Costs incurred for an investment carried out by another entity cannot constitute tax-deductible costs under Article 15(1) of the CIT Act
In its decision of January 8, 2025, case no. II FSK 444/22, the Supreme Administrative Court stated that the costs related to a certain investment made by a company cannot constitute tax-deductible costs for tthe shareholder. There is no connection, even indirect, between the incurrence of these costs and the income generated. Only the company making the investment will gain revenue (income) from the investment. The only revenue (income) a shareholder can earn is dividend income, for which no tax cost can be recognized.
Comment:
In our opinion, the ruling confirms the need for a given cost to meet the condition of a connection with taxable income, which income should be generated by the same entity that incurs the cost, and it must be specific income that can be identified.
The ruling should be taken into account by entities planning to invest in Poland through special purpose vehicles.
Inability to treat the amount of compensation established in the Debt compromise Agreement ias tdax-deductible
The Supreme Administrative Court in its verdict of January 14, 2025, case no. II FSK 464/22, ruled that the expenses incurred by the developer for the payment of the remuneration based on the agreement concluded with the buyer of the real estate, according to which the buyer, in exchange for the remuneration, waives all claims related to defects and faults of the building and undertakes not to pursue them, do not constitute tax-deductible costs in the meaning of Article 15(1) of the CIT Act, as the expenses were not incurred for the purpose of obtaining, securing or maintaining a source of income. According to the Supreme Administrative Court, the purpose of the payment in question was to take care of the company’s image on the market.
Comment:
In our opinion, the concluded agreement allowed the taxpayer to avoid incurring costs related to the settlement with the contractor, so one can try to find a justification for incurring the costs that would correspond to t Article 15(1) of the CIT Act. On the other hand, the costs incurred by the developer are similar in nature to compensation, and should be subject to Article 16(1)(22) of the CIT Act, according to which contractual penalties and damages for defects in goods delivered, works performed and services rendered, as well as delays in the delivery of goods, are not considered tax deductible. The tax authorities interpret this provision strictly and claim that contractual penalties and damages should not be included in tax costs. However, there have been verdicts of the Supreme Administrative Court that are favorable to taxpayers. For example, in its verdict of July 25, 2023, case no. II FSK 137/21, the Supreme Administrative Court stated that costs in the form of contractual penalties for delays in the delivery and assembly of goods are not excluded from tax deductible costs under Article 16(1)(22) of the CIT Act. As a result, it was recognized that the above-mentioned costs may be tax costs under the general rules, i.e. if the premise of Article 15(1) of the CIT Act is met, their incurrence is related to maintaining or securing a source of income.
The company is not entitled to recognize payment of amounts owed to another subcontractor on the basis of joint and several liability of the company as tax deductible.
The Head of the National Revenue Information Service stated in an individual tax ruling of December 17, 2024, No. 0111-KDIB1-1.4010.620.2024.1.SG, that the company is not entitled to treat payment of receivables to another subcontractor incurred due to the joint and several liability of the company as tax deductible. The tax expense should relate to a specific business operation and be recorded in the books on the basis of an invoice or other accounting evidence. Therefore, the payment of amounts due to another subcontractor does not constitute a tax cost for the company.
Comment:
At this point, it should be noted that a similar legal issue based on facts similar to the present case, i.e. the possibility of recognizing expenses incurred by investors or contractors for subcontractors as tax-deductible costs, has already been the subject to a verdict of the Supreme Administrative Court. The position of the Director of the National Revenue Information Service is consistent with the position of the Supreme Administrative Court presented in the judgment of February 3, 2017, case no. II FSK 4113/14: „It would be unacceptable to adopt the view that since the joint and several liability of the investor and the contractor or subcontractor resulting from Article 6471 § 1 and § 5 of the Civil Code constitutes 'the possibility for the subcontractor to address the entire claim for payment of the due compensation directly to the investor’ (p. 13), this may constitute a basis for recognizing the expenses incurred as tax deductible costs.”
However, recent rulings of the Supreme Administrative Court are favorable to taxpayers and allow the investor to include in its tax-deductible expenses incurred as a result of joint and several liability for the benefit of another subcontractor. For example, in its verdict of February 24, 2021, case no. II FSK 2966/20, the Supreme Administrative Court held that „the company, as an investor, may include in its tax-deductible cost the expenses incurred in paying certain amounts to subcontractors under joint and several liability with the general contractor, to the extent that they have not been reimbursed in any way by the general contractor. In the present case, DKIS wrongly assumed that there were „two costs”. Contrary to this view, in the present case there is no risk that the company will double count the same expenses as tax deductible costs. The WSA correctly pointed out that there are two different titles for inclusion in tax-deductible expenses. The amount was not refunded to the company in any way (…) The allegation of violation of Article 16(1)(10)(b) of the CIT Act is also not properly justified, either in terms of the tax law provisions or in terms of the facts of the case. The panel agrees with the plaintiff’s position, expressed in the response to the cassation appeal, that even if it is assumed that the obligation regulated by the investor has a „guarantee character”, the linguistic interpretation does not allow the assumption that it is a „guarantee obligation”. A different conclusion indicates an expansive approach to the concept of „guarantee obligation” and is not permissible”. Furthermore, in its decision of June 10, 2021, file no. II FSK 441/21, the Supreme Administrative Court stated: „In view of the above, it must be concluded that the company, as an investor, may include in its tax-deductible expenses the expenses incurred in paying certain amounts to subcontractors under joint and several liability with the general contractor, to the extent that they have not been reimbursed in any way by the general contractor, even if the party (the investor) has paid the contractor’s remuneration. (…) The assertion that the investor’s liability for the performance of the contractual obligations between the general contractor and the subcontractor, based on Article 6471 § 5 of the Civil Code, has the nature of a guarantee does not justify the recognition of the payments made by the company as the repayment of sureties or guarantees within the meaning of Art. 16 sec. 1 point 10 letter b of the Polish Accounting Act”.
The amount due to the company from the client, referred to as compensation, constitutes remuneration for services provided by the Company to the Client and is subject to VAT.
The Director of the National Revenue Information Service (KIS), in an individual tax ruling of December 31, 2024, No. 0114-KDIP4-3.4012.630.2024.2.APR, stated that the amount due to the company from the client, referred to as compensation, constitutes remuneration for services rendered by the company to the client and should be subject to VAT. The remuneration, in the amount of indirect costs, includes payment for additional services provided during the extended period of work. According to the Director of the National Revenue Administration, this situation is an equivalent transaction – a service in exchange for remuneration specified in the annexes to the contract and the negotiation protocol.
Comment:
It should be noted that compensation, damages or contractual penalties have not been indicated by the legislator as activities subject to VAT. This means that their payment should not be subject to this tax. This approach is confirmed by numerous individual tax rulings. However, the nature of the transaction may vary depending on the specific facts. It should therefore be noted that the name used does not determine the nature of the transaction. The characteristics of the transaction that are relevant from a tax perspective may also be significant. Therefore, compensation payments under contractual obligations should always be carefully analyzed with respect to VAT.
