Hypothetical interest in Poland – how to reduce CIT tax?

Many entrepreneurs in Poland would like to have lower tax liabilities. It’s worth taking a closer look at the opportunities introduced by the legislator.
One such mechanism that can help reduce CIT tax is hypothetical interest on equity capital.

What is hypothetical interest?

Hypothetical interest is the amount a company would potentially pay as interest if it used external financing, such as a loan, instead of funding its activities with its own capital. However, the Polish tax system allows these interest expenses to be considered as tax-deductible costs, which ultimately leads to a reduction in tax liabilities.

How does the hypothetical interest mechanism work?

The hypothetical interest mechanism allows companies to include certain amounts related to retained earnings or contributions made by shareholders as tax-deductible expenses. The key rules of this mechanism are as follows:

• Hypothetical interest applies to reserve or surplus capital created from company profits or contributions made by shareholders.
• The tax-deductible cost is calculated based on the reference rate of the National Bank of Poland (NBP) increased by 1 percentage point.
• Interest can be recognized as a tax-deductible cost for a maximum of three years, with an annual limit of 250,000 PLN.

Example of interest calculation for 2024

To better illustrate how this mechanism works, let’s look at the following example.

Let’s assume that in 2024, a company decided to retain 3 million PLN of profit in its reserve capital.

For 2024, the NBP reference rate was 5.75%, which means that to calculate hypothetical interest, we apply a rate of 6.75% (5.75% + 1%).

The calculation is as follows:

3,000,000 PLN x 6.75% = 202,500 PLN

Thus, the company will be able to report a cost of 202,500 PLN in its tax return, which will reduce the tax base. Moreover, this cost can be recognized in the next two tax years, applying the current NBP reference rates, but it’s important to keep in mind the annual limit of 250,000 PLN.

Tax benefits of using the mechanism and company obligations

Benefits of using the hypothetical interest mechanism:

• Reduction of CIT tax – The company can reduce its tax base by including an additional 250,000 PLN in expenses, leading to real savings (up to 47,500 PLN per year).
• Incentive to retain earnings – By using this mechanism, companies can build their own capital reserves instead of paying out profits as dividends.
• Financial change – The possibility of using internal financing in a tax-efficient way.

Obligations and limitations resulting from the mechanism:

• Correction period of 3 years – After using this mechanism, the company must monitor its situation for three years to avoid having to correct costs or recognize additional income.
• Annual limit of 250,000 PLN – This means that larger companies may not be able to fully utilize the potential of this mechanism due to higher costs.
• Changes in the reference rate – It is necessary to constantly check the updated NBP reference rate, as it will affect the amount of costs that can be recognized.
• Balance sheet loss – The rules for hypothetical interest do not apply to contributions or profits allocated to cover a balance sheet loss.

Who can benefit from hypothetical interest?

This mechanism is available to companies that:

• Retained earnings in reserve or surplus capital.
• Received contributions from shareholders according to applicable regulations.
• Settle CIT tax.
• This preference can also be applied to previous years, allowing companies to amend their CIT-8 return and report costs.

Is it worth using the hypothetical interest mechanism?

Hypothetical interest is an attractive, though still underappreciated, mechanism for reducing CIT tax. Through it, companies can legally reduce their tax liabilities while strengthening their equity capital.