Tax Deductibility in Debt-to-Equity Conversion – New Individual Ruling by the Director of the Polish National Tax Information

A debt-to-equity conversion involving loan receivables is a tool for capitalising a subsidiary while transforming debt obligations into equity. It allows for the strengthening of the subsidiary’s balance sheet and restructuring its debt without the need to inject new cash. In practice, however, questions have arisen as to whether, and to what extent, tax-deductible costs can be recognised in such conversions, particularly when capitalised interest on the loan is included.

The latest individual tax ruling issued by the Director of the National Tax Information on 24 June 2025 (0111-KDIB1-2.4010.217.2025.2.EJ) confirms a taxpayer-friendly position in this respect.

What was the case about?

A parent company granted a loan to its subsidiary, transferring the principal amount via a bank transfer to the subsidiary’s account. The interest on the loan, which remained unpaid on the due date, was capitalised before the conversion date, meaning it was added to the principal, and the parent company recognised it as taxable income. As part of a restructuring process, the group planned to convert the entire receivable (loan principal plus capitalised interest) into the share capital of the subsidiary.

The question concerned whether the company was entitled to recognise the full value of the receivable transferred for conversion, including capitalised interest, as tax-deductible costs.

What was the tax authority’s decision?

• Debt-to-equity conversion as a non-cash contribution – The authority confirmed that the conversion of a receivable into the share capital of a subsidiary, regardless of the form it takes, is treated for tax purposes as a non-cash contribution (Article 12(1)(7) of the Polish CIT Act).
• Possibility of recognising tax-deductible costs – In accordance with Article 15(1j) of the Polish CIT Act:

For the principal amount of the loan, the cost should be determined based on the value of the loan transferred to the subsidiary’s bank account (Article 15(1j)(2a) of the CIT Act).

For the capitalised interest, the cost should be determined based on the value of the interest, provided it was previously recognised as taxable income (Article 15(1j)(2b) of the CIT Act).

It is important to note that the interest must be capitalised prior to the conversion date and recognised as taxable income, and that the cost must be related to the taxpayer’s business activity and serve the purpose of generating or securing income.

Why does this matter?

In practice, corporate groups often undertake debt-to-equity conversions in their subsidiaries to strengthen their financial standing, reduce debt levels, and improve key financial ratios. However, uncertainties have arisen regarding the possibility and scope of recognising tax-deductible costs in such transactions.

What does the ruling of the Director of the National Tax Information mean?

The ruling confirms a favourable and established approach by the tax authorities, under which the taxpayer is entitled to recognise the full value of the receivable – including both the principal and capitalised interest – as tax-deductible costs when these receivables are converted into shares in a subsidiary, provided that the statutory conditions are met. This interpretation aligns with the existing approach of the tax authorities regarding debt-to-equity conversions and is particularly relevant for planning restructuring activities within corporate groups.