Taking a loan to a friend may result in tax consequences. As a first step, it should be pointed out that the repayment of the borrower’s own borrowing expenses does not entail any tax liability. This obligation will arise when the borrowers are paid interest for late payment. According to the Director of National Tax Information, interest on delays paid to the borrower who took out a loan to another person will be his asset, which is a taxable income.
A request for an individual interpretation of tax law was received by the Director of KIS, in which the taxpayer wanted to ensure that he would not have to pay personal income tax in connection with the amount charged to him, together with interest on late payment.
The interest was to be paid by a friend of the borrower to whom he took out the loan. The borrower has arranged to arrange a loan to the bank for him with first payment after six months. By that time, the borrower's colleague was to regulate the creditworthiness and make the assignment, and thus take over the repayment of the loan.
The borrower transferred all the money from the loan to the student, but this did not take over the loan, resulting in the borrower repaying this commitment in the bank for the colleague. After some time, the borrower asked the court to judge for him the money he had already paid.
The court found the claim and granted the borrower an amount, together with interest for late payment, setting out the findings of the borrower with the colleague as an unnamed civil contract.
The borrower asked the authority whether it would be liable to pay personal income tax on the undertaking.
According to the Director of the KIS, income tax revenues do not include amounts obtained from different types of reimbursements of expenditure incurred for another entity, provided that the reimbursement actually corresponds to the amount of costs previously incurred.
On the other hand, default interest is a by-product which is closely linked to the principal debt, but the source is essentially different from the source of the principal debt.
The legal institution regulates interest on late payment Article 481(1)(2) Act of 23 April 1964 Civil Code (Journal of Laws of 2019, item 1145), according to which if the debtor fails to comply with the cash benefit, the creditor may claim interest for the time of the delay, even if he has not suffered any damage and even if the delay is due to circumstances for which the debtor is not liable.
The creditor may require them only if the debtor fails to meet the cash benefit. According to the Director, therefore, the payment of interest for late payment on the amount corresponding to the expenditure incurred by the borrower constitutes revenue from other sources specified in Article 10(1)(9) with regard to Article 20(1) PIT Act.
In conclusion, the reimbursement of expenses incurred by the borrower does not give rise to tax consequences in personal income tax (remember, however, that this reimbursement must correspond to the amount of costs previously incurred). On the other hand, the interest payment for the delay charged on the amount corresponding to the expenditure incurred will be revenue from other sources and will be subject to income tax on individuals on a general basis.
On the basis of an interpretation of the individual tax law of 29 July 2020, No. No. 0115-KDIT2.4011.409.2020.3.RS
Author: Paweł Boś
Junior Tax Consultant, associated with Russell Bedford Poland from 2018. Author of numerous articles on legal and tax matters, published in the industry press. Law student at Leon Kozminski Academy in Warsaw