Specific cost constraints – use of intangible assets and trope push down

The new rules limit the right of taxpayers to include in the tax costs depreciation deductions from the initial value and intellectual and legal rights and all types of charges and charges for the use or the right to use such values and rights up to the amount of income generated by the disposal of those values and rights to the entity third[1] . This restriction applies only if the taxpayer first created or acquired intangible property, has disposed of that value to the entity third, and subsequently uses it, for example, on the basis of an agreement concluded with that entity third (licensing, financial leasing, etc.).

Introduction

The purpose of the new rules is to eliminate situations where the value was transferred by the taxpayer in an untaxed way and then the taxpayer recognises the tax costs for its use.

Regulation only covers strictly defined intangible assets (listed) under Article 16b(1)(4-7) the Corporate Income Tax Act):

• 1) copyright or related property rights,
• 2) licences,
• 3) rights under industrial property law, i.e. inventions, utility designs, trademarks, industrial designs, topographies of integrated circuits, geographical indications, and
• 4) values equivalent to the information obtained in the fields of industrial, commercial, scientific or organisational knowledge.

Repurchase of intangible and legal assets

First, It should be pointed out that this restriction on depreciation will apply, according to the tax authorities, also in the event of the re-purchase of intangible assets. This conclusion follows an individual interpretation from 15 June 2018[2] .

This position is quite radical, since although the intangible assets were once transferred by the taxpayer to another entity (which may have been untaxed), the taxpayer incurred certain expenses for this purpose as a result of their re-purchase and should be entitled to include in the tax costs an amount corresponding to the purchase price.

Relationship between individual provisions limiting the right to charge expenditure on intangible assets to tax costs

In addition to the provisions discussed, the amendment the Corporate Income Tax Act, which entered into force 1 January 2018[3] , It also introduced restrictions on the inclusion of expenditure on the acquisition of intangible services, including the use of intangible assets (Article 15e the Corporate Income Tax Act), and limits to the tax costs of expenditure on debt financing costs which may be applicable to leasing (Article 15c the Corporate Income Tax Act). Under these regulations, expenditure on the use of intangible assets may be included in the tax costs only up to certain limits.

This raised concerns for taxpayers as to how to apply the "imposed" rules.

In an individual interpretation of 2 May 2018[4] , the authority has confirmed that the leasing of intangible assets falls within the scope of application Article 16(1)(73) the Corporate Income Tax Act In addition, the Authority decided that First, the taxable person is always obliged to apply Article 16(1)(64a) the Corporate Income Tax Act and Article 16(1)(73) the Corporate Income Tax Act He pointed out that those provisions did not provide for any restrictions on their application, including a situation where the restriction resulting from other provisions could apply to the expenditure concerned.

the Corporate Income Tax Act, Among others, Article 15c the Corporate Income Tax Act It is only for that part of the cost which is not covered by the exemption described that the taxable person must verify whether he can, and to what extent, charge such cost to tax costs in the light of Article 15c or Article 15e the Corporate Income Tax Act A similar position was presented in the personal interpretation of the Director of KIS from 8 May 2018[5].

Wide definition of intangible assets

From the above-mentioned interpretation of 8 May 2018 it follows that the tax authorities very widely interpret the definition of "all kinds of charges and charges" relating to the use of intangible assets. They recognise that, in addition to the fees and depreciation costs, the limitations also cover the costs associated with the promotion of the mark (marketing, advertising, visual and audiovisual services).

In our view, such a position is not justified in the light of the wording of the provisions in question and it is unduly extending their scope.

Debt and income combination (debt push down)

Historically, in the case of the acquisition of a debt-funded company, the standard procedure was the acquisition allowing the combination of debt and income generated by the acquired company (the so-called debt push down).

The transaction scheme was as follows: the buyer formed a special company (the acquiring company) which incurred a debt and bought shares in the acquired company. The acquiring company and the acquired company subsequently merged, either the acquiring company or the acquired company.

Regardless of the direction of the merger, this resulted in a ‘merger’ of debt to acquire shares with the income of the acquired company.

From a tax perspective, it allowed the deduction of interest and other financial costs from the revenues of the acquired company (a similar effect could be achieved by converting the acquired company into a passenger company or creating a tax capital group).

Of course, there were also extra-tax reasons for this operation – the "collection" of debt to the level of the acquired company improved its repayment and was much more effective from the funding point of view.

This scheme led to tax advantages, but was difficult to qualify as aggressive tax optimization or artificial operation without economic justification. In fact, this led to a comparison of the tax effects of the purchase of debt-funded shares with the direct purchase of assets, which was quite rational for the buyer.

However, this option was eliminated by the legislator from 1 January 2018 Indeed, a provision has been introduced which excludes the deductibility of the costs of debt financing incurred for acquisition of the company’s shares in the part in which they would reduce the tax base, which takes account of the revenue associated with the continuation of the business activity of the acquired company, in particular in connection with the merger, the in-kind contribution, the transformation of the legal form or the formation of a tax capital group (Article 16(1)(13e) the Corporate Income Tax Act).

The cost of debt financing was defined as the cost of debt financing within the meaning of the undercapitalisation provisions (i.e. all types of costs related to the collection and use of funds, in particular interest, fees, commissions, etc.). Article 15c(12) the Corporate Income Tax Act).

As can be seen, the legislator wanted to lead to a situation where, in the case of the acquisition of a company financed (at least partially) by debt, the financing costs could never be deducted from the revenue generated by the acquired company/company of the acquired company.

Debt refinancing

In an individual interpretation of 5 February 2018[6] the Authority took the view that in the case of debt refinancing, the restriction in question also applies to new financing. In the situation under examination, the applicant planned to borrow a consolidation loan to replace several loans financing different objectives.

one of them was an acquisition credit for the purchase of shares in a company which subsequently merged with the applicant (it was taken over by the applicant). The Authority considered that the consolidation loan would ‘take over’ restrictions on acquisition credit.

The resolution of the Authority is not entirely in line with the literal wording of the provision, as the new loan was not drawn into the acquisition of the company’s shares. Therefore, such an extensive interpretation may raise some doubts.

Even if it is accepted as correct, it should be remembered that in the case of mixed refinancing (e.g. debt and capital, debt and equity) it will be important to determine which measures, in accordance with the provisions of the parties or the actual flow, re-financed the debt incurred for the acquisition of the shares.

Exchange rate differences

In an individual interpretation of 12 October 2018[7] the Authority has confirmed that the exchange rate differences made in the repayment of the loan to acquire the shares are also excluded from the costs. This is consistent with the interpretations of undercapitalisation rules, which indicate that exchange rate differences are included in the cost of debt financing.

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1 Article 16(1)(64a)(73) Act on 15 February 1992 corporate income tax, i.e. Journal of Laws of 2018, item 1036, Next: the Corporate Income Tax Act

2 reference no. 0114-KDIP2-3.4010.121.2018.1.KK, Legalis.

3 Act of 27 October 2017 amending the Personal Income Tax Act, the Corporate Income Tax Act and the Flat-rate Income Tax Act on certain revenues generated by individuals, Journal of Laws of 2017, item 2175.

4 reference no. 0111-KDIB1-3.4010.60.2018.1.JKT, Legalis.

5 reference no. 0111-KDIB1-2.4010.102.2018.2.MM, Legalis.

6 reference no. 0114-KIDP2-2.4010.295.2017.1.AM, Legalis.

7 reference no. 0114-KDIP2-2.4010.415.2018.1.AM, Legalis.