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When starting a business, owners often choose how best to finance their company. The key is not just obtaining capital but selecting a method that brings tax benefits without harming cash flow.
Options include a shareholder loan and additional capital contributions. Each has pros and cons, but contributions enable the use of notional interest, potentially generating substantial tax savings.
What is notional interest and how does it work?
Notional interest is a mechanism under Article 15cb of the CIT Act allowing a company to treat as a tax-deductible cost the interest that a shareholder would hypothetically charge for the use of their capital.
It is beneficial because it reduces the tax base and therefore CIT due.
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What conditions must be met to use the relief?
To settle notional interest, the following conditions must be met:
Shareholders must make additional contributions pursuant to a shareholders' meeting resolution.
The contributions must be transferred to the company's reserve capital.
The notional interest rate equals the NBP reference rate plus one percentage point, e.g. 5.75% + 1% for contributions made in 2025.
Example of tax savings from notional interest
Suppose the shareholders add a contribution mechanism to the company agreement up to PLN 500,000. In 2025 they pay a total of PLN 360,000 into reserve capital. What are the tax benefits?
| Year | Notional interest | Tax shield (CIT savings) |
|---|---|---|
| 2025 | PLN 360,000 * 6.75% = PLN 24,300 | PLN 24,300 * 0.09 = PLN 2,187 |
| 2026 | PLN 360,000 * 6.75% = PLN 24,300 | PLN 24,300 * 0.09 = PLN 2,187 |
| 2027 | PLN 360,000 * 6.75% = PLN 24,300 | PLN 24,300 * 0.09 = PLN 2,187 |
This mechanism allows the company to reduce CIT by PLN 2,187 annually, saving PLN 6,561 over three years.
CIT relief for notional interest
Another way of calculating the relief uses the reference rate at the end of the year preceding the tax year for which a CIT return is filed.
The company's 2021 financial statements showed PLN 3,000,000.00 of profit, which a resolution of the ordinary shareholders' meeting allocated entirely to reserve capital.
For transferring PLN 3,000,000.00 to reserve capital in 2021, the company could recognise the following tax-deductible costs:
PLN 33,000 in 2022 (PLN 3,000,000 × 1.1%, i.e. the 0.1% reference rate on 31 December 2021 plus 1%).
PLN 82,500 in 2023 (PLN 3,000,000 × 2.75%, i.e. the 1.75% reference rate on 31 December 2022 plus 1%).
PLN 232,500 in 2024 (PLN 3,000,000 × 7.75%, i.e. the 6.75% reference rate on 31 December 2023 plus 1%).
The relief reduced tax by PLN 69,600 (19% of PLN 348,000 in tax-deductible costs).
Conditions for retaining the relief
To qualify, retained earnings or additional contributions must remain in the company for at least three years from the end of the tax year in which the resolution allocating them to reserve capital was adopted.
If contributions are returned, profits distributed or used to cover losses during this period, the company must recognise taxable revenue corresponding to the previously deducted costs. Similarly, a merger, division or conversion into an entity without legal personality before three years elapse means losing the relief.
Notional interest and other financing methods
Owners often consider the best way to finance a business. Shareholder loans are popular: any amount may be lent, and they are not subject to tax on civil-law transactions (PCC). On the other hand, the liability appears on the balance sheet and may affect access to external financing.
Unlike loans, shareholder contributions are not liabilities and increase company equity, improving its financial position. However, they are subject to 0.5% PCC. Even so, access to notional interest may make this option more profitable.
If you found this article interesting, explore our tax advisory services and read how we can help you:
Summary
Notional interest is one of the simplest tax reliefs available to Polish business owners and can optimise company financing costs. Despite its benefits, relatively few use it, mainly because they do not know it exists.
If you need help with your company's accounting and recording notional interest correctly, contact our team of experts!
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