Thin Capitalization and its Effect on Tax Deductible Expenses

Abstract

The article presents the legislation in respect of thin capitalization rules applicable in Poland until December 31, 2014, compares it with the new legislation in force since January 2015 and evaluates the effect of the new legislation on the amount of tax deductible expenses. The article draws the conclusion that the above-mentioned effect is multidirectional. Under the new legislation (with all other conditions un- changed) the companies (borrowers) characterized by low seed capital (share capital) to equity ratio, high operating profit and high tax base of the assets may profit from improved terms on which the interest on loans and credits granted by qualified entities may be deducted from the taxable base. At the same time the new legislation reduces the possibility of deduction from the taxable base of the interest on loans and credits taken by the companies (borrowers) characterized by high seed capital (share capital) to equity ratio, low operating profit and a low tax base of the assets.