entail an adjustment of their respective profits throughout a potential tax audit.