CIT

Contractual penalty for the early termination of lease contract can be tax deductible

In accordance with the judgment of the Supreme Administrative Court of 27 March 2019 (case no. II FSK 292/16), contractual penalty paid in connection with withdrawal from lease agreement can be tax deductible if the early termination of the lease agreement was more profitable for the taxpayer than lease continuation. The case concerned a taxpayer who had been charged by the contractor for a contractual penalty in connection with the withdrawal from the lease agreement of premise in the shopping centre. In the assessment of the taxpayer, continuation of the lease was unprofitable and more advantageous alternative was withdrawal from the contract, even if it was equal to the obligation to pay a contractual penalty. The court pointed to a prevailing interpretation of Article 15 Clause 1 of CIT Act, and stated the penalty incurred by the taxpayer is a tax deductible cost securing a source of income. The court pointed out that running a business involves making rational decisions in order to obtain economic benefits. What’s more, these activities may also consist in cancellation of unprofitable initiatives. In the courts’ opinion, the taxpayer’s activity led to the elimination of potential unprofitability risk of the conducted activity, therefore it was a justified action and the contractual penalty paid could be a tax deductible cost.

Real estate as liquidation proceeds transferred to shareholders of a legal entity and the matter of CIT taxation of the liquidated company

Voivodship Administrative Court in Gliwice in the judgment of March 26, 2019, sign. I SA / Gl 1292/18, took the view that in the event of transfer of the company’s liquidation assets in the form of real estate (previously contributed to the company to cover the value of acquired shares), the revenue is generated on the side of the liquidated company (legal entity). Consequently, it should be taxed with corporate income tax at the level of the liquidated company pursuant to art. 14a(1) of Polish CIT Act. The Voivodship Administrative Court in Gliwice shared the position expressed in the so-far prevailing judgment of the Supreme Administrative Court of June 27, 2017,sign. II FSK 658/17. However, it should be noted that recently has been a change in the jurisprudence line in this matter at the level of the Supreme Administrative Court, which in the judgments of: 31 July 2018, sign. II FSK 2049/16; 31 January 2019, sign. II FSK 370/17; February 20, 2019, sign. II FSK 396/17 and 5 March 2019, sign. II FSK 668/17, indicated that the transfer of liquidation assets is an unilateral act (it is not a non-cash consideration with order to settle the obligations) and thus is not subject to corporate income tax.

Expenditure on enhancements and refurbishment works performed jointly

In accordance with an individual tax ruling issued by the Head of the National Fiscal Information on 8 November 2018 (0111-KDIB1-1.4010.359.2018.1.ŚS), costs of works associated with putting previously rented premises back to their original state and adapting them to the needs of future tenants shall both be defined as refurbishment expenditures. The above refers to situations when the price for both services is calculated jointly. The taxpayer underlined, that expenditures for adapting the premises to the first tenants were included in the initial value. Newly incurred expenditures will not change the function of premises. Tax authorities agreed with the requestors arguments and stated that there is no possibility of differentiation of types of expenditures. It is good news for the taxpayers, as in reality, distinguishing between costs that should increase the initial value and those that should be included in the P&L can sometimes be problematic.

Revenues derived from the participation in profits in partnerships cannot be entirely attributed to the so-called income from other sources

In the application for individual tax ruling 0111-KDIB2-1.4010.14.2019.1.EN the applicant, a limited liability company, asked the Director of National Fiscal Information to which source of income (“capital gains” or “other sources”) his revenues derived from the participation in profits of a limited liability partnership should be attributed to. From his point of view the lack of revenues from partnerships in the enumerative list of “capital gains” (art. 7b CIT Act) as well as the fact that as a partner he could not have sufficient information about the qualification of revenues derived by a partnership. The “break-down” of his revenues from a partnership into various source of income would be discriminative in relation to other partners being natural persons. The Director assessed the position of the applicant negatively, indicating that the qualification to either “capital gains” or “other income” sources takes place already at the level of a partnership and its further reconciliation by a subject-to-CIT partner is only its consequence and is made proportionately to the share in profits. The authority pointed-out that such mode of proceeding confirms the intention of a lawmaker and is elaborated in the explanatory memorandum to the amendment act that came in force at the beginning of 2018.

Application of art. 15e of CIT Act in the practice of tax authorities

The Head of the National Fiscal Information Service in an individual tax ruling of March 20, 2019 (ref. no. 0111-KDIB1-1.4010.12.2019.2.NL) stated that the costs of a credit service, consisting of, among others, assessment of the financial standing of clients, issuance opinions on contracts in terms of financial risk, monitoring the timeliness of payment of receivables, are subject to the limitation of cost of intangible services purchased from related parties compliant with provisions from Art. 15e of CIT Act. For the above assessment it was important that the costs of financial services did not affect the final price of the goods and services offered. The tax authority stated also that support services in the area of human resources are not subject to the above limitation.

Costs related to the assumption of a guarantee risk by a related company do not fall within the catalogue of intangible services covered by the limit on tax deductibility of the expenses

In an individual tax ruling of March 19, 2019, the Head of the National Revenue Information (sign. 0111-KDIB1-3.4010.12.2019.2.MBD) stated that costs related to the assumption of the risk of warranty repairs cannot in any event be considered equivalent to costs of insurance, guarantee and surety services and similar referred to in article 15e of the CIT Act. The subject of the issued ruling is the background in which an affiliate sold the vehicles to the related party (a principal). Parties within the agreed business model have agreed that the company will be charged by the principal with costs of assumption the guarantee risk associated with the vehicles produced by the company.
A tax authority indicated that the limit referred to in art. 15e of the CIT Act includes solely guarantee and surety services which are aimed at security of financial obligations of a purchaser. Subject to the provisions are mainly costs of guarantee and surety services relating to credits and loans contracted by the purchaser of guarantee. Additionally, according to the Ministry of Finance’s Explanations (published in May 25, 2019 on the MF website) as instruments of a similar nature as guarantees are letters of credit. In the light of the above, there was no reason to consider guarantees of quality granted to buyers, (the purpose of which is guarantor commitment to remove the defect of products or delivery of item free without defects) as guarantees being a collateral for debt.

IT networks management and services provided by the general partner in the context of including their costs in the costs of advisory and management services

According to the sentence issued by the Provincial Administrative Court on March 13, 2019 (file reference: I SA/Po991/18) both IT network management services and services provided by the general partner shall not be subject to limiting their recognition as tax deductible costs in the case of intangible services acquired from affiliated entities referred to in Art. 15e of the CIT Act. IT services can not be qualified for advisory or management services, even in the case of administering a part or the entire IT system, because these services do not have any element that would provide advice or advisory services. However, the activities performed by the general partner are the implementation of their key functions constituting the expression of the proper operation of partnerships, which results both from the provisions of the Code of Commercial Companies and the provisions contained in the articles of association. Due to this, it can not be indicated that the general partner’s activity is based on management services.

RET

Completed construction and the obligation in real estate tax

The Supreme Administrative Court in the judgment of April 2, 2019 (ref. no. II FSK 1456/17) referred to the issue of the change of the building permit decision and its impact on the obligation in real estate tax. In 2014, the company completed construction and applied for a further construction permit for the same building, construction of which was completed in 2015. Contentious issue was the moment of the tax obligation in the real estate tax. When issuing the interpretation, the authority did not analyse the actual state in order to determine the date of completion of the construction. In particular, tax authority did not refer to the fact that both decisions although separated are correlated. Due to the above procedural inadvertence, the court obliged the authority to re-issue the interpretation. The commented interpretation will in the future be a good reference point to how to proceed in an analogous situation.

VAT

The necessity to conclude the independent property management contract after the purchase of a real estate affects the classification of transaction as a purchase of real estate subject to VAT

The Supreme Administrative Court in the judgment of March 21, 2019 (reference number I FSK 1605/18) indicated that the fact of entering the new property management contract by the buyer after the real estate purchase affects the assessment of transferred assets as an organized part of the enterprise. The Court pointed out that the group of property components is characterized by the ability to conduct independent business activity, when, after being included in the enterprise of the buyer it does not require supplementing with additional elements. Therefore, it is not possible to continue business operations without taking any additional steps towards the acquired real estate if the property management contract has not been transferred to the purchaser. The judgment of the Supreme Administrative Court is consistent with the explanations of the Minister of Finance published in December 2018 regarding VAT taxation of real estate transactions.

What can stand on the plot of land so that it can still be treated as undeveloped?

On January 31, 2019 the Supreme Administrative Court (NSA) in its ruling (ref. I FSK 1879/16) presented a positive statement for a land supplier, regarding the plot of land on which the fragment of the building was located – side wall belonging to the building located on the neighbouring property and part of the stairs leading to this building.
In the case under consideration, the Applicant in the application for the tax ruling indicated that the sale of the property on which the neighbour’s wall and stairs are located, who is also to be its future buyer – should be considered as exempt from VAT, because only the ground will be the subject of transaction. However, the Director of the Tax Chamber in Poznań disagreed with the taxpayer, stating that since the wall and stairs are on the plot of land, this area should be considered as developed.
The above statement of tax authorities was questioned by the Administrative Court in Wrocław, which indicated that in analysed case the key issue is legal and economic authority over the property. As the Applicant has no right to dispose of the building, the very fact that part of the property is located on its land cannot prejudge that it is the sale of developed areas. The NSA agreed with the Administrative Court.

Establishment of VAT base in case of delivery of an immovable property by a debtor in case of an assignment by way of security

The Voivodship Administrative Court in Krakow in the judgement from 28 March 2019, file no. I SA/Kr 100/19 assessed the issue of the way of establishment of VAT tax base in case of a transfer immovable property as result of execution of security. The applicant adopted the position that the tax base of the delivery of goods by the debtor should be calculated with reference to the gross amount indicated in the transfer agreement. In case the final price of sale of the immovable property by the assignee would be lower than the gross amount from the security transfer agreement, the tax base should be corrected by the debtor. As of the moment at which the taxability of the delivery of the property should be made, the applicant argued that it had been moment of conclusion of the transfer agreement. The tax authorities responded negatively, in particular indicating that the applicant’s position is detached from the legal character of institution of transfer by way of security as regards the establishment of tax base. In the opinion of authorities the tax base should be calculated as the difference of total claims of the applicant against the debtor and output VAT calculated on top of delivery executed according to the transfer agreement. In case the final sales’ price between the applicant and the third party were lower than the total claims, the debtor would be obliged to issue a VAT correction invoice. Finally, as of the moment at which the taxability of the delivery of immovable property, the authorities emphasised that it is always established at the moment of delivery what means that in this scope the provisions of the transfer agreement are irrelevant. The position of tax authorities was confirmed in the judgement of the court in Kraków, which particularly underlined that the tax authorities correctly interpreted the tax regulations, basing on the correct understanding of legal institution of transfer by way of security.

Following the statements of obtained individual tax rulings results in total protection for tax payers

In accordance with the judgement of Supreme Administrative Court of 21 March 2019 (file no. I FSK 2082/18), application for VAT refund based on obtained individual tax ruling, concerning transaction indisputably defined as an asset deal subject to 23% VAT, could not be rejected. The fact of revoking the ruling or not including it in the resolution of certain matter, after the application for refund was brought or the refund was obtained, is not relevant in this case. Thereby, the Supreme Administrative Court demonstrated, that the guarantee function of individual tax ruling also refers to excess input tax refund.

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