Free benefits in PIT

According to the law of 26 July 1991 on personal income tax 1 (hereinafter: u.p.d.o.f.) the business income is also the value of benefits received in kind and other unpaid benefits. The PIT Act does not specify clearly what is meant by ‘free benefits’.

In order to clarify this concept, the law on 23 April 1964 - Civil Code 2 (hereinafter referred to as ‘k.c.’) and decisions of the administrative courts.

The income tax on individuals has a very wide scope, it may happen that, even if the taxpayer has not obtained income, in the light of tax rules, certain benefits may be considered to be a taxable advantage.

1. Income of a natural person and the principle of universal taxation

The scope of the term “income” of a natural person is defined by the provisions Article 11(1) u.p.d.o.f., which states: “By incomes, subject to Article 14-15, Article 17(1)(6)(9)(10) on the implementation of rights deriving from financial derivatives, point 11, Article 19, Article 25b, Article 30ca, Article 30da and Article 30f, are received or made available to the taxpayer in the calendar year of money and cash value and value of benefits received in kind and other unpaid benefits.’ Thus, according to the legislator, incomes are, in principle, received or made available to the taxpayer in the calendar year of money and monetary value and the value of benefits received in kind and other unpaid benefits.

Income from unpaid benefits in principle arises at the time of receipt of the unpaid benefit, i.e. on the day of receipt of the property[3].

The principle of universality of taxation is the basic principle of the provisions of the u.p.d.o.f. In order for the benefit to be determined to be considered free of charge as a source of taxable income, there must be a legal relationship whereby one the entity makes a specific benefit, second but this benefit receives free of charge, thus increasing its tax revenues[4].

2. Free benefits

The provisions of u.p.d.o.f. and other tax laws do not contain a definition of the term “free certificate” and the legislator only mentions under Article 11(2a) the above law that ‘the value of benefits in kind, including unpaid benefits, shall be determined:

• 1) where services falling within the business of the provider are the subject of the provision, at the prices applicable to other customers;
• 2) where services are purchased at purchase prices;
• 3) where the subject of the benefits is the provision of the premises or buildings, according to the amount of the rent that would be granted if the lease of the premises or buildings were concluded;
• 4) in other cases, on the basis of the market prices used to provide services or to make available goods or rights of the same type and species, taking into account in particular their state and degree of consumption and the time and place of access.’

As mentioned above, it is in vain to seek the definition of “free return” in tax laws, and therefore, in order to determine its content, it is necessary to understand the meaning of this concept of the provisions of k.c. The case law of the administrative courts and the interpretation of tax authorities should also be invoked.

Despite the lack of a statutory definition of the concept in question, in the PIT legislation the legislator introduced a clear distinction between, inter alia, unpaid benefits and benefits in kind. The legislator points out that a free transfer of goods or rights is considered to be benefits in kind.

It can therefore be assumed that the legislator meant that free services are to apply to services. This belief may be confirmed by the provisions of civil law according to which the subject matter of the free provision is not a thing but a provision of services.

The Civil Code states that an unpaid benefit cannot be considered to be a situation where the provider of benefits has a future asset advantage.

Examples of unpaid benefits can be civil contracts:

• loans (Article 710 k.c., the characteristic feature of the loan agreement is the free use of a particular item. This is often the case in everyday life, for example: free lending to a friend of peace for a limited period of time),
• free use (Article 252 k.c., free use usually occurs in contracts between individuals and is linked to the right of life. For example: the daughter, when purchasing property under a life contract from her parents, establishes for their benefit the free use of the home land),
• interest-free loan (Article 720 k.c., e.g. parents lend their son and daughter a certain amount of money to renovate the apartment that young people are due to pay in time two years without interest). The essence of the unpaid benefit is not only its unpaid, understood as a lack of remuneration, but also the absence of any mutual benefit, now or in the future.

Unpaid benefits received by a natural person usually involve income on the person’s side. Revenue may be taxed or exempt, depending on the circumstances. In the case of an exemption, it shall not be taken into account when settling with the tax office.

It appears that in cases where an unpaid benefit should be taxed, taxpayers often forget the obligation to settle and pay tax on it.

At times taxpayers themselves must tax the value of the benefit obtained free of charge; at other times, it is the duty to pay the tax or advance payment of the pregnancy tax on the transferor, who acts as the payer[5].

An unpaid benefit may arise from:

• – free of charge performance of a service to the taxpayer,
• – free access to goods (e.g. car),
• – free access to the property.
• 3. Unpaid benefits in case law

The case law of Polish courts emphasizes that the legislator did not define the concept of unpaid benefits[6]. Therefore, a coherent view has to be developed, which could serve as a reference to further consideration.

According to him, free-of-charge benefits for tax purposes must be understood to mean any economic phenomenon and legal event resulting in an advantage at the expense of another entity or any such legal event, economic event in the activity of a legal person resulting in free of charge, i.e.

not related to costs or other forms of equivalent, the transfer of assets to that person, having a specific financial dimension[7].

This definition is also accepted by the tax authorities. The Supreme Administrative Court indicated in its judgment that the condition that the benefit in kind constitutes a free benefit is that the worker receives the benefit in fact, not merely the benefit in question. Therefore, the mere possibility to benefit from the benefit (duty to work) cannot be considered as the above specific and individualised, measurable asset benefit[8].

From another judgment of the NSA we learn that the term “free of charge” used under Article 20(1) u.p.d.o.f., as well as under Article 11(1), Articles 12(1) and 21(1) point 68 u.p.d.o.f. was not defined in this bill, but has a broader scope than in civil law.

It includes not only a benefit in a civilised sense (action or omission to another party – Article 353 k.c.), but it also covers all economic phenomena and legal events resulting in an advantage at the expense of another entity, or all legal events and economic events in the activities of legal persons whose effect is free of charge, i.e.

not related to costs or other forms of equivalent, the provision of assets to that person, having a specific financial dimension[9].

The Provincial Administrative Court in Gorzów Wielkopolski pointed out that, in the absence of a definition of the term “free of charge” in the tax law, it is appropriate to refer to the meaning of that term, which is formed in the judicial case-law, according to which the free provision within the meaning of the income tax provisions – generally – is any legal event and economic phenomenon resulting in a benefit at the expense of another entity, or all legal and economic events resulting in free of charge, that is to say, not related to costs or other form of equivalent, bringing the property of the person concerned, having a specific financial dimension. This may consist of increasing the assets (the assets) or avoiding its reduction (saving expenses)[10].

The Constitutional Court’s judgment recalls that the unpaid benefit must be of a real nature: ‘ Tax revenue arises when another unpaid benefit is not only at the disposal of an employee but also actually received by him. Thus the income achieved by the employee should be realistic and concrete 11 ”.

The NSA In the next He pointed out that the mere fact that the company did not receive remuneration from its board members does not mean that it has not yet obtained an unpaid benefit. The question of whether, in a given case, a taxable person obtains an unpaid benefit must always be examined in detail by the tax authorities.[12].

The Supreme Administrative Court also indicated that ‘the principle is that any individualised legal relationship, event or fact with which income is obtained is considered to be the source of income and that exceptions to this rule must result from a specific provision of the law, excluding or exempting specific tax revenue.

The corporate income tax has the characteristics of a common tax covering any permanent assets received during the tax year, regardless of their nature.

By indicating the characteristics relevant to the categorisation of unpaid benefits within the meaning of Article 12(1)(2) the Corporate Income Tax Act It should be stressed that those that are considered to be such may be considered as first have a measurable financial effect for the taxpayer, after second In principle, the advantage resulting from it cannot be available in a general way to all operators, since otherwise each economic operator would be equally enriched free of charge and after third it shall not entail the obligation to bear any equivalent to other persons’ 13 .

4. Summary

The provisions of u.p.d.o.f. do not contain the definition of “free-of-charge”. In order to clarify this definition, reference must be made to the provisions of the C.C. and to the rulings of the courts, as well as interpretations of tax authorities.

It turns out that, according to the practice of Polish courts, the definition of “free of charge” is broader than that of civil law, as it includes not only a civil service, but also all economic phenomena and legal events resulting in the benefit of another entity, or all legal events and economic events in the activities of legal persons whose effect is unpaid, that is not related to costs or other forms of equivalent, the acquisition of assets to that person having a specific financial dimension.

However, it must be borne in mind that the question of whether, in a given case, the taxpayer obtains an unpaid benefit always requires an in-depth analysis of the facts by the tax authorities.

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[1] i.e. Journal of Laws of 2019, item 1387 as amended

3 https://www.gofin.pl/podatki/17 ,1,61,152490,revenue-from-independent-services.html, access: 18 August 2020

4 Interpretation of individual tax law with 25 April 2016, reference no. IPPB6/4510-128/16-2/AG.

5 R. Kowalski, Unpaid benefits [online]. ABC Electronic Publications, 23 July 2020 [access: 14 August 2020]. Internet access: https://sip.lex.pl/#/publication/469835035

7 https://poradnikprzedsiebiorcy.pl/-przychody-z-nieodplatnych-swiadczen-na-gruncie-pit-i-cit, access: 18 August 2020 See also the interpretation of individual tax law from 3 December 2019, reference no. 0111-KDIB1-1.4010.402.2019.2.ŚS.

Bibliography

1. Act of 26 July 1991 on income tax on individuals, i.e. Journal of Laws of 2019, item 1387 as amended
2. Act of 23 April 1964 Civil code, i.e. Journal of Laws of 2019, item 1145.
3. Kowalski, Unpaid benefits [online]. ABC Electronic Publications, 23 July 2020 [access: 14 August 2020]. Internet access: https://sip.lex.pl/#/publication/469835035

Judgment

1. Judgment of the Chief Administrative Court of 11 December 2014, reference no. II FSK 3275/14.
2. Judgment of the Chief Administrative Court of 23 April 2015, reference no. II FSK 1138/13.
3. Judgment of the Provincial Administrative Court in Gorzów Wielkopolski from 29 December 2016, reference no. I SA/Go 383/16.
4. Judgment of the Constitutional Court 8 July 2014, reference no. K 7/13.
5. Judgment of the Chief Administrative Court of 27 November 2014, reference no. II FSK 2640/12.

Interpretations

1. Interpretation of individual tax law with 3 December 2019, reference no. 0111-KDIB1-1.4010.402.2019.2.ŚS.
2. Interpretation of individual tax law with 25 April 2016, reference no. IPPB6/4510-128/16-2/AG.