Instructions for taxation of winnings in competitions – obligations on the payer and the taxpayer

This study only covers competitions and games to which it applies Article 30(1)(2) Act on 26 July 1991 on personal income tax 1 (Further: u.p.d.o.f.).

Pursuant to this provision, a flat-rate income tax is levied on revenues (revenues) from winnings in competitions, games and betting or prizes relating to premium sales received in an EU Member State or in another EEA country at a higher rate 10% win or reward.

Thus, any win in competitions or games obtained in an EEA State will be taxable 10% a tax, determined against the value of the win.

1. Comment

1.1. Taxation of winnings in competitions

As shown by Article 30(3) u.p.d.o.f., flat-rate income tax of 10% shall be collected without deduction of revenue by the cost of obtaining revenue.

Nevertheless, attention should be paid to Article 30(9) u.p.d.o.f., which indicates that the tax rule on winnings 10% the flat-rate income tax shall apply with regard to double taxation agreements to which the Republic of Poland is party.

However, the application of the tax rate resulting from the double taxation agreement or the non-payment (non-payment) of the tax in accordance with such a contract is possible provided that the taxpayer documents his residence for tax purposes with a residence certificate.

In other words, in the case of a win obtained by a taxpayer with a limited tax obligation in Poland (non-resident), the non-collection of tax at the rate resulting from the u.p.d.o.f. may only occur if the non-resident who has received the win documents his residence with a residence certificate.

Otherwise, the provisions of u.p.d.o.f will apply accordingly.

Thus, the winnings received in a competition in an EEA State are generally taxable 10% flat-rate income tax charged on the value of the win. When verifying the conditions of application of a reduced rate of tax or exemption from taxation or non-collection under tax law, the payer shall be obliged to exercise due diligence.

The evaluation of due diligence shall take into account the nature and scale of the payer's activities.

Apart from the above, where the competition is directed only to its own employees, the resulting award should be taxed as income from employment or related relations (see individual interpretation of the Director of KIS from 9 November 2018 2 , and the NSA judgment of 27 March 2015 3 ).

1.2. Tax exemption for winnings in competitions

1.2.1. Legal regulations

The u.p.d.o.f. introduced a derogation from the universality of winning taxation in competitions. According to Article 21(1)(68) u.p.d.o.f.

the value of wins in competitions and games organised and issued (announced) by the media (press, radio and television) and competitions in the fields of science, culture, art, journalism and sport, as well as prizes related to the sale of bonus goods or services, if the one-off value of these wins or awards does not exceed the amount 2,000 PLN.

The tax exemption for the sale of premium goods or services shall not apply to prizes received by the taxable person in connection with his non-agricultural economic activities, which constitute income from that activity.

In view of the above, consideration should be given to the conditions which must be met in order for the benefit to be won in the competition or game to benefit from a specific exemption under Article 21(1)(68) u.p.d.o.f.

Undoubtedly the value of winnings not exceeding the amount 2,000 PLN (as of 31 December 2017 was 760 PLN) is exempt from taxation on income tax on individuals. If it is exceeded, the total win in the competition shall be taxed 10% flat-rate income tax, not just a surplus over the amount 2,000 PLN. (…).

It is also worth paying attention to Article 21(1)(68a) u.p.d.o.f., which provides that the value of the unpaid benefits in question is free of income tax under Article 20(1) a.p.d.o.f., received from the provider in connection with its promotion or advertising, if the one-off value of these benefits does not exceed the amount 200 PLN.

The exemption shall not apply if the benefit is made to a provider’s staff member or to a person who remains with the provider in civil law.

According to Article 21(1)(68a) In order to apply the exemption, the following conditions shall be met cumulatively:

• 1) the benefit must be the income in question under Article 20(1) u.p.d.o.f., i.e. be revenue from other sources,
• 2) the benefit must be free of charge,
• 3) the benefit must remain in connection with the promotion or advertising of the provider,
• 4) the one-off value of this benefit must not exceed 200 PLN gross,
• 5) the benefit is not made to a provider’s employee or to a person associated with him or her with a civil relationship,
• 6) the benefit must be non-monetary[4].

In the author's opinion, there are no contraindications that, as part of activities aimed at increasing the sale of his products (services), the taxpayer organises various promotional (advertising) actions of the character of competitions.

If the events of the nature of the contests comply with the conditions of this exemption, the prize value up to 200 PLN may benefit from a tax exemption.

Importantly, in the author's opinion, these may be other competitions than those organised and issued (announced) by the media (press, radio and television) and other than competitions in the fields of science, culture, art, journalism and sport.

A certain disadvantage of applying this exemption to competitions may be the value of the exemption itself, as it would be awards of relatively low value (to 200 PLN gross). It is worth noting the condition to apply the exemption in the form of a transfer of the benefit, which is to be free of charge.

The concept of unpaid benefit under this exemption is the subject of a dispute between taxpayers and tax authorities. In general, the tax authorities assume that in exchange for the benefit of the provider, no other benefit from the recipient (e.g. winning competition in the competition) can be pursued.

Otherwise, such a benefit may not be eligible as unpaid. So stated the Director of KIS in an individual interpretation of 18 April 2018 (…).

In turn, administrative courts indicate that not every action performed by the winner of such a competition (although winning the competition) is equivalent to a return allowance. They stress that in normal economic practice there are reactions to typical, standard consumer behaviour which cannot be treated as equivalent to the benefit received (e.g. a consumer visit to the partner's facility). Then, despite the specific behaviour of the recipient, such a benefit remains free of charge.

Judgment

The concept of unpaid benefit covers not only a civil benefit, as it covers all economic phenomena and legal events resulting in an advantage at the expense of another entity, or all legal and economic events in the activities of legal persons whose effect is free of charge, that is not related to costs or other forms of equivalent, the provision of assets to that person, having a specific asset or financial dimension.

Court first the court correctly accepted that, on the basis of the facts set out in the request for interpretation of the provisions of tax law, consumer behaviour cannot be considered to correspond to the value of the prizes received and the prizes will be free of charge because they respond to typical, standard consumer behaviour which cannot be treated as equivalent to the benefit received, e.g.

the consumer’s visit to the partner’s facility, the consumer’s submission on behalf of the entity third contract partner of specified height, product testing, use of corporate card[5]. (…).

However, it seems that the approach of tax authorities in certain cases is beginning to evolve towards the position taken by administrative courts. This may be demonstrated by the individual interpretation of the Director of KIS from 27 March 2019

Individual interpretation of the Director of National Tax Information from 27 March 2019 6

Taking into account the presented description of the future event and the tax legislation laid down, it should be concluded that the benefit offered to the individual by the Applicant in the form of the so-called launch package is free of charge, since, as indicated by the Applicant, in order to receive this package, the natural person joining the above-mentioned promotion shares will only be required to provide his or her data without having to bear any costs associated with the accession of those shares. Nor will the above person make any equivalent benefits in return for receiving this package.

In conclusion, in the author's opinion, the view presented by the case law of the administrative courts is correct. However, the application of the exemption from Article 21(1)(68a) u.p.d.o.f.

in relation to activities aimed at increasing the sale of products (services) by organising various promotional (advertising) actions of the nature of competitions, creates a risk of dispute with the tax authority. The term ‘competition’ should be considered as such according to the analysis presented below.

Similarly, it should be noted that if an organised competition under the circumstances indicated under Article 21(1)(68a) u.p.d.o.f. would not comply with the conditions of exemption from this provision, the win in such a competition should in principle be taxed according to Article 30(1)(2) u.p.d.o.f. (10% a flat-rate income tax).

1. 2.2. Concept of competition or games and conditions for the application of the exemption — decisions of tax authorities and administrative courts

First, indicate that used under Article 21(1)(68) u.p.d.o.f. defined terms, such as ‘competition’, ‘play’, ‘organised and broadcast’, ‘media (press, radio and television)’ and ‘competitions in the fields of science, culture, art, journalism and sport’ do not contain legal definitions under u.p.d.o.f.

It is therefore appropriate to interpret these concepts in accordance with commonly accepted interpretative rules and give them the meaning they have in common language. The issue of taxation of competitions and the application in their case of exemptions of a certain value. 21 section 1 point 68 u.p.d.o.f.

has been the subject of numerous decisions by both the tax authorities and the jurisprudence of the administrative courts, so for further examination of these concepts it is worth indicating how the above concepts are defined by the competent authorities or administrative courts.

It is widely accepted that the key factor determining whether an undertaking (event) can actually be a competition is the element of competition. The definition of the competition under u.p.d.o.f. can be found in the NSA judgment of 9 April 2014 7 .

Judgment

First, Whereas the competition should be announced together with the relevant rules of procedure, after which the participants should take appropriate action which, by its very nature, should contain a competitive element; The conclusion of the competition, which is the result of the competition of the participants, is the announcement of results and often the award.

It is also clear from the NSA that the result of the competition is closely related to the effect of direct competition between the participants and their competition. The Internet version of the Great Dictionary of Polish Language (project under the ed. P.

Żmigrodski) entitled "competition" states that it is "an artistic, entertainment, sports, educational or business venture whose participants compete for priority with prizes". In this definition, as a key, mapping definition of ‘competition’, the element of ‘competition’ appears.

Without a "realization" we cannot define the term "competition". The dictionary of the Polish Language, under the phrase “to compete”, indicates that it means “to seek priority, to win, to get something; to compete; to compete with someone” 8 .

In view of these concepts relating to the ‘competition’, it must be stated that only the competition (its height) by the players, coaches and other persons who stand out in sports activities – without competing, competing among themselves – does not fall within the concept of ‘competition’ referred to in the abovementioned provision Article 21(1)(68) u.p.d.o.f.

Rivalization (competition, competition) took place earlier, when these individuals in previous competitions proved who was the “best” and who was the “next” and the next “best”.

The sine qua non condition for a given project to be regarded as a competition is an element of competition, understood as a condition which can also be defined as competition or competition of participants.

Therefore, since there is a strong element of competition, it should also be pointed out that a winner or winner (winners) must also be selected in the competition. In other words, they will be those people who won the competition – very figuratively speaking.

Thus, it can be concluded that the circle of winners of the competition is in some way limited.

It is worth considering what may be a game in the context of this exemption and what is different from the competition. At this point attention should be paid to the individual interpretation of the Director of IS in Bydgoszcz from 19 July 2011

Individual interpretation of the Director of the Tax Chamber in Bydgoszcz with 19 July 2011 9

The game is “a set of rules, usually involving several people (more often one), for entertainment purposes. Most games, though not all, have a competitive character and the goal of a player or group of players is to defeat the other players." As important as the competition element is the formal side of the whole project. It is necessary to draw up rules which specify the name of the game or contest, the organiser, participants, prizes and the way in which the winners are selected.

From this definition it can be concluded that the elements combining the game with the competition are competition (and therefore competition) and the formal side of the project.

Therefore, for tax purposes it can be assumed that the secondary issue is whether a given event is a competition or a game – it is important that participants competing for winning participate in them.

Moreover, in addition to the competition element, it is also necessary to provide a page of formal competition or game, which is manifested by the fact that the competition or game is held under the rules and must be announced beforehand.

The rules laid down in the Rules of Procedure in particular must confirm that competition is a key factor in the event and define such elements as those cited above, namely: the name of the competition or game, the organizer or the planned prizes, as well as the way the winners are selected.

This should essentially set the limit determining the undertaking as a competition or game within the meaning of Article 21(1)(68) u.p.d.o.f.

If it is found that the event meets the conditions for qualifying it as a competition or game, Next, it should be determined whether they are organised and broadcast (announced) in the mass media (press, radio and television).

In the case law one can find the view that dictionaries of Polish language contain different definitions of mass media. In this respect: 1) a definition relating to technical devices for communication, used in the transmission of images, sounds, written words, e.g. newspaper, satellite television or radio receiver, or 2) an entity definition relating to institutions included in the mass media which provide information on the use of these technical devices.

Such a position can be found in the NSA judgment of 27 March 2015 10 . It is worth noting that Article 21(1)(68) u.p.d.o.f. does not include the Internet in the media[11]. It can be concluded from a literal interpretation that the legislator excluded it from the media. However, the position put forward by the administrative courts rejects this concept and goes a completely different way, generally assuming that the Internet is a media medium.

It is also extremely important to indicate that Article 21(1)(68) u.p.d.o.f. determines the application of tax exemption from winnings in competitions still from a key element. Competitions or games must be organised and broadcast (announced) by the media. Now that it has been established what the media really are, it is important to consider whether the exemption is always dependent on the fulfillment of these two conditions, i.e.:

• 1) the contest (or game) is organised by an entity included in the mass media, and
• 2) the competition (or game) is issued (announced) by the mass media.

Despite initial attempts to interpret that in this case it is sufficient to comply one of these conditions, the view of the speaker did not find approval in the tax authorities’ interpretations and judgments of the administrative courts, which is reflected, among other things, in the NSA judgment cited above 4 February 2016 On the basis of this judgment, this dependence can be portrayed very well.

It is not difficult to imagine that most taxpayers have their own websites, but not every taxpayer who has its own website is the owner of an online newspaper (webport), radio or television, which would allow it to be included in the media.

Competitions or games organised through social networks will also not benefit from this exemption[12].

Thus, in the opinion of the administrative courts, only a taxable person who issues (pronounces) the competition via the Internet and is himself a mass media entity can benefit from the exemption. The practical effect of this interpretation is to restrict this exemption only to those who are at the same time mass media.

Thus, only after all the above conditions have been met can the prize be awarded in the competition or the game be exempt from tax on income tax on individuals up to the amount 2,000 PLN. It is also noteworthy that in competitions and games that meet the above conditions, their object is irrelevant. Thus, it may be a competition or a game from any chosen field.

However, according to Article 21(1)(68) u.p.d.o.f., in the absence of an exemption in the case of competitions and games organised and issued in the mass media, the taxpayer shall benefit from another exemption resulting from that provision. This exemption concerns competitions in the fields of science, culture, art, journalism and sport.

In addition, it does not include games – it refers only to competitions. It should be assumed that competitions in these fields must meet the same requirements (as defined) as competitions organised and issued (announced) by mass media. Since u.p.d.o.f.

also does not contain the definition of ‘science, culture, art, journalism and sport’, these concepts are interpreted in accordance with commonly accepted interpretative rules and are given the meaning they have in common language.

In other words, it will be a meaning derived from the definitions given to them by dictionaries of Polish language.

At the beginning, it is worth pointing out that the rules on taxation and dismissal of contests up to the amount 2,000 PLN resulting from u.p.d.o.f. in the fields of science, culture, art, journalism and sport, allow for a connection In one competitions of several listed fields, but also the organisation of separate competitions in different fields. There are many definitions of these areas in both common and dictionary languages and in each case they have a wide range of meaning.

Therefore, any competition in the field mentioned above should be analysed in an elevator. Nevertheless, it is possible to identify certain elements which such a competition must contain. These elements include:

• 1) competition of participants,
• 2) winning a particular circle of winners resulting from the competition of participants and
• 3) formal page.

Practical problems may arise in the event of an attempt to determine whether the action in the competition can be classified as belonging to the areas mentioned above.

However, it seems reasonable to take the view that such a competition is a competition in a given field until it is clearly excluded, on the basis of objective criteria, that it is not, taking into account the definition of individual fields in the common language and context of the competition.

Given the nature of this study, it is not possible to conclusively determine which criteria should be followed when deciding the subject matter of individual competitions in terms of individual fields, i.e. science, culture, art, journalism and sport, specified under Article 21(1)(68) u.p.d.o.f....

1. 3. Obligations of the payer and of the taxable person in relation to taxation and exemptions from taxation of contests
2. 3.1. Situation of the operator of the contest

According to Article 41(4) u.p.d.o.f.

natural persons carrying out business activities, legal persons and their organisational units and organisational units not having legal personality are obliged to collect a flat-rate income tax on payments made or made at the disposal of the taxpayer of money or cash values from specified titles under Article 30(1)(2) u.p.d.o.f.

Thus, if a natural person conducting an economic activity, a legal person and its organisational unit and an organisational unit not having legal personality organises a competition or a game and, as a result, a natural person having an unlimited tax obligation (resident) in Poland receives a win from such an entity, which is not exempt from taxation under Article 21(1)(68) u.p.d.o.f.

(relatively, the benefit obtained in the competition is not exempt from taxation on the basis of Article 21(1)(68a) (u.p.d.o.f.), it is on such a subject the duties of the payer, i.e. the calculation and collection of the tax from the taxable person and its payment in due time to the tax authority. (...).

1. 3.2. Situation where the taxpayer is obliged to pay the amount of flat-rate income tax

In turn, as it states Article 41(7) (i.e. the winner of a contest or game) is obliged to pay the payer the amount of flat-rate income tax due before the win is made available. (...).

1. 3.3. Situation where the taxpayer (a winner of the contest) is non-resident and holds a residence certificate

If the taxpayer is nonresident and holds a residence certificate, the payer shall apply the tax rate resulting from the relevant double taxation agreement or shall not collect the tax in accordance with the contract.

When verifying the conditions of application of a reduced rate of tax or exemption from taxation or non-collection under tax law, the payer shall be obliged to exercise due diligence. The evaluation of due diligence shall take into account the nature and scale of the payer's activities.

If the nonresident does not hold a residence certificate, the payer shall apply the rules resulting from the Article 30(1)(2) u.p.d.o.f. (as for the resident).

If the amount of flat-rate income tax is collected by the payer (whether resident or non-resident) he is obliged, within the time limit 20.

on the day of the month following the month in which the tax was collected, transfer the amount of flat income tax to the account of the tax office by which the head of the tax office competent according to the place of residence of the payer performs his tasks and where the payer is not a natural person, according to the place of establishment or place of business where the payer is not established (Article 42(1) u.p.d.o.f.)....

The resident or non-resident does not combine this type of income with other income taxed on a tax scale (cf. Article 9(1a) u.p.d.o.f.

in conjunction with Article 27(1) U.p.d.o.f.) Consequently, he does not have to give any testimony on the amount of income earned (loss incurred) for a given tax year in Poland or to show in such a statement such income (income) if for a given tax year he is obliged to pay it. (...).

1. 3.4. Situation where the competition is organised by an external entity (agency)

Where an external entity (agency), on the order of the taxpayer, organises and implements and assumes the obligations associated also with the acquisition of prizes on its own behalf and then forwards these awards to the participants of the competition, the tax authorities shall take the view that the taxpayer is the payer[13].

In turn, the case law of the administrative courts goes in a completely different direction, indicating that in similar situations the agency is the payer[14]. However, given the nature of the study, for the purposes of the instructions, it was accepted that the competition or the game was organised by the taxpayer.

1. 3.5. Situation where the contest is won by a natural person who conducts business

Finally, it is worth pointing out that in the case of natural persons who conduct non-agricultural business and are transferred to them winnings for participation in a competition or game, they have so far developed two diverging positions of tax authorities and administrative courts.

The tax authorities’ individual interpretations show that the payers who transfer the winnings in competitions or games are not required to collect a flat-rate 10% income tax and reporting obligations referred to above[15].

Administrative courts, on the other hand, argue that it does not matter that the recipient of the win is a natural person conducting non-agricultural business[16].

An interesting point of these two mutually exclusive interpretation of the same provision is the NSA ruling from 17 April 2018 17 , in which the ruling found that the winnings in the competition were revenue from non-agricultural business activities and therefore the provisions on the payer could not apply in such cases.

According to the author, a similar dispute may also arise on the ground Article 21(1)(68a) u.p.d.o.f. Nevertheless, given the nature of the study and for the purposes of the instructions, it was accepted that the beneficiaries of the winnings in competitions or games are only those who do not conduct non-agricultural business. (...).

2. Model of tax instructions for winning contests

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2 reference no. 0113-KDIPT2-3.4011.497.2018.1.SJ, Legalis.

3 reference no. II FSK 1695/14, Legalis.

4 Cf. NSA judgment of 8 October 2019, reference no. II FSK 3562/17, Legalis.

6 reference no. 0113-KDIPT2-3.4011.88.2019.1.RR, Legalis.

8 see Dictionary of Polish Language, M. Szymczak (ed.), Warsaw 1989, t. III, p. 155.

9 reference no. ITPB2/415-414/11/IB, Legalis.

10 reference no. II FSK 414/13, Legalis.

11 see e.g. NSA judgment with 4 February 2016, reference no. II FSK 3140/13, Legalis.

12 see final judgment of the WSA in Łódź with 12 July 2012, reference no. I SA/Łed 646/12, Legalis.

13 This is confirmed by the individual interpretation of the Director of KIS from 24 April 2018, reference no. 0113-KDIPT2-3.4011.115.2018.1.SJ, Legalis.

14 see the final judgment of the WSA in Poznań with 21 December 2017, reference no. I SA/Po 853/17, Legalis.

15 So stated the Director of KIS in an individual interpretation of 28 November 2017, reference no. 0115-KDIT2-2.4011.317.2017.1.RS, Legalis.

16 see NSA judgment of 1 December 2015, reference no. II FSK 2075/13, Legalis.

17 reference no. II FSK 989/16, Legalis.

Legal basis

Article 9(1a), Article 21(1)(68)(68a), Article 27(1), Article 30(1)(2)(3)(9), Article 38(1b), Article 41(4)(4aa)(7), Article 42(1)(1a)(2)(2)(3)(4)(6) u.p.d.o.f.

The article contains extensive fragments of the author's publication from the book Publishing House C.H. Beck "Accounty and Tax Instructions" under the ed. prof. adj. dr. hab. Artur Hołda, plus CD, du. 2, 2020, https://www.ksiegarnia.beck.pl/19340-instrukcje-ksiegowe-i-podatkowe-artur-holda