Notional interest in the context of dividend payment – what you need to know before passing the resolution

– up to a total of 250 thousand zloty annually. 

This mechanism allows a company to include in its CIT calculation interest which it would need to pay if it borrowed capital from third parties instead of using in-house funds (profits or shareholders’ contributions). 

The concept of Notional Interest Deduction has been designed to put tax advantages of external borrowing on equal footing with building own equity. Notional interest encourages taxpayers to accumulate profits, and makes own funding more attractive compared to borrowing. The opportunities offered by the CIT Act may bring measurable tax savings. 

Importantly, if you use notional interest, you cannot return the additional capital contributions and cannot divide and pay out the retained earnings before three years have passed. If you return the contributions or divide and pay out profits before this deadline, the value of the hypothetical interest expense or its part will become your taxable revenue. As a consequence, you have to pay back the deductions you have made. 

Therefore, you need to be extra careful in drafting the resolutions on profit distribution to minimise the tax risk. An error in the resolution may trigger a risk of having the right to the notional interest deduction challenged.

If you company has applied the notional interest deduction or you want to use this tax preference, contact u​s​. We will help you enjoy this preference properly from the legal and tax perspective. ​