Costs of obtaining revenue in the case of property management

Invariably, for many years the subject of tax rulings and the analysis of the position of case law and doctrine is the question of the attribution of expenses incurred by companies to revenue costs. According to Article 15(1) Act on 15 February 1992 on corporate income tax 1 (hereinafter: (u) Article 16(1) This bill.

In practice, it is often the case that expenditure between the company and the service provider in the case of property management services is so defined.

In such situations, where specific contracts concluded by both parties are implemented, it is useful for taxpayers to know the criteria for recognising expenditure as the costs of obtaining revenue which the tax authorities draw attention to and, in their judgments, administrative courts.

1. Introduction

On 1 December 2020 The Director of National Tax Information issued a tax ruling on whether the applicant is entitled to credit the remuneration paid for the success to the cost of obtaining revenue 2 . The applicant was sp. z o.o., an active VAT taxable person, renting the property area to other companies for storage purposes. The purpose of her investment was to build a warehouse with infrastructure. It included 2015 with its counterparty, sp. z o.o. (also an active VAT taxable person) three Management contracts:

• 1) real estate,
• 2) assets and
• 3) concerning real estate development.

first of them concerned, inter alia, financial services, invoices, collection of rent fees, assistance in collecting receivables, keeping records, second – sales strategy, strategic decision-making, annual business plan, supervision of real estate investments, and third – management and coordination of development work (real estate construction) carried out by other entities, supervising the general work of the contractor.

2. Service premium – additional remuneration for the service provider

In addition, the same 2015 – except third the above-mentioned agreements have been concluded fourth, the so-called success remuneration agreement between the applicant (Polish limited liability company.), the service provider associated with the company entity S. (all shares in the company) and entity P.

– the guarantor for the obligations of the service provider.

This agreement, as the author of the request for interpretation provided, described the detailed manner of financial settlement between the company and the service provider, and the remuneration was an additional premium, dependent on the company's performance, for services provided to the applicant under management contracts.

Its amount depended on the value of the cash in the Waterfall Funds.

According to the above-mentioned agreement, the contractor acquired the right to an additional remuneration if all or a substantial part of the property were sold to the person third at market conditions (by selling assets as well as the company’s shares or one from its subsidiaries) or until the company has voluntarily ceased its business activity.

Since the company sold all its shares to E., which was not a party to any of the four The contracts discussed here, the applicant was obliged to pay the service provider a remuneration for success, which also happened.

The applicant asked the body issuing the interpretation to ask whether the company has the right to charge this remuneration to the cost of obtaining revenue?

3. Criteria for recognising expenditure as revenue costs

In the applicant’s assessment, the answer to the above question should be yes. The company argued, citing the case law, doctrine and explanations of tax authorities[3], that the expenditure will be regarded as the cost of obtaining income if: it was actually borne by the taxpayer (covered by his assets); it was definitive; it remains in connection with his business; it was incurred in order to obtain income, or to preserve or secure the source of income; it was properly documented; it is not excluded according to Article 16(1) u.p.d.o.p.

As regards the definitiveity of the expenditure, which was the remuneration for the success, the applicant pointed out that the expenditure relating to this premium had been borne by the company and would not be reimbursed by the service provider or by any other entity, and that the financing of this remuneration was not a loan paid by E, as that loan was ‘an undertaking that would ultimately be repaid from the company’s assets.

The applicant cited here, among other things, the position of doctrine according to which “credit financing cannot be regarded as payment by persons third, but by the taxable person himself’ 4 and to the case-law that ‘only expenditure of a definitive nature which is not recoverable may be regarded as revenue-making costs’ 5 .

The successful remuneration was paid by the company on the basis of the VAT invoice issued by the service provider at the rate 23%, and the transfer came from the applicant's bank account. The expenditure has therefore been properly documented.

The applicant also argued that the company’s objective, in connection with the acquisition of the services listed in the management contracts (based on these contracts, was to build up the storage space) was to increase its business income, inter alia due to higher rental revenues and to increase the value of the property.

He also pointed out that ensuring high efficiency in the service provider's activities was just an additional incentive to pay for success.

He also appealed to the NSA judgment of 16 October 2012 6 , In which he pointed out that: ‘Not every expenditure incurred by a taxable person in connection with its business is deductible from the tax base, but only one which remains in a causal relationship.

(...) The cost-effective qualification of a specific expenditure with a particular taxpayer must therefore take into account the nature and profile of the economic activity carried out.’

Management services have contributed to maximising the profits of the company from the rental of real estate, and the expenditure on additional remuneration for the service provider was directly linked to its business activity and cannot be considered excluded from the cost of obtaining revenue according to Article 16(1) u.p.d

In its tax ruling, the Director of KIS considered the applicant’s position on the right to credit the additional remuneration paid for the costs of obtaining revenue to be correct.

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1 T.J. Journal of Laws of 2020, item 1406 as amended 2 Ref. No 0111-KDIB1-2.4010.427.2020.2.AW. 3 Among other things, the NSA judgment 11 March 2020, reference no. III FSK 829/18, the interpretation of the Director of KIS from 7 November 2017, No. 0111-KDIB2-1.4010.218.2017.1.BKD. 4 M. Pogoński, Corporate Income Tax Act. Comment. LexisNexis, 2014. 5 Thus NSA judgments: with 20 March 1996, reference no. SA/Ka 332/95 and 10 September 2019, reference no. II FSK 839/18. 6 reference no. II FSK 430/11.