Investment and commercial law Is "Safe Harbour" Really a Safe Haven?
Contribution and loan – a brief Introduction
A contribution is additional capital paid by shareholders into the company. The basis for making contributions is a resolution of the shareholders' meeting.
What a loan is does not need much explanation. However, it is worth noting that unlike contributions, a loan can be granted by another person (entity) than a shareholder.
Loan Agreement – problematic interest
A loan agreement is a popular form of financing a company. Typically, the parent company or an individual shareholder provides the loan.
Formally, there are no obstacles for another entity to grant a loan, but in such a case, the loan is subject to the tax on civil law transactions (PCC) at a rate of 0.5% of the loan amount. Therefore, in practice, the lender is usually the shareholder, which allows the exemption from PCC.
The lack of PCC in this situation is a significant advantage. However, it should be remembered that in business realities, the repayment of the loan must include interest, as the lender should receive compensation for providing capital. Often within the same group of companies, the lender may not require interest or offer a very low rate, but such practice can be challenged by the tax office, which may treat the loan as a gift. In such a case, the financed company would have to pay tax on the so-called gratuitous benefit, as the obtained advantages constitute taxable income.
The question then arises: what should the interest rate be to avoid the aforementioned problem? Here, the "Safe Harbour" solution is helpful—a statutory mechanism that allows setting interest at market conditions without the risk of it being questioned by tax authorities.
Safe harbour – a tax-safe solution
The conditions for using the "Safe Harbour" mechanism are published in the regulations of the Ministry of Finance. These conditions may change annually. Below we present the current requirements for loans granted in PLN for 2024 as an example:
- Loan interest rate: 3M WIBOR + margin for the lender of at least 2.2 percentage points.
- Loan period: The loan must be granted for a period of no more than five years.
- Limit: The total amount of loans during the year may not exceed 20 million PLN or the equivalent.
Meeting these conditions allows for the use of the "Safe Harbour" simplifications, reducing the risk of the loan being questioned by tax authorities and limiting documentation obligations.
The past few years have shown that with significant interest rate fluctuations, applying the "Safe Harbour" is not always optimal, as interest payments due to these fluctuations can reach high amounts that subsidiaries are not always able to pay. For this reason, in recent years, some companies have decided to "replace" loans granted under "Safe Harbour" with other financing—typically opting for contributions in such cases.
Contributions – an alternative to Internal loans
Contributions are a mechanism provided in the Commercial Companies Code, which allows the company to be capitalized by shareholders without changing the share capital. Unlike loans, contributions are generally non-refundable, although a resolution can be adopted to return them.
Benefits of Contributions:
- Legal simplicity: Contributions can be decided by a majority vote of the shareholders, allowing for quick implementation.
- No obligation for interest and repayment: Contributions are considered a capital injection rather than a liability to repay with interest.
- Possibility of interest and repayment: The regulations do not require contributions to be interest-bearing but do not exclude it either. It all depends on the company's statute and the shareholders' resolution based on which contributions are made. If shareholders decide on interest, the tax office cannot question its level. The same applies to the repayment obligation.
Required PCC Tax:
The drawback of contributions is the obligation to pay the civil law transaction tax at a rate of 0.5% of the contributed amount.
Loans vs. Contributions – which to choose?
he choice between a loan agreement and contributions should depend on the company's financial needs and the planned time horizon. Loans may be more advantageous for short-term financing, while contributions may better support the company's long-term capital stability.
Tax aspects should also be taken into account:
- Loans: Interest may be a tax-deductible expense, but its rate must be in line with market conditions.
- Contributions: They do not generate taxable revenue or expenses. They eliminate the risk of questioning the interest rate. They are flexible—the shareholders can even decide on repayment post-factum.
Summary
Both internal loan agreements and shareholder contributions are effective tools for financing companies, but their application requires considering various legal and tax regulations. The "Safe Harbour" rules offer additional support regarding loans, allowing for reduced tax risk and simplified documentation. Contributions, on the other hand, are a very interesting and flexible solution that offers shareholders great freedom.
The decision on the appropriate solution should be made individually for each company, considering its capital structure, current financial needs, and long-term strategy.
In our law firm, we assist clients in analyzing available financing options and preparing documentation in accordance with applicable regulations. We invite you to contact us to discuss your situation together and choose the best solution for your company.
