Exemption from tax costs of expenditure financed from net profit

According to the new Article 16(1)(15a) Act on 15 February 1992 on corporate income tax[1] , the amounts paid as a breakdown (accounting) of the entity's financial result (net profit) are excluded from tax costs. The introduction of this provision is the result of historical disputes as to the possibility of recognising as the cost of obtaining revenue for employees’ prizes (premiums) financed from net profit (tax revenue).

Introduction – history of the dispute

This dispute has its origin in interpretation Article 16(1)(40) the Corporate Income Tax Act, which restricts the inclusion of social security contributions as well as of the Labour Fund and other special-purpose funds, established under separate laws from prizes and bonuses paid in cash or in securities from income after tax.

As indicated in the letterature, according to the wording the Corporate Income Tax Act: „Thus, they were not at the expense of the contribution, but the provision did not restrict the inclusion in the costs of the prizes and bonuses on which those contributions were calculated.’[2] .

However, in practice, taxpayers had doubts about the possibility of including in tax costs all premium and reward expenses financed from a net profit, which resulted in many interpretations of tax law.

In most interpretations, tax authorities considered that the premiums and prizes financed from the net profit could constitute revenue costs.

The universality of the Ministry of Finance's questioning of tax law favourable to taxpayers has sparked many disputes before administrative courts. These disputes effectively led to education two divergent jurisprudence lines: ‘profiscal’ and ‘proposal’. According to the so-called Profissional Court Line of the NSA[3] the premiums and prizes financed from net profit could not constitute the cost of obtaining income, but according to the so-called "proposal" trend[4] could be considered tax costs.

This discrepancy led to the composition of the case seven NSA judges. In the resolution of 22 June 2015 the court found[5] , that the rewards and bonuses paid to employees by the taxpayer to the corporation tax on income after tax may constitute the cost of obtaining the income of that taxpayer.

In addition, it is worth noting that this interpretation was also approved in the subsequent resolution of the NSA of 1 February 2016[6] . These resolutions forced the Ministry of Finance to change its position and accept the view that expenditure on bonuses and prizes for workers financed from a net profit could constitute revenue costs.

This was also reflected in interpretations issued after publication of resolutions (such as in individual interpretations: from 1 June 2017, reference no. 0111-KDIB1-2.4010.64.2017.1.AW, Legalis; of 10 March 2017, reference no. 0461-ITPB3.4510.45.2017.1.PS, Legalis; of 9 March 2016, reference no.

IBPB-1-2/4510-907/15/MS, Legalis; of 6 October 2016, reference no. ILPB2/4510-1-61/16-2/PS, Legalis; of 19 February 2016, reference no. IPPB6/4510-418/15-2/ AK, Legalis.

However, the legislator did not fully accept such an interpretation of the issue under consideration and decided to explicitly exclude from the tax costs the amounts paid for the division of the unit's (net profit) result, including in particular bonuses and prizes. The legislator’s motivation in this regard is clearly indicated in the text of the explanatory memorandum for amendment the Corporate Income Tax Act, introduced by Law of 27 October 2017 amending the Personal Income Tax Act, the Corporate Income Tax Act and the Flat-rate Income Tax Act on certain revenues generated by individuals[7] .

Reason for amendment the Corporate Income Tax Act, introduced by Law of 27 October 2017

Given the jurisprudence of the administrative courts, as regards the admissibility of inclusion in the costs of obtaining the income from the profits, it is desirable to introduce the the Corporate Income Tax Act the provision of expressis verbis excluding the possibility of including in the cost of obtaining revenue from any component of the company's profits, regardless of their destination.

A similar view is found in literature[8] .

Interpretative doubts related to the content of the introduced provision

According to the author, the introduction to the Corporate Income Tax Act recipe Article 16(1)(15a) only seemingly eliminates the possibility of including premiums and prizes financed from net profits in tax costs[9] .

The authors of the amendment explicitly indicated in the statement of reasons that they wished to exclude such expenditure from the tax costs, however, it was not ultimately decided to make any reference to bonuses and prizes in the added content of the regulation, which only refers to "the amounts paid by dividing the entity's (net profit) financial result".

Therefore, in order to be able to interpret the new regulation, it is necessary to refer to the Act of 15 September 2000 – Commercial Companies Code[10] (further k.s.h.), which regulates the distribution of profits in capital companies – in particular to Article 191.

According to that provision, the main form of net profit settlement is its division between shareholders, in accordance with the articles of association, after completing additional formalities and covering losses and other deficiencies. However, according to Article 191(2) k.s.h.

it is possible for partners to decide in the partnership agreement on a different method of distribution of profits – e.g. to increase the reserves or to pay prizes and bonuses to employees.

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1 i.e. Journal of Laws of 2018, item 1036, Next the Corporate Income Tax Act

2 Mr Malecki, M. Mazurkiewicz, CIT. Taxes and accounting. Commentary, Lex/el. 2018.

3 This case law has been initiated by an NSA judgment with 29 May 2012, reference no. II FSK 2208/10, Legalis and continued in judgments: from 3 October 2012, reference no. II FSK 332/11, Legalis; of 5 March 2013, reference no. II FSK 1375/11, Legalis; of 16 April 2013, reference no. II FSK 1692/11, Legalis.

4 second from the educated rulings of the NSA was initiated by judgment of 29 May 2012, reference no. II FSK 2275/10, Legalis and continued in judgments: from 29 April 2014, reference no. II FSK 1220/12, Legalis and of 3 December 2014, reference no. II FSK 3618/13, Legalis.

5 Resolution of the NSA of 22 June 2015, reference no. II FPS 3/15, Legalis.

6 Resolution of the NSA 7 Judges from 1 February 2016, reference no. II FPS 5/15, Legalis.

7 Journal of Laws of 2017, item 2175.

8 P. Małecki, M. Mazurkiewicz, CIT. Taxes... op. cit; W. Dmoch, Corporate Income Tax. Commentary, Legalis/el. 2018; W. Modzelewski and Others, Commentary on the Corporate Income Tax Act, Legalis/el. 2018.

9 W. Dmoch, Profit premium and income cost, Tax review 2018 No 5, p. 11-12.

10 i.e. Journal of Laws of 2017, item 1577.