Loan Agreements Under Polish Tax Law: The VAT–Transfer Tax Dichotomy

I. Introduction

The tax characterization of loan agreements at the intersection of value added tax and civil transaction tax (podatek od czynności cywilnoprawnych, hereinafter “CTT”) remains among the most contested questions in Polish fiscal law. The deceptive simplicity of the threshold inquiry — “VAT or CTT?” — belies a doctrinal complexity rooted in the mutual exclusivity mechanism governing the relationship between these two levies and the evolving jurisprudence of both the Polish administrative courts and the Court of Justice of the European Union.

The practical stakes of mischaracterization are considerable. An erroneous classification may result in the imposition of CTT at a rate of 0.5% on the principal amount of the loan — including  loans extended by a company to its shareholders or board members — or, alternatively, in recognition of the transaction as a VAT-exempt financial service under Article 43(1)(38) of the Polish VAT Act, with far-reaching consequences for the calculation of the taxpayer’s input VAT deduction ratio. In the most adverse scenario, the tax authority may challenge the adopted classification and assess arrears together with penalty interest under either regime.

II. The Mutual Exclusivity Principle — Article 2(4) of the CTT Act

The foundational mechanism delineating the respective domains of VAT and CTT is the complementarity principle codified in Article 2(4) of the Act on Civil Transaction Tax. Under this provision, civil law transactions — other than the formation or amendment of a company — fall outside the scope of CTT where:

(a) at least one party is subject to VAT in respect of that transaction, or

(b) at least one party is exempt from VAT in respect of that transaction — subject to certain exceptions, including, inter alia, sales agreements exempt under Article 43(1)(2) of the VAT Act.

The operative effect of this mechanism is straightforward: where the extension of a loan constitutes a transaction within the scope of VAT — even if exempt — it is excluded from CTT. The CTT obligation crystallizes only where the loan falls entirely outside the ambit of VAT, typically because the lender does not act in the capacity of a VAT taxable person.

III. The Loan as a Supply of Services Under the VAT Act

It is well established that a loan — understood as an obligation to make capital available for a defined period in exchange for remuneration in the form of interest — constitutes a supply of services within the meaning of Article 8(1) of the Polish VAT Act. The transaction is classified as a financial service under division 64 of the Polish Classification of Products and Services (“Finansowe usługi, z wyłączeniem ubezpieczeń i funduszów emerytalnych”).

The analytical difficulty lies not in the objective characterization of the transaction but in the subjective inquiry: whether the lender, in extending a particular loan, acts in the capacity of a VAT taxable person within the meaning of Articles 15(1) and 15(2) of the VAT Act.

IV. The Decisive Criterion: Acting “in the Capacity of a Taxable Person”

A. Legal Persons — The Absence of a Private Sphere

With respect to legal persons — including limited liability companies, joint-stock companies, foundations, and associations engaged in economic activity — the jurisprudence has consistently held that such entities do not possess a “private asset sphere” analogous to that recognized for natural persons. All activities of a legal person are situated within the professional domain and are inherently connected to its economic activity.

This position was authoritatively affirmed by the Supreme Administrative Court (Naczelny Sąd Administracyjny, hereinafter “SAC”) in its judgment of 15 December 2022 (Case No. I FSK 1634/19), in which the Court held:

“There can be no doubt that the transfer of monetary funds to a borrower for a defined period, in exchange for remuneration (interest) received at established settlement intervals, constitutes the use of those funds on a continuing basis and for gainful purposes. Where a loan — even one of a sporadic character — is extended from the lender’s own resources and that lender carries on an economic activity, the entrepreneur acts in the capacity of a VAT taxable person.”

The SAC rejected each of the arguments advanced by the appellant company, which had contended that: the loans were incidental in nature; they were extended exclusively to related entities; they arose from a transitory cash surplus; the company did not conduct organized lending activity; it charged no commissions; and it did not assess the creditworthiness of borrowers. None of these circumstances altered the Court’s assessment.

Several features of the SAC’s reasoning merit particular attention. First, the Court emphasized that economic activity is an objective category, to be assessed on the basis of factual circumstances rather than the subjective characterization adopted by the taxpayer (point 3.7 of the judgment). Second, the Court found that the lending activity constituted “a permanent element embedded in the functioning of the taxpayer’s principal business” (point 3.10), noting in particular that the loans strengthened the position of the related companies, thereby reinforcing the appellant’s own market position (point 3.10 in fine). Third, the Court held that neither the absence of a creditworthiness assessment nor the failure to charge a commission bore upon the classification of the activity as economic — observing that even external financial institutions do not invariably charge commissions (point 3.12).

B. The CJEU Framework — Case C-77/01 (EDM)

The SAC’s analysis is fully consonant with the judgment of the Court of Justice of 29 April 2004 in Case C-77/01, Empresa de Desenvolvimento Mineiro SGPS SA (EDM) v. Fazenda Pública. That case concerned a holding company in the mining sector whose principal activity — mineral prospecting and exploration — generated revenue only in the medium term and could prove unprofitable, while its financial transactions — including loans to subsidiaries, bank deposits, and investments in Treasury notes — produced income exceeding the turnover from its core operations.

The Court drew a critical distinction among different categories of financial transactions:

Transactions outside the scope of VAT. The simple sale of shares and other securities, including holdings in investment funds, does not constitute an economic activity within the meaning of Article 4(2) of the Sixth Directive (now Article 9(1), second subparagraph, of Directive 2006/112/EC) and accordingly falls entirely outside the scope of VAT (paragraphs 57–62). Similarly, yields from placements in investment funds do not constitute supplies of services “effected for consideration” within the meaning of Article 2(1) of the Sixth Directive (now Article 2(1)(c) of Directive 2006/112/EC) (paragraph 63). Turnover attributable to such transactions must be excluded from the calculation of the deductible proportion — not as “incidental transactions,” but as transactions lying beyond the directive’s scope altogether (paragraphs 54, 64).

Transactions within the scope of VAT — exempt. By contrast, with respect to interest-bearing loans granted to subsidiaries and placements in bank deposits and securities such as Treasury notes and certificates of deposit, the Court held that:

• interest received on such transactions does not arise from the mere ownership of an asset but constitutes consideration for making capital available to a third party (paragraph 65);
• the holding company acts in a business or commercial capacity characterized, in particular, by the objective of maximizing returns on invested capital (paragraph 67);
• this characterization obtains irrespective of whether the loans are extended as financial support to subsidiaries, as placements of treasury surpluses, or for any other purpose (paragraph 68);
• such transactions therefore constitute economic activities carried out by a taxable person acting as such, within the meaning of Articles 2(1) and 4(2) of the Sixth Directive (now Articles 2(1)(c) and 9(1) of Directive 2006/112/EC) (paragraph 70), and are exempt from VAT under Article 13B(d)(1) and (5) of the Sixth Directive (now Article 135(1)(b) and (f) of Directive 2006/112/EC) (paragraph 71).

A point of doctrinal precision warrants emphasis. In reaching this conclusion, the Court invoked its earlier judgment in Case C-306/94, Régie dauphinoise, which had established the criterion of “direct, continuous, and necessary extension” of a taxable person’s taxable activity (paragraph 66 of EDM). However, the EDM Court adopted a broader rationale: the mere fact that an undertaking deploys funds forming part of its assets to supply financial services in a business or commercial capacity — characterized by a concern to maximize returns on capital — suffices to establish that the person acts as a taxable person (paragraphs 67–68). This formulation does not require a demonstration that the specific transaction constitutes an “extension” of a separately identifiable taxable activity; it is sufficient that the undertaking utilizes its assets for the provision of financial services with a commercial objective.

C. Natural Persons — The Private Sphere as Gateway to CTT

The analysis differs materially for natural persons who do not conduct an economic activity or who extend a loan outside the scope of any such activity. A natural person managing private assets who occasionally lends funds — for instance, to a family member or an acquaintance — does not, as a general rule, act in the capacity of a VAT taxable person. Such a loan is subject to CTT.

The boundary, however, is porous. Where a natural person extends loans in an organized and continuous manner — even informally, such as by regularly lending funds to several individuals for remuneration — the tax authority may determine that the person conducts an unregistered economic activity within the meaning of Article 15(2) of the VAT Act, with all attendant consequences. In such circumstances, it is advisable to seek an individual tax ruling (interpretacja indywidualna), which affords legal protection in the event of a dispute with the fiscal authorities.

V. When VAT Applies — Summary of Conditions

A loan is subject to VAT — as a service exempt under Article 43(1)(38) of the VAT Act — where the following conditions are cumulatively satisfied:

1. The lender is a VAT taxable person — that is, the lender carries on an economic activity within the meaning of Article 15(2) of the VAT Act.
2. In extending the loan, the lender acts in the capacity of a taxable person — the loan bears a nexus to the economic activity conducted. For legal persons, this condition is, in practice, invariably met. For natural persons, it requires an assessment of whether the transaction transcends the management of private assets.
3. The loan is effected for consideration — the remuneration takes the form of interest. Interest-free loans give rise to distinct questions under Article 8(2) of the VAT Act.

The consequences are as follows: the transaction is exempt from VAT, excluded from CTT, but the interest enters the turnover taken into account in calculating the input VAT deduction ratio (the coefficient under Article 90 of the VAT Act) — unless the transactions qualify as ancillary (incidental) within the meaning of Article 90(6) of the VAT Act.

VI. When CTT Applies — Summary of Conditions

A loan is subject to CTT — at a rate of 0.5% on the principal amount — where:

1. The lender is not a VAT taxable person with respect to the transaction — for instance, the lender is a natural person who does not conduct an economic activity.
2. Neither party benefits from a VAT exemption in respect of the specific transaction.

The CTT obligation arises at the moment the transaction is effected (the conclusion of the loan agreement) and falls upon the borrower. The CTT-3 declaration must be filed within fourteen days of the date on which the tax obligation arises.

Practitioners should remain attentive to applicable exemptions, notably: loans extended by entrepreneurs without a registered office or place of management in the territory of the Republic of Poland (Article 9(10)(a) of the CTT Act); and loans within the immediate family (Article 9(10)(b) — up to PLN 36,120, and above that threshold subject to documentation by bank transfer and notification to the competent tax office).

VII. The Problem of “Ancillary Transactions” and the VAT Deduction Ratio

Even where a loan falls within the scope of VAT as an exempt service, its impact on the taxpayer’s VAT settlement need not be severe — provided the transaction qualifies as “ancillary” within the meaning of Article 90(6) of the VAT Act (implementing Article 174(2) of Directive 2006/112/EC, formerly Article 19(2) of the Sixth Directive).

The CJEU’s judgment in EDM furnishes the authoritative interpretive framework in this regard. The Court explained that the purpose of excluding ancillary transactions from the calculation of the deductible proportion is to neutralize the distortive effect that such transactions would otherwise exert on the ratio, thereby vindicating the principle of fiscal neutrality inherent in the common VAT system (paragraph 75). Were all receipts from financial transactions to be included in the denominator of the fraction — even where their execution entailed no use, or only very limited use, of goods or services subject to VAT — the deduction calculation would be distorted (paragraph 76).

The decisive criterion is accordingly the degree of engagement of VAT-bearing resources: financial transactions may be regarded as ancillary where they “involve only very limited use of assets or services subject to value added tax” (paragraph 78).

The Court was careful to add an important qualification. The scale of income generated by financial transactions within the scope of the Sixth Directive “may be an indication” that such transactions should not be regarded as ancillary (paragraph 77). Nevertheless, the mere fact that income from financial transactions exceeds revenue from the undertaking’s declared principal activity does not, without more, preclude their classification as ancillary. Critically, however, this conclusion was reached in the specific factual context of EDM: the company’s principal activity — mineral prospecting — was profitable only in the medium term and carried a risk of long-term unprofitability, such that turnover from transactions conferring a right to deduct could be very small. In those circumstances, including financial transactions in the denominator solely because of the magnitude of the income they generated would have “clearly result[ed] in distortion of the calculation of the deduction” (paragraph 77 in fine). This holding should therefore be read not as establishing a general rule but rather as a context-dependent application of the neutrality principle.

The assessment of ancillary character is necessarily case-specific and is reserved to the national court (paragraph 79) — in practice, it falls to the taxpayer, subject to the risk of challenge by the tax authority. In the event of a tax audit, the burden of establishing the ancillary character of the transactions rests with the taxpayer.

VIII. A Decision Framework

The practical analysis should proceed in the following sequence:

Step 1. Is the lender a VAT taxable person (does the lender carry on an economic activity within the meaning of the VAT Act)?

• Yes → proceed to Step 2.
• No → CTT applies (0.5% on the principal amount, subject to exemptions).

Step 2. In extending the loan, does the lender act in the capacity of a VAT taxable person (i.e., does the transaction bear a sufficient nexus to the economic activity)?

• Yes (the default position for legal persons) → proceed to Step 3.
• No (possible only for natural persons — the private sphere) → CTT applies.

Step 3. The loan is subject to VAT as an exempt service (Article 43(1)(38) of the VAT Act) → exclusion from CTT. The taxpayer must assess the impact on the VAT deduction ratio (Article 90 of the VAT Act) and consider whether the transaction qualifies as ancillary (Article 90(6) of the VAT Act), with particular regard to the degree of engagement of VAT-bearing resources in the execution of the financial transaction.

IX. Other Financial Transactions of Holding Companies — The EDM Taxonomy

Irrespective of the classification of loans, holding companies engaged in diverse financial transactions should bear in mind the taxonomy established by the CJEU in EDM:

• The simple sale of shares, equity interests, and holdings in investment funds does not constitute an economic activity within the meaning of the VAT Directive and lies entirely outside the scope of VAT; turnover from such transactions does not enter the deductible proportion calculation (paragraphs 57–62, 64).
• Yields from placements in investment funds do not constitute supplies of services effected for consideration and likewise remain outside the scope of VAT (paragraph 63).
• Interest on loans, bank deposits, and securities constitutes consideration for making capital available and falls within the scope of VAT as an exempt service; such interest is, in principle, included in the deductible proportion calculation unless the transactions are of an ancillary character (paragraphs 65–71).

The practical import of this distinction is significant: transactions outside the scope of VAT do not affect the deduction ratio, whereas exempt transactions — unless ancillary — reduce the deductible proportion.

X. Intragroup Loans — Heightened Scrutiny

Loans extended within corporate groups warrant separate consideration. Intragroup loans are subject not only to VAT/CTT classification but also to transfer pricing scrutiny under Articles 11a–11t of the Corporate Income Tax Act. The interest rate on the loan must reflect arm’s length terms; absent such compliance, the tax authority may adjust the income of either the lender or the borrower.

Moreover, in international structures — for example, loans extended by a holding company established in Cyprus or the United Arab Emirates — the analysis must extend beyond VAT and CTT to encompass general anti-avoidance rules (GAAR), controlled foreign corporation (CFC) provisions, and the economic substance requirements applicable to the foreign entity.

XI. The Role of the Family Foundation

It bears noting that the Polish family foundation (fundacja rodzinna) — as an entity permitted to carry on designated economic activities — may extend loans to its beneficiaries or to entities in which it holds equity interests. The VAT/CTT classification of such loans is governed by the same principles: as a legal person, the family foundation does not possess a private sphere, and accordingly an interest-bearing loan extended by it constitutes, as a matter of principle, a VAT-exempt service.

XII. Practical Conclusions

First, corporate entities extending loans — even sporadically, even exclusively to related parties, even from surplus working capital — should treat such transactions as VAT-exempt services excluded from CTT. Following the SAC’s judgment in Case No. I FSK 1634/19, the contention that a loan extended by a legal person “falls outside the scope of its economic activity” carries very substantial tax risk.

Second, the consequences for the VAT deduction ratio demand careful tax planning. For undertakings whose principal activity generates a full right to input VAT deduction, a single loan of significant nominal value may materially distort the deduction coefficient — unless the taxpayer successfully demonstrates its ancillary character within the meaning of Article 90(6) of the VAT Act. As the CJEU’s judgment in EDM makes clear, the decisive criterion is the degree of engagement of VAT-bearing resources in the execution of the financial transaction, not the absolute value of the interest — although the scale of financial income may serve as an indication militating against ancillary classification.

Third, holding companies engaged in diverse financial transactions should separately classify each transaction type: the simple sale of equity interests remains outside the scope of VAT and does not affect the deduction ratio, whereas interest on loans and deposits — as turnover from exempt services — in principle reduces that ratio.

Fourth, the only reliably safe domain for CTT classification of a loan is the extension of credit by a natural person outside the scope of any economic activity — typically, family loans or occasional loans between individuals who do not conduct a business.

Where doubt persists as to the proper classification, the prudent course is to obtain professional tax advice or commission a formal tax opinion addressing the specific features of the transaction in question.

Robert Nogacki

Founder and Managing Partner of Skarbiec Law Firm, recognized by Dziennik Gazeta Prawna as one of the best tax advisory firms in Poland (2023, 2024). Legal advisor with 19 years of experience, serving Forbes-listed entrepreneurs and innovative start-ups. One of the most frequently quoted experts on commercial and tax law in the Polish media, regularly publishing in Rzeczpospolita, Gazeta Wyborcza, and Dziennik Gazeta Prawna. Author of the publication “AI Decoding Satoshi Nakamoto. Artificial Intelligence on the Trail of Bitcoin’s Creator” and co-author of the award-winning book “Bezpieczeństwo współczesnej firmy” (Security of a Modern Company). LinkedIn profile: 18 500 followers, 4 million views per year. Awards: 4-time winner of the European Medal, Golden Statuette of the Polish Business Leader, title of “International Tax Planning Law Firm of the Year in Poland.” He specializes in strategic legal consulting, tax planning, and crisis management for business.