Borrowers with Swiss franc loans often decide to take legal action to invalidate their loan agreements. But could challenging the validity of a loan agreement result in tax liability? This is discussed in today's "Tax This and That.".
Settlement with the bank
Statistics show that in most cases involving loan agreement invalidation, courts uphold the borrowers' claims. For this reason, banks often agree to settlements to minimize costs. However, does entering into such a settlement entail tax consequences for the borrower?
The question was posed by a taxpayer who had entered into a loan agreement with a bank. Although she received the agreed-upon loan amount in Polish zloty, the agreement specified the loan for the corresponding amount in Swiss francs. The loan was also indexed to the exchange rate for that currency.
Following the court dispute, the borrower was offered an out-of-court settlement. Under the terms of the settlement, the parties would have recognized that the loan was originally denominated in Polish złoty. As a result, the conversion would have resulted in the borrower paying more than the loan principal plus interest. Under the settlement, the bank would have refunded the overpaid amount.
Doubts were raised as to whether receiving a refund of the loan overpayment as a result of the settlement would result in a tax liability.
In the issued tax interpretation, the Director of the National Tax Administration found that the amount received under the settlement with the bank would not be subject to taxation.
The justification indicated that the return of an unduly received benefit does not constitute income. In such a case, the bank's client receives back their capital – a refund of the amounts paid to the bank. Therefore, the assets are equalized. Therefore, there is no basis for considering the returned amounts as taxable income. For tax purposes, such a return is tax-neutral.
Loan forgiveness
In the above case, no tax liability arose because the amount received was not subject to taxation at all. However, there are situations in which, despite the generation of income, tax collection was waived. These are specified, among others, in the Regulation of the Minister of Finance of March 11, 2022, on the waiver of income tax collection on certain income related to mortgage loans granted for housing purposes (Journal of Laws of 2024, item 102).
According to the regulation, the omission to collect personal income tax applies to the following amounts:
1) receivables from a housing loan written off to a natural person, in the event that:
a) the housing loan was taken out for the implementation of one housing investment, and in the case of more than one housing loan – when the housing loans were taken out for the implementation of only one housing investment,
b) the natural person who is a party to the housing loan agreement did not benefit from the waiver of tax collection on the amounts of written off receivables from a housing loan taken out for the implementation of a housing investment other than the one specified in letter a;
2) benefits received by a natural person under a housing loan granted in a foreign currency or in Polish zloty, but denominated or indexed to a foreign currency, in connection with the generation of income from the application of a negative interest rate.
Tax is not deducted from the loan amount (capital) or from interest and other necessary fees incurred to obtain the loan.
The waiver of tax collection applies to loans that meet three conditions:
1) were granted before 15 January 2015 by an entity whose activities are subject to supervision by a state financial market supervisory authority, authorized to grant loans under separate acts regulating the principles of operation of such entities,
2) were secured by a mortgage established on real estate or a share in real estate, or the right of perpetual usufruct of land or a share in such a right, or a cooperative ownership right to a residential premises or a share in such a right, or the right to a single-family house in a housing cooperative or a share in such a right,
3) were incurred for the expenses referred to in Art. 21 sec. 25 item 1 of the Personal Income Tax Act (including the purchase of a residential building, a residential premises, a building plot, as well as for construction or renovation).
In addition, the waiver of tax collection applies to income earned in the period from January 1, 2022 to December 31, 2024.
Invalidation of a credit agreement
A distinction must be made between loan cancellation (which is subject to the waiver of tax collection) and the invalidation of a loan agreement by a court. This can occur when the parties fail to reach an agreement.
However, obtaining benefits as a result of invalidating a loan agreement is also not subject to income tax.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of September 30, 2024
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