Tax capital groups (TCGs) are an exceptional type of Polish CIT taxpayer. However, they may benefit (at least to some extent) from the tax preferences that the legislator has granted to ‘ordinary’ CIT taxpayers. An example of this is the research and development (R&D) tax credit. However, what if a member of TCG carrying out such activities makes a tax loss or income insufficient to make the full deduction?
Basic regulations
As the Polish CIT Act indicates, the taxpayer may be a group of at least two commercial companies with legal personality that are in a capital relationship with each other (this is the definition of the tax capital group).
Further, the CIT Act indicates that the taxpayer obtaining income other than from capital gains deducts from the tax base the tax-deductible costs incurred for research and development activities (Article 18d(1) of the CIT Act). Importantly, the amount of the deduction may not exceed the amount of income earned by the taxpayer from income other than from capital gains in the tax year.
Application for a tax ruling – factual situation
The taxpayer (here: a parent company in the TCG) requested an individual interpretation (tax ruling) related to the interpretation of the above regulations. He indicated that the TCG represented by him includes a company that conducts R&D activities (work on new products and technologies) and incurs expenses under eligible costs. At the same time, it could potentially happen that the value of the expenses incurred by the company under the eligible costs will be higher than the income earned by the company. However, this expenditure will not exceed (in total) the amount of income earned by the TCG from non-capital revenues.
The applicant asked whether, in the situation presented, it is the TCG that will be entitled to deduct from the tax base the qualified costs accounted for under the R&D relief, which were incurred by the company. He took the view that the TCG will be entitled to deduct these costs and that the amount of the deduction will not be limited by the amount of the income earned by the company.
Position of the Director of the National Fiscal Information
It should be borne in mind here that in the TCG the income from a source of revenue is the surplus of the sum of the incomes of all the companies forming the group obtained from a given source of revenue over the sum of their losses incurred from that source of revenue.
The authority (the Director) found the applicant’s position to be incorrect. It stated that the determination of the tax base based on the cited provisions should be based on the accounts of the individual group companies, i.e. summing up their tax results. In his view, even though the companies comprising the TCG are not taxpayers, they should nevertheless determine revenues and costs (and consequently the tax result) in the same way as CIT taxpayers. He went on to emphasise that if a taxpayer shows a loss or the amount of its income is lower than the amount of deductions to which it is entitled, it is possible to deduct qualified costs, but only to the extent that the company could deduct them in a given tax year (i.e. in this case, less than the total value of the settlement to which it is entitled as a result of incurring qualified costs in connection with its R&D activity).
Therefore, since the company has made a loss, it does not have the ability to take the full deduction. It can (potentially) deduct the remaining eligible costs, but only in the next six tax years.
The position of the Provincial Administrative Court…
TCG brought the case before the Provincial Administrative Court in Opole. The Court disagreed with the position of the Director of the CIT and agreed with TCG.
As it explained, TCG is a CIT taxpayer. As a rule, such regulations should be applied to it as to other CIT taxpayers. It should also be remembered that the companies that are part of TCG lose their CIT taxpayer status to it (to TCG). The task of a company from TCG is only to determine whether it has earned income or made a loss from a given source – such a result of the company, however, is not a taxable base. Once the income (or loss) has been established, the deduction of qualified costs in connection with R&D activity should be made by TCG, as it is it that is the taxpayer (and not the company). The Court pointed out that the Director did not take the above into account at all and ignored the distinctiveness and tax exclusivity of the TCG, and the interpretation presented by the authority does not follow from the regulations at all.
The provision of Article 18d(1) of the CIT Act refers to the tax base, in the case of TCG it is the income of this group defined as the sum of income and losses of the individual companies forming the group. The deduction of qualified costs is thus made at the level of the group and not at the level of the company that conducts research and development activities. Thus, such costs must be taken into account when determining the tax base of the TCG (as taxpayer).
… and the Supreme Administrative Court
The Director did not agree with the verdict issued by the Provincial Administrative Court and filed a cassation appeal with the Supreme Administrative Court. However, the latter, in its latest ruling (ref. II FSK 179/22), agreed with the reasoning presented by the Provincial Administrative Court.
It confirmed that it is the TCG (and not the company that is a member of it) that is entitled to make the deduction related to the occurrence of qualified costs in the company that is a member of the TCG in question. This is indicated by at least a linguistic interpretation of the provision. For the above, it is de facto irrelevant what the financial result of the TCG member company will be, as it is only the TCG that will make the settlement, not the company.
Summary
It follows from the above considerations and judgments presented by the administrative courts that for the purposes of settling the R&D relief in a tax capital group, the financial result achieved by a company that is a member of TCG is of no significance. Even if it was the company that incurred expenses related to R&D activity, the eligible costs are deducted only at the level of the CIT taxpayer, which is the tax capital group, not the company itself.
