Debt push-down in Poland: Maximising benefits

Understanding the debt push-down mechanism

The debt push-down mechanism is commonly employed when an investor acquires a company via a special purpose vehicle (SPV). Following the acquisition, the SPV merges with the target company, transferring the acquisition debt to the operational entity. This structure enables interest expenses on the debt to be deducted from the acquired company's taxable income, thereby reducing the overall tax burden.

This mechanism aligns with international tax planning principles and is widely utilised globally. However, since 2018, it has no longer been available in Poland.

Debt push-down exclusion in Poland

Since 01 January 2018, the Polish Corporate Income Tax Act has explicitly prohibited tax benefits associated with the debt push-down mechanism. Under Article 16(1)(13e) of the CIT Act, taxpayers must exclude from tax-deductible costs any financial expenses incurred in acquiring shares (stocks) in a company if these costs reduce the tax base. 

This restriction particularly applies where income is generated from the acquired company’s continued operations, including mergers, in-kind contributions, legal form transformations, or the creation of a tax capital group. The purpose of this provision is to prevent the artificial reduction of taxable income through acquisition financing.

Exploring alternative solutions

Although the debt push-down mechanism cannot be directly applied, alternative ways of deducting interest expenses remain. Article 16(1)(13e) of the CIT Act only restricts costs incurred in acquiring shares in a company that is later merged with the financing entity. It does not extend to costs related to refinancing the acquired company’s existing debt tied to its business operations.

One potential alternative is refinancing existing debt through a loan. However, this requires careful timing, a well-justified business rationale, and an individual tax ruling. Polish tax authorities have previously argued that loans taken for refinancing may be subject to debt push-down restrictions, even though the CIT Act does not explicitly impose such limits.

Another alternative is structuring the transaction as an asset deal executed at the SPV level and financed with new debt.

Tax risk mitigation

Exploring alternatives to the debt push-down mechanism requires meticulous tax planning. Investors must ensure a strong business justification for the financing structure and transactions. It is advisable to consider instruments to safeguard against the General Anti-Avoidance Rule (GAAR). A comprehensive assessment of potential tax benefits and compliance with tax scheme reporting (DAC6) obligations is also essential.

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Piotr Prokocki specialises in comprehensive services for M&A, and develops effective structures for financing transactions, capital withdrawal, and profit distribution.