Financial safe harbour 2023 – the saga continues
As the busy season, class 2021, has graduated, we can all move on to our next grade – 2022. Time flies fast and we have just started the 5th year of the 2019 revolutionary transfer pricing regulations.
Although part of the rules underwent a minor or major metamorphosis (let us spare a minute of silence for the abolished regulations for indirect tax-haven-transactions), the Polish safe harbour regulations for intercompany financing have continued steadily ever since.
In this article, we present what conditions must be met to qualify for the financial safe harbour, what benefits it provides, but also what to watch out for.
Financial safe harbour conditions
According to art. 11g par. 1 of the Polish CIT Act, the tax authority shall waive the determination of the taxpayer's income (loss) with respect to the amount of interest on the loan if the following conditions are jointly met:
- The annual interest rate of the loan as of the date of the agreement is determined based on the type of base interest rate and the margin, as specified in the announcement of the Ministry of Finance;
- Apart from the interest rate, the loan agreement does not include any additional remuneration elements connected with granting or maintaining the loan;
- The loan is granted for a period not exceeding 5 years;
- During the tax year, the total level of liabilities or receivables of the taxpayer on account of the capital of loans with related parties, calculated separately for loans granted and borrowed, is no more than PLN 20,000,000 or the equivalent amount;
- The lender is not an entity having its place of residence, registered office or management on the territory or in a country applying harmful tax competition.
FY2023 base rates and margins
Consistently with the previous years and delegation stated in art. 11g par. 4 of the Polish CIT Act, the Minister of Finance announced the base rate and margins to be applied by taxpayers who intent to enjoy the benefits of the financial safe harbour in 2023 (announcement dated 20 December 2022; conditions to be applied starting from 1 January 2023).
This year’s amendments included updating the base rates for PLN by allowing to use WIRON 3M rate. This implementation reflects the transition of the Polish interbank offering rates, as the WIRON rates are allowed to be used since December 2022, with full market deployment in 2023.
Coherently with the 2022 announcement, financing denominated in foreign currency should be determined using 3-month base interest rates:
- SOFR for USD;
- SONIA for GBP;
- SARON for CHF;
- EURIBOR for EUR.
However, it is allowed to use the outdated base interest rates LIBOR GBP and LIBOR USD in case of the loans granted before January 1st, 2022, although the rationale to the announcement indicates that the development, publication and continued use of synthetic versions of these base rates is intended only for the orderly extinguishment (annexation) of active contracts, concluded before January 1, 2022.
In case of the margins applied by the taxpayers, they should not be:
- Lower than 2.4 pp. – in the case of lenders;
- Higher than 2.9 pp. – in the case of borrowers.
Benefits of the financial safe harbour
The most important aspect of the financial safe harbour is the tax risk mitigation. Tax authorities are obliged by law to abandon the tax assessment of the interest rate if the safe harbour conditions are fulfilled and the taxpayer does not have to prepare the comparability study.
What is even more favorable for the taxpayers is the fact that starting from 2022, the intercompany financing benefiting from the safe harbour mechanism are excluded from the local transfer pricing documentation’s obligation (art. 11n par. 12 of the Polish CIT Act).
These aspects definitely limit the administrative burden of the tax compliance process, which can be very time and cost consuming.
Although it may seem that the financial safe harbour is a very convenient solution for the taxpayers, possible side effects should be considered before its implementation.
The obligation to fulfill all the conditions listed in the CIT Act requires a constant monitoring. Probably the most volatile one that needs a special attention is the total amount of liabilities / receivables related to the intercompany financing. If at any point of the year the amount exceeds the PLN 20,000,000 threshold, the taxpayer loses the privilege to benefit from the safe harbour.
This aspect can be particularly tricky in case of financing denominated in foreign currency. Although the FX rate for the loan disbursement should be accounted as of the last business day preceding the capital payout (art. 11g par. 2 of the CIT Act), the volatile exchange rate might cause the threshold overrun especially in the case of partial payouts of capital during the year.
Apart from the above, it should be noted that the financial safe harbour is a tax scheme under Polish Mandatory Disclosure Rules, as it is considered as a unilateral safe harbour.
Safe harbour considerations can become even more complicated when taking into account the perspectives of both domestic parties to the transaction. It may be very inconclusive how to approach the situation, when the lender exceeds the receivables limit, while simultaneously the original borrower secures the right to use the safe harbour simplification. Such a situation might occur for example if the lender grants loans to several group borrowers.
As in this case the comparability study obligation arises for the lender, it might even end up with a conclusion that the safe harbour interest rate does not comply with the arm’s length principle, taking into account the specific conditions of the transaction such us the credit rating of the borrower or present financial market conditions. Such a situation should not be deemed impossible, particularly considering the recent volatility of the financial markets and geopolitical disruptions in Central-Eastern Europe. According to the published along with the latest announcement its rationale, the type of base interest rate and the amount of the margin should apply to controlled transactions that, by the decision of the taxpayer, are included in the safe harbor simplification regime (the taxpayer may take advantage of the simplification, but is not obliged to do so). The types of base interest rate and the amount of the margin should not constitute a so-called benchmark for the purposes of transfer pricing analysis. If the taxpayer decides not to take advantage of the safe harbor simplification, the controlled transaction will be subject to general tax provisions, including application of the arm’s length principle.
In conclusion, the implementation of the safe harbour should be carefully considered by the taxpayer, weighting the potential benefits and drawbacks for both parties engaged in the transaction.