Funding a Polish subsidiary: shareholder loan or equity, and what changes for UK, US and Chinese investors?

A shareholder loan can provide a contractual repayment route, while equity strengthens the company without an interest obligation. The tax result depends on more than that distinction. A Polish subsidiary must test the purpose and deductibility of interest, transfer pricing, withholding tax and the legal form of the contribution. The shareholder’s country of residence can change the withholding result even when the amount and interest rate are identical.

Legal position as at 1 November 2026

What is the company expected to do with the money?

Start with the investment and a cash-flow forecast. A loan for working capital, a loan used to buy shares and a refinancing of an existing group obligation can engage different rules. The contract should identify principal, currency, interest calculation, maturity, repayment, security and any withholding-tax gross-up. Board approval should explain why the chosen funding is suitable for the borrower.

The first tax question is whether an expense qualifies under Article 15(1) of the CIT Act and whether a specific exclusion applies. Article 16(1)(10)(a) distinguishes repayment of principal from interest; Article 16(1)(11) addresses accrued but unpaid interest. Acquisition-related group debt also requires attention to Article 16(1)(13f). A commercially sensible investment does not establish the deductibility of every funding instrument used to implement it.

Equity has a different profile. It does not create a recurring deductible interest expense or an ordinary debt repayment claim. The possibility of returning capital must be analysed under company and tax law at the relevant time. It should not be promised to investors as if it were a repayment instalment under a loan agreement.

Can all shareholder interest be deducted?

Article 15c of the CIT Act limits excess debt-financing costs by reference to the higher of PLN 3 million and 30% of the statutory tax-EBITDA amount, subject to the provision’s conditions and exceptions. The test concerns the relevant aggregate financing position, not an isolated invoice. A borrower cannot establish full deductibility merely by keeping the interest on one loan below PLN 3 million.

The arithmetic comes after the expense’s initial tax qualification. A cost excluded by another rule does not become deductible because the Article 15c capacity has not been used. Conversely, exceeding the capacity raises questions about exclusion and possible later deduction under the statutory rules, rather than automatically changing the civil-law debt.

Transfer pricing is another independent requirement. Under Articles 11c and 11k of the CIT Act, the arm’s-length nature and the applicable documentation obligations must be assessed. Currency, maturity, credit risk, security, subordination and actual repayment capacity matter. A percentage taken from another group company’s loan is not necessarily a comparable market price.

Why do the Lexel and X BV judgments need to be read together?

In Lexel, C-484/19, a Swedish company was denied a deduction for interest paid within a group to a company in another Member State. The Court examined the unequal treatment against the position of comparable domestic group financing. Its judgment of 20 January 2021 rejected the restriction on freedom of establishment in the circumstances of that national rule. It did not establish an unconditional EU right to deduct all related-party interest.

X BV, C-585/22, decided on 4 October 2024, demonstrates the limit. The Court considered interest on related-party debt linked to acquiring a participation. Where the debt itself forms part of a wholly artificial arrangement, a complete denial of interest deduction can be proportionate even if the interest rate is at arm’s length. A correct price does not, by itself, establish a commercial reason for the debt.

For a Polish borrower, the combined lesson is to retain two different files: evidence of the commercial purpose and structure of the funding, and evidence supporting its price. The judgments concern their particular national rules and EU freedom of establishment. Their conclusions cannot simply be copied to every Chinese or post-Brexit UK funding situation; the relevant freedom, taxpayer and domestic provision must first be identified.

How does the lender’s country affect Polish withholding tax?

Article 21(1)(1) of the CIT Act sets the domestic rule for interest paid to a non-resident; Article 26 governs collection and documentation. Treaty treatment depends on the actual lender’s entitlement, residence, the character of the payment and any connection with a Polish permanent establishment.

For an ordinary qualifying payment under Article 11(2) of the Poland–UK treaty, the treaty ceiling is 5% of gross interest. Specific exceptions exist and should not be assumed for an ordinary shareholder. Article 12(1) of the published 1974 Poland–US treaty exempts qualifying interest paid to a resident of the other state from source-state tax. Paragraphs 2 and 3 limit that result for debt effectively connected with a permanent establishment and excess interest arising from a special relationship. Domestic documentation and due-diligence obligations still need to be met. The Poland–China treaty uses its own Article 11 conditions and a 10% ceiling in the ordinary model. Each text must be applied on its own terms.

An American LLC is not automatically entitled to the treatment available to a US corporate resident. The tax classification, treaty residence and identity of the person deriving the income require separate analysis. Nor should an MLI principal-purpose provision be copied into a US treaty analysis without confirming that it actually modifies that treaty.

The EU Interest and Royalties Directive has a defined scope for qualifying associated companies. A lender resident in the UK, the US or mainland China does not obtain its exemption simply by lending to a Polish subsidiary. The treaty route and the Directive route must remain distinct.

For payments covered by the Polish pay-and-refund mechanism, an otherwise available treaty result may not be the immediate cash result. Articles 26(2e), 26(7a) and the applicable opinion or exemption rules must be considered. The scope of the mechanism depends on payment category, relationship, recipient and aggregated amounts; it is not a general rule for every foreign invoice.

Does a gross-up change the economics?

Illustrative model: Assume the lender must receive PLN 100,000 net interest, the contract obliges the Polish company to bear withholding tax, and the final applicable withholding rate is 5%. The gross interest is 100,000 ÷ 0.95 = PLN 105,263.16, of which PLN 5,263.16 is withholding. At an assumed 10% rate, gross interest is PLN 111,111.11 and withholding PLN 11,111.11.

These figures do not establish treaty entitlement or the timing of collection. They exclude corporate-tax deductions, exchange differences and temporary pay-and-refund effects. They show why the contract’s net-payment promise can change funding cost before any deduction benefit is considered.

What about PCC and conversion into capital?

Article 9(10)(i) of the PCC Act exempts a loan granted by a shareholder to a capital company, provided the transaction meets that provision. A loan from a group treasury company that is not a shareholder cannot simply be labelled a shareholder loan for this purpose. Other exclusions or exemptions require their own assessment.

An increase of share capital follows a separate PCC analysis under Articles 1, 6 and 7. The statutory rate for a taxable company agreement is 0.5%, but the tax base is not automatically every amount paid to the company; the legal allocation between nominal capital and other components matters. A later debt-to-equity conversion is therefore another transaction to examine, not a retroactive change to the original loan’s treatment.

When should the group assess MDR and hybrid mismatches?

For arrangements implemented under the rules effective from 1 October 2026, Article 86a §2(13) of the Tax Ordinance defines the cross-border reporting framework. The general and specific hallmarks in §2(8) and §2(15) must be matched to actual facts. Ordinary interest to a normally taxed foreign shareholder is not reportable merely because it crosses a border. A deductible payment benefiting from a particular tax treatment, a circular flow or a qualifying transfer of functions can require a different conclusion.

Hybrid-mismatch rules are another test. Articles 16n–16t of the CIT Act implement rules relevant to specified differences in the treatment of instruments or entities. If the two countries classify the funding differently, the group needs to establish whether a deduction/non-inclusion or other statutory mismatch exists and whether an exception applies. A tax treaty and an arm’s-length report do not replace that work.

Before transferring funds, prepare the financing contract, business-purpose memorandum, borrower forecast, pricing support, residence evidence and withholding analysis. The final choice should compare the company’s ability to service debt, the investor’s repayment expectations and the combined cash effects of tax and compliance.