The rationale for spending in recognition of it as the cost of obtaining revenue

As defined under Article 15(1) Act on 15 February 1992 on corporate income tax 1 (Next: the Corporate Income Tax Act), the cost of obtaining revenue is the costs incurred to obtain revenue from the source of revenue or to preserve or hedge the source of revenue, except for those listed exhaustively under Article 16(1) This bill.

The taxpayer may consider the expenditure to be the cost of obtaining revenue provided that the cumulative condition is that the expenditure has been incurred by him; it is definitive; it is linked to the economic activity of that taxpayer; it has been properly documented; it is not included in the costs mentioned above Article 16(1) the Corporate Income Tax Act; has been carried out for a specified purpose under Article 15(1) that bill.

In practice, the fulfilment of all these criteria can give taxpayers many problems. The situation becomes more complicated when it comes to the cost of obtaining the revenue of expenditure incurred by the legal predecessor of the company and the company itself, related to the regulation of ownership issues.

1. Introduction

On 24 March 2020 Director of National Tax Information (hereinafter: Director of KIS) issued an interpretation of tax law 2 determining whether the expenditure incurred by the legal predecessor of the applicant company or by the applicant company on the remuneration paid in connection with the settlements concluded may constitute the cost of obtaining revenue for that company.

In the company’s assessment, these expenses may constitute such a cost. The company, justifying its position, presented the facts of the events according to which 18 September 2019 the merger of X Sp. z o.o. with X S.A. was entered in the KRS (as the applicant) with X S.A., with X S.A.

being acquired by the applicant and transferred to it all the assets of that company. X Sp. z o.o. (executing anti-corrosive protection services of steel components and continuing operations of X S.A.) also entered into certain tax laws and obligations of the company taken over.

The applicant reported that before the merger of the two companies, 30 March 2018 there was an increase in share capital of X S.A. at the General Meeting of Shareholders, and later, due to the acquisition of majority shareholders 95% shares, for the compulsory redemption of minority shareholders’ shares[3].

Both resolutions in these cases were contested by some of these minority shareholders, and due to several dozen disputes X S.A. incurred significant expenses for legal and procedural services as well as image losses. Therefore, X S.A.

concluded out-of-court settlements with minority shareholders aimed at determining the way in which the dispute was concluded and the mutual claims were waived by both parties.

In accordance with these agreements, shareholders were obliged to withdraw the lawsuits in full and, among other things, not to comment publicly, not to provide information and not to publish assessments on social networks about second page. In return, X S.A. undertook to pay these shareholders certain salaries.

1. Remuneration expenditure in connection with agreements with minority shareholders and revenue costs

In the applicant’s assessment, the costs of the above-mentioned salaries can be classified as revenue costs.

Namely, as a result of the settlements, it was possible to prevent risks that affected or could affect less interest in the services of the company, and thus also to reduce its revenues; to restore the company's view as a reliable business counterparty; not to incur further costs of legal handling disputes and reduce losses; to regain organisational and management liquidity.

According to X Sp. z o.o., ‘the expenditure in question (for remuneration – S.W.) has been/will be actually incurred by the company, is/will be definitive and is/will be properly documented’ and this is undeniable.

According to the applicant, this expenditure is also linked to its business activity — if ‘organising and managing liquidity for companies active in business is a priority, then (...) also restoring it in circumstances of uncertainty/a lack of corporate governance is an absolute priority’. X Sp. z o.o.

referred to the NSA judgment of 9 March 2017 4 , in which he stated that ‘in writing and jurisprudence, apart from linguistic interpretation, it is difficult to find an in-depth interpretation of the concept of ‘costs of conduct or of safeguarding the source of revenue’.

Therefore, they must be understood as costs, other than those directly incurred in order to obtain revenue, spent in order to ensure the continuity of the operation of the source of revenue, so that the source generates revenue in the future, including the mandatory costs resulting from the legal organisation of the source of income.’ The Court also held that ‘even if the majority shareholders themselves, as such, benefit from the compulsory redemption of shares from minority shareholders, this does not in itself result in that the costs of carrying out such a project cannot be regarded as costs of obtaining income from the company’.

According to the applicant, the remuneration paid is clearly linked to ‘security/preservation of the source of revenue and even to a real chance of revenue’.

3. Causal-effectual link of expenditure with taxable income

The Director of KIS considered the applicant’s position incorrect, noting that the definition contained under Article 15(1) the Corporate Income Tax Act is of a general nature and each taxpayer's expenditure should be assessed individually.

According to the tax authority, ‘there has been no evidence that expenditure is desirable (no causal link between expenditure and the cost of obtaining revenue).

When presenting the overall relationship of expenditure, the applicant did not indicate the conditions for attributing remuneration to the costs incurred to preserve or secure the source of revenue. We do not deal with e.g.

the company's bankruptcy, the possible termination of this activity, etc., with events that indicate that the costs of remuneration are incurred/will be in order to preserve or secure the source of revenue."

The Director of KIS also pointed out that the applicant had clearly defined the purpose of the settlements: to determine how the dispute would be concluded, to waive each other's claims relating to the dispute, to confirm that, after settlement, the parties would not be entitled to any mutual claims (including future or even potential). In the Authority’s assessment, ‘the fact that the cost of remuneration in question has been/will be actually borne by the taxpayer is/will be definitive, is/will be properly documented, remains/will remain in connection with economic activity and is not mentioned under Article 16(1) the Corporate Income Tax Act does not mean that all the conditions governing the possibility of recognising the expenditure incurred as the cost of obtaining revenue are met.’

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2 reference no. 0111-KDIB2-1.4010.28.2020.1.AR.

3 In Mode Article 418 Act on 15 September 2000 Commercial Companies Code (i.e. Journal of Laws of 2019, item 505).

4 reference no. II FSK 359/15.