The Polish banking sector is currently facing another major challenge related to Swiss franc issues. This time, however, it concerns the tax consequences of settling loans taken out in CHF. The problem has arisen as a result of court judgments invalidating loan agreements and in view of settlement agreements concluded between banks and borrowers. At the heart of the issue is the right of banks to treat as tax deductible interest, commissions, exchange rate gains and other similar amounts returned as part of settlements with customers. To shed some light on these issues, specialists, tax professionals, bankers, regulatory body’s representatives and lawyers, and among them Agata Dziwisz-Moshe, head of our Tax Practice and initiator of the debate on the tax consequences of bank loan settlements, met together to discuss how to resolve this complex situation fairly.
The expert discussion took place in the welcoming offices of the Polish Press Agency, and was attended by Tadeusz Białek, President of the Polish Bank Association, Henryk Walczewski, judge of the Regional Court in Warsaw and columnist writing about the practice of law, and Dr Piotr Bodył Szymala, attorney at law and member of the ”Monitor Prawa Bankowego“ magazine team.
Settlement agreements between CHF mortgage borrowers and banks – preferable, faster and cheaper
The number of settlement agreements concluded with CHF mortgage borrowers is steadily increasing – by the end of October, more than 120,000 individual agreements had been concluded, including 11,000 court settlement agreements.
This is an efficient and elegant solution. Settlement agreements provide a significant time and financial advantage over court proceedings, as the average time to reach a settlement is around one month, which is an attractive alternative compared to several years of expensive and highly involved court proceedings.
However, the issue of tax settlements not only after the loan agreement has been declared invalid, but also after a settlement agreement has been concluded, remains unresolved and particularly problematic.
Tax aspects of settling Swiss franc loans
The Supreme Administrative Court’s negative case law on loan agreements declared invalid calls into question the banks’ right to treat the returned amounts as tax deductible costs.
The Supreme Administrative Court argues that a loan agreement declared invalid constitutes, inter alia, an act that cannot be the subject matter of an effective agreement within the meaning of the CIT Act, and thus should not be taxable at all. Therefore, the bank can at most adjust the historically recognised income, but it cannot settle tax costs on an ongoing basis.
However, such an interpretation raises serious doubts. In fact, it is crucial to distinguish between socially undesirable acts (such as prohibited acts) and those that have become invalid due to certain legal factors. Swiss franc loan agreements undoubtedly fall into the latter category. Moreover, in most cases, the adjustment of the bank’s historically earned revenue is no longer possible, due to issues related to the period of limitation of tax liabilities. The approach of the Supreme Administrative Court therefore means that, in practice, banks have paid income tax that they can no longer adjust in any way.
When concluding settlement agreements, banks have even more arguments in favour of treating the expenses incurred as tax costs. However, this seems to have been completely ignored by the administrative courts, as a very unfavourable case law has begun to emerge in this area also.
Tax implications of bank loan settlements – case law, challenges, effects
The need for the courts to take into account not only legal but also economic aspects when ruling on CHF mortgage cases is one of the key aspects of the whole situation. This includes:
- a change in the value of money over time
- exchange rate determination mechanisms
- the overall economic impact of declaring loan agreements invalid
There is currently a worrying trend in case law, due to the administrative courts equating the tax effects of settlement agreements concluded with customers and the effects of judgments declaring loan agreements invalid. This approach is not only unjustified, but also potentially damaging to the entire banking sector. In the case of settlement agreements, we are dealing with a voluntary, conscious agreement between the parties, which – unlike declaring an agreement invalid – does not undermine the original legal basis of the transaction. Expenses incurred by banks in connection with settlement agreements should qualify as tax deductible costs, as they serve to secure a source of revenue and limit potential losses. Such an approach is not only in line with the tax law, but also supports out-of-court dispute resolution, which is in the interest of all market participants, comments Agata Dziwisz-Moshe.
It is also important to remember that the manner of tax settlement of settlement agreements and judgments has a direct impact on the competitiveness of Polish banks and their ability to attract foreign capital. This is because the current interpretation increases the real costs of settlements with CHF mortgage borrowers, which, compared to other European countries where, in similar situations, banks can act more efficiently, puts the Polish financial sector in a much weaker position.
Future prospects and a broad view of Polish banking
In the context of emerging comparisons between CHF and WIBOR-based loans, experts highlight the fundamental differences between these two.
The WIBOR, as an external benchmark outside the control of the banks, cannot be used as a basis to question the validity of loan agreements in a manner analogous to Swiss franc loans.
In this context, it is also worth keeping in mind the systemic and long-term perspective of the entire sector. In fact, the precedents created by the Swiss franc (and WIBOR) cases may have serious long-term consequences, e.g. in terms of future products and services. Banks, out of fear of similar problems, may be less inclined to introduce innovative financial solutions or finance the mortgage market. And these are, after all, some of the key elements in planning their long-term business strategies. The disruption may therefore be relevant not only for current settlements, but also for the future of the entire banking sector in Poland.
Conclusions
Solving the problem of Swiss franc loans requires a comprehensive approach that takes into account both legal (civil and tax law) aspects and economic aspects. It is thus particularly important to develop clear tax settlement rules that allow banks to maintain financial stability while settling fairly with borrowers.
Economic education in the judiciary is also crucial, which would allow for a more comprehensive understanding of market mechanisms and their impact on the banking sector. Such an approach may contribute to more sustainable solutions that take into account the interests of all parties.
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