Is income tax payable on an interest-free loan?

The issue of granting interest-free loans still raises significant doubts among taxpayers. While the payment of the civil law transaction tax (PCC) is clear for the parties to loan agreements – in principle, a loan is subject to taxation at a rate of 0.5% of the loan value, payable by the borrower – the question of income tax raises more problems. This is hardly surprising given the previous significant discrepancies in case law and the tax authorities’ positions. What is the latest view of the tax authorities regarding the granting of an interest-free loan? Does such a loan generate income and who is obliged to pay any potential tax? Guidance on this matter is provided by an individual interpretation issued by the Director of the National Tax Information on 2 September 2022.

Facts of the case

The applicant, together with his wife, concluded a long-term interest-free loan agreement for the amount of 300,000.00 PLN with an unrelated person. According to the terms of the agreement, the loan was to be repaid in 200 instalments, with the final repayment date set for 2039. Neither party to the loan agreement was conducting business activity. The loan amount was paid into the borrower’s account within 3 days of signing the agreement, i.e. by 2 July 2022. The loan was granted without any remuneration for the lender for providing the capital and was reported to the relevant head of the tax office. The civil law transaction tax was paid.
The applicant asked the National Tax Information whether the interest-free loan, concluded under the above conditions, does not cause the creation of a gratuitous benefit and whether it would not require payment of income tax on interest unpaid to the lender. According to the applicant, the interest-free loan did not generate income on his part from gratuitous benefit. Therefore, the applicant should not be obliged to pay personal income tax.

Interest-free loan and income tax

The answer to the applicant’s question is not obvious. Both the tax authorities and the courts have over the years made many conflicting assessments regarding the generation of income by interest-free loans. One of the less favourable rulings for taxpayers was the judgment of the Voivodeship Administrative Court in Kraków of 4 June 2009, case no. I SA/Kr 959/08, where the court fully supported the then position of the tax authorities. The court stated that an interest-free loan leads to the creation of a gratuitous benefit within the meaning of Article 11 of the Personal Income Tax Act. According to the court, the gratuitous loan generated income equal to the interest that the taxpayer would have had to pay if they had taken out a loan on commercial terms. The tax authorities established the above income based on the average interest rate, calculated from data from several banks.
If this position were still valid, granting interest-free loans would be extremely disadvantageous for borrowers. Given the current level of the reference interest rate and rising instalments on bank loans and credits, it would be more profitable to include a low interest rate in the loan agreement than to choose a gratuitous variant (because in the gratuitous loan variant the income would be equal to the average interest rate of current commercial loans). Fortunately, in the content of the analysed interpretation, the Director of the National Tax Information fully agreed with the applicant’s position. The authority emphasised that if the parties stipulated the absence of remuneration in the form of interest in the loan agreement, this fact does not give rise to tax consequences in the form of the borrower receiving a gratuitous benefit. Consequently, under the provisions of the Personal Income Tax Act, receiving an interest-free loan is tax-neutral. Therefore, the tax authorities agreed that the applicant is not obliged to pay personal income tax.
The analysed interpretation constitutes a good forecast primarily for taxpayers seeking ways to optimise the taxation of loans obtained on favourable terms from unrelated persons (separate exemption is provided for close family even if gratuitous income arose).
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