Financing during the pandemic of the coronavirus of staff salaries from FGSIP funds in the context of tax exemption

Entrepreneurs using the support provided by the Act 2 March 2020 specific prevention, prevention and eradication solutions COVID-19, other infectious diseases and the resulting crises[1] (Next: uCOVID-19) they shall, inter alia, receive funds from the Guaranteed Workers' Benefits Fund (hereinafter: FGS) to protect jobs.

This aid is granted, in view of the decline in economic turnover in relation to periods prior to the pandemic, both to taxable persons who are exclusively taxed and to those who carry on activities exempt from the tax in accordance with the provisions of the Act of 15 February 1992 on corporate income tax[2] (Next: the Corporate Income Tax Act).

In the case of a company operating in a special economic zone (hereinafter the SEZ), is the co-financing of employees' salaries from FGSI funds a revenue from exempt activities?

1. Introduction

According to Article 17(1)(34) the Corporate Income Tax Act tax-free income from economic activities carried out in SEZs on the basis of a permit[3], Whereas the amount of public aid granted in the form of this exemption must not exceed the amount of State aid to the entrepreneur allowed for areas eligible for aid to the greatest extent, in accordance with separate provisions.

On 24 February 2021 Director of National Tax Information issued an individual interpretation[4], the applicant was sp. z o.o., which is part of an international capital group and operates in the SEZ on the basis of two permits.

Company, using the support provided by the regulations uCOVID-19, received funding from the FGS to fund the wages of workers with reduced working time[5], and staff not included in the downtime defined Article 81 Act on 26 June 1974 - Labour Code[6] or economic downtime, or reduced working time[7].

The employees concerned by the above-mentioned support carry out tasks in the SEZ.

The applicant asked the tax authority whether the funds received from the FGS on the basis of Article 15g and Article 15gg, as remuneration subsidies constitute revenue from exempt activities in accordance with Article 17(1)(34) the Corporate Income Tax Act?

2. Revenue and revenue from activities in the Special Economic Zone

In the company’s assessment, the answer to this question should be yes.

The applicant recalled that Article 17(4) the Corporate Income Tax Act provides that the tax exemptions in question Under section 1 points 34 and 34a that law, is entitled to the taxable person solely for the income obtained from the business activity in the zone or area specified in the support decision, but it can also be concluded that all categories of income from which the income was the result of the activity specified in the zone permit.

He also cited the Supreme Administrative Court's ruling from 9 January 2020[8], in which he stated that Article 17(1)(34) the Corporate Income Tax Act it does not talk about revenue from the sale of goods and services, but about ‘the income obtained from the business activity carried out in the SEZ on the basis of a permit’, which is a broader phrase.

The company also argued that the financing of FGSP, as specified here under Article 15g and Article 15gg uCOVID-19 is, indeed, the nature of incidental income due to a random occurrence, but also directly linked to its core economic activity, as it concerns financial assistance to workers employed in carrying out the tasks indicated in the permits, in the context of zone activities.

According to the applicant, the cash from the FGS is therefore the income from that activity which generates income benefiting from the tax exemption according to Article 17(1)(34) the Corporate Income Tax Act (taking into account the limit of public aid).

The company also pointed out that the cost of remuneration of employees is the cost of its business, from which income is exempt from corporation tax.

According to the applicant, if they did not benefit from the tax exemption, they would ‘be a tax return for the taxpayer, while the remuneration paid to the employees covered by the subsidy would not reduce the tax base as costs related to the activity from which the income is exempt.

This would directly affect the diversity of the situation of taxable persons engaged exclusively in taxed activities, for which the co-financing received would be neutral from a tax perspective from exempt taxable persons.’

3. Non-taxed business income only

The tax authority considered the position of the company to be incorrect and pointed out that in this situation the public aid to the entrepreneur was not paid a tax calculated by him on income obtained exclusively from activities carried out in the SEZ under the permit, and the provisions (Article 17(1)(34) the Corporate Income Tax Act and Article 12(1) u.s.s.e.) at the same time set limits on the use of this assistance.

Therefore, these regulations “are binding the right to an exemption with a permit to operate in the SEZ and to respect the conditions laid down in that permit, meaning that the tax exemption in question under Article 17(1)(34) the Corporate Income Tax Act only income from activities within the zone shall be subject to the authorisation obtained.

If an economic activity is not mentioned in the authorisation, the income obtained from it shall not benefit from the tax exemption.’

The Director of KIS in his interpretation conclusions indicated that, in principle, the support of entrepreneurs in the form of remuneration and contributions of the Social Security Office would constitute taxable income from their business activities and that the expenditure financed by the amount of the grant could be the cost of obtaining income if they meet the conditions set out in the under Article 15(1) the Corporate Income Tax Act „On the other hand, where the remuneration of employees and the social security contributions due from them in the part in which they were co-financed were not included in the tax costs, the subsidy of these costs does not constitute tax revenue either (Article 12(4)(6a) the Corporate Income Tax Act).

According to this provision, the revenue does not include other expenditure not included in the cost of obtaining revenue (...), which has been covered from a different source than the income generated from the economic activity carried out in the SEZ.

Consequently, employee remuneration subsidies do not constitute revenue from exempt activities on the basis of Article 17(1)(34) the Corporate Income Tax Act 9.

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1 Act of 2 March 2020 specific prevention, prevention and eradication solutions COVID-19, other infectious diseases and their emergency situations, Journal of Laws of 2020, items 374, 567. 2 Act of 15 February 1992 corporate income tax, i.e. Journal of Laws of 2020, item 1406.

3 referred to under Article 16(1) Act on 20 October 1994 special economic zones, i.e. Journal of Laws of 2020, item 1670, Further: u.s.s.e. 4 reference no. 0111-KDIB1-3.4010.608.2020.1.MBD.

5 under Article 15g(1) uCOVID-19 the workers are identified as under economic downtime or reduced working time following the occurrence of coronavirus. 6 Act of 26 June 1974 - The Labour Code, i.e. Journal of Laws of 2020, item 1320.

7 Article 15gg uCOVID-19, where the entity receiving such co-financing cannot terminate the employment contract for reasons not affecting the employee during the period of collection of benefits for the co-financing of remuneration. 8 reference no. II FSK 312/18.

9 The Director of KIS referred here to the Minister of Finance's reply to a parliamentary inquiry from 3 July 2020, No PG7.054.2.2020, In which he stated that: (...) co-financing for staff salaries cannot be considered as income from zone activities, as this is not a eligible cost for ‘zone’ aid.