Debt financing. Factoring can be a good alternative
Factoring as an alternative to leasing contracts? This could be an interesting solution, particularly in the era of the Polish Deal, through which the excess of debt financing costs within the limit set by the amount of PLN 3,000,000 or the value of 30% of the EBITDA obtained in the tax year can be included in tax expenses. The WSA in Warsaw ruled that full factoring does not constitute debt financing at all, so it is not subject to the above limits.
The debt financing regulations introduced starting in 2019 are quite severe for entities with significant financing costs. The Polish Deal has further exacerbated this problem. Indeed, from the beginning of January 2022, there is no doubt that a maximum of either PLN 3 million or 30% of the so-called tax EBITDA can be included in tax expenses. In this situation, clients of leasing companies may consider more tax-advantaged options for financing their operations.
Factoring can be an attractive alternative. A factoring transaction combines 3 elements: financing, release from the risk of debtor insolvency and administrative handling of the receivables. The proportions between them can be distributed in different ways. Sometimes, however, these services are not separated, and the factor simply purchases the receivable, earning a discount (the difference between the nominal price of the receivable and the purchase price). In fact, this is a common financing method on the part of leasing companies. In such a transaction, the financing element cannot be isolated or calculated.
The WSA’s interpretation of factoring is extremely favorable to taxpayers, but appears to be correct. Nevertheless, it is worth remembering that the matter may be less clear-cut in the situation of factoring with recourse, where interest may indeed be charged. Given the potential tax benefits for clients, however, it is worth considering whether factoring, especially for those highly indebted, is worth offering as an alternative form of financing.
Full factoring is not debt financing
It was on the grounds of such a case that the Regional Administrative Court Warsaw judge on 25 November 2021 (no. III SA/Wa 828/21). Court in Warsaw ruled that such a transaction does not constitute debt financing at all. Interestingly, however, it was not the lack of separability of the financing part that proved crucial to the court. Court in Warsaw held that in the case of the sale of receivables under full factoring (without recourse), there is a definite gain on the part of the factor – since there is no debt to be repaid. In this situation, we are not dealing with financing, which requires the existence of a debt to be returned.
Given the potential tax benefits for clients, it is worth considering whether factoring is worth offering as an alternative form of financing to clients – especially highly indebted ones. This is more so because, in principle, factoring is used to finance different business events than leasing and can be a complementary product.
This is an interpretation that is extremely favorable to taxpayers, but appears to be correct. Nevertheless, it is worth remembering that the matter may be less obvious in the situation of factoring with recourse, where interest may actually be charged.
Author: Bartosz Mazur, Tax Advisor