Tax Updates: July 16 2024
Consistent with our commitment to provide updated information on current tax issues
Consistent with our commitment to provide updated information on current tax issues
Article Posted date
16 July 2024
2 min read
Clarifying Circular on the tax treatment of commitment fees paid to banks as a consideration for the provision of credit
By virtue of the recently issued Circular E.2046/2024, the Independent Authority for Public Revenue (IAPR) provided clarifications on what concerns the deductibility of commitment fees paid by taxpayers to banks for the provision of credit. In particular, the Circular clarifies the following:
- Under the relevant bank loan agreements, the bank undertakes to make additional funds available to the borrower, apart from the funds immediately borrowed, at the agreed interest rate under certain conditions and up to a certain amount and against a pre-agreed commitment fee, whereas the borrower may draw such additional funds at any time during the term of the agreement. The borrower must pay the abovementioned commitment fee to the bank, which is the consideration for the bank’s readiness to provide the agreed credit to the borrower. In essence, such commitment fee is the consideration paid by the borrower for a separate service offered by the bank, i.e. having additional credit available during the term of the agreement even if the borrower will not ultimately need such additional funds. In this regard, the borrower is not burdened from the very beginning with the total interest for the additional approved funds, which is normally higher than the commitment fee, but instead only from the time such funds are requested and will be disbursed to the borrower by the bank.
- The commitment fee is not considered interest but it is an incidental and essential financing cost, which is paid as compensation for the financial costs incurred by the bank for keeping the agreed credit available at all times.
- In order to determine the deductibility of commitment fees, it should be examined whether such expense is incurred for the benefit of the enterprise or in the ordinary course of its business, and indicatively:
- whether the cost of the commitment fee on approved but unused funds is lower than the cost to be incurred if the borrower would disburse the total credit amount, indicating that it is in the benefit of the enterprise; or
- whether the term introducing the commission fee is a term generally included in similar bank loan agreements (as in open credit accounts), indicating that the relevant agreements are normal commercial transactions.
