A loan or credit from a foreign entity in the light of the VAT Act

In the course of their business activities, entrepreneurs use various sources of financing. Equity is not sufficient for new ventures, therefore the direction of research is leaning towards foreign capital. Rising interest rates and constantly stricter credit conditions encourage people running a business to reach for foreign credit products. At this point, the question arises as to how the received loan or credit from a foreign entity will be taxed.

Differences between a loan and a loan

A loan is a process which consists of placing at the borrower's disposal funds of a certain amount, objects or financial instruments by a natural person or entity conducting business activity consisting in granting loans or credits on predetermined mutually agreed conditions, within a defined period of time intended for the purpose accepted by both parties and agreed in the contract.

The loan, in turn, is the commitment of the institution, the company granting it, to provide the amount agreed by both parties for a predetermined purpose and period of time. Then, the borrower will take the steps that make up the intended use of the loan, together with the reimbursement of the amount received together with the remuneration due to the institution or company granting the loan in the form of commissions and interest.

Receiving a loan or credit and tax income

Entrepreneurs who have received a loan or credit card do not have to worry that they will have to tax this transaction with income tax, because pursuant to Art. 14 sec. 3 of the PIT Act, income from economic activity does not include, inter alia, collected payments or accrued receivables for the supply of goods and services that will be performed in the following reporting periods, as well as received or returned loans (credits), including those settled in kind, with the exception of capitalized interest on these loans (credits).

A loan or credit from a foreign entity and VAT

When purchasing a loan or credit from a foreign entity specializing in granting loans and credits, we use the service provided by the entity. The received loan or credit from a foreign entity will constitute an import of services for a Polish entrepreneur (regardless of whether it is VAT exempt or not), because it has its registered office or permanent place of business in Poland and uses the service of receiving a loan or credit from a foreign entity that does not have a seat or a permanent place of business in Poland, as provided for in Art. 17 section 1 point 4 of the VAT Act.

Pursuant to Art. 28b of the VAT Act, in the described case, the taxation of the loan or credit will take place in Poland, because the place of providing the service to the Polish entrepreneur will be the country where the Polish entrepreneur has its registered office or permanent place of business or permanent residence.

In turn, according to art. 19a paragraph. 5 point 1e, in the case of the provision of loan services, the tax obligation will arise upon receipt of all or part of the payment. A Polish entrepreneur will not know when exactly the foreign company will receive individual loan or loan installments, therefore it is assumed that the obligation to tax the received loan with VAT will arise upon payment of the loan installment to the foreign entity's bank account.

VAT tax obligation and tax on civil law transactions

Another important issue is the possibility of taxing the received loan or credit from a foreign entity with the tax on civil law transactions, hereinafter referred to as PCC. The general rule is that if the loan agreement is subject to VAT, it is not subject to PCC and vice versa.

This position is included in the individual ruling of 13 July 2011 of the Director of the Tax Chamber in Poznań, ref. No. ILPB2 / 436-79 / 11-2 / MK.

Pursuant to Art. 1 clause 4 of the PCC Act, civil law transactions are subject to taxation with the PCC tax if their subject matter is:

1. things located on the territory of the Republic of Poland or property rights exercised on the territory of the Republic of Poland,

2. things located abroad or property rights exercised abroad, if the buyer is domiciled or established in the territory of the Republic of Poland and the civil law transaction has been performed on the territory of the Republic of Poland.

When taking a loan or a loan, ask yourself the following:

1. whether the loan will be granted at home or abroad and

2. whether the act of granting a loan or credit by a foreign contractor will be subject to VAT or at least one of the parties is exempt from VAT for this activity.

For example, if the contract between the lender and the borrower is signed outside the country, and on the date of its conclusion, the money will be deposited in a foreign bank account, then the entrepreneur will not have to tax this transaction with PCC.

Another example will be a situation where the signing of a loan agreement takes place in Poland and the money on the date of conclusion of the agreement would be deposited in a Polish bank account, then the entrepreneur will have to tax the transaction with PCC.

The confirmation of the above is the individual interpretation of August 24, 2015 of the Director of the Tax Chamber in Katowice, ref. No. IBPB-2-1 / 4514-59 / 15 / MD.

Subject exemption from VAT and settlement of the received credit or loan

A Polish entrepreneur who is an entity exempt from VAT tax and who uses a loan or credit from a foreign entity will be obliged to recognize the loan or credit received as an import of services, therefore he will have to settle VAT on this transaction, regardless of the exemption from VAT to which he is subject.

In this situation, due to the inability to deduct VAT, the Polish company will be obliged to pay VAT by the 25th day of the month following the month of taxation of the given service (month of payment of the installment). A Polish entity benefiting from a subjective VAT exemption will be required to complete and submit a VAT-9M declaration for the import of the loan or credit purchase service at the same time as the payment of VAT.

In other cases, when the Polish entrepreneur is an active VAT payer, he will take into account the installment of the VAT-7 (monthly) or VAT-7K (quarterly) declaration.

It should be remembered that only the amount of interest due in a given settlement period should be included in VAT returns, because only they constitute turnover in the light of the VAT Act and are also remuneration for the loan service.

The above position is included in the individual interpretation of 23 July 2015 of the Director of the Tax Chamber in Katowice, ref. No. IBPP4 / 4512-190 / 15 / PK.

A loan or credit from a foreign entity and withholding tax

In situations of receiving loans or credits from foreign entities, there is often a situation of withholding tax settlement due to the foreign counterparty obtaining income in the form of interest due, arising in the borrower's territory.

Pursuant to Art. 29 sec. 1 of the VAT Act, persons who do not have their place of residence in the territory of Poland, but simultaneously obtain revenues in its territory, should tax them in the amount of a lump sum of 20% of this income. The tax is collected by the borrower who pays it to the Polish tax office.

However, it should be noted that each situation should be considered individually, because in addition to the above, an international agreement concluded with the lender's country on the avoidance of double taxation will apply. The fact that the lender has the so-called a certificate of residence, specifying the main center of vital interests due to the taxation of its activities.