It is a common practice of taxpayers to take over the debts of contractors when purchasing real estate, leasing or other contracts standard for business transactions. Such a debt takeover may have a positive impact on, for example, the price or terms of concluded contracts. However, what if the taxpayer decides to repay all or even part of someone else’s debt? Is it then possible to include the expense in question as tax-deductible costs?
On one hand, as we know, in accordance with Art. 15 sec. 1 of the Polish CIT Act, tax-deductible costs are costs incurred in order to generate income or maintain or secure a source of income, with the exception of the costs listed in Art. 16 sec. 1 of this Act.
In practice, this means that for the expenditure incurred by the taxpayer to be tax-deductible, the following conditions must be met:
- incurring by the taxpayer;
- finality, i.e. non-returnability;
- remaining in connection with the taxpayer’s business activity;
- incurring in order to obtain revenues or to maintain or secure a source of revenues;
- not being included in the catalog mentioned in art. 16 sec. 1 of this Act;
- proper documentation.
In the context of the possibility of recognizing (or not) an expense to repay someone else’s debt as a tax-deductible cost, Art. 16 sec. 1 point 10 letter b) of the Polish CIT Act should be taken into account. It indicates that expenses for the repayment of other liabilities, including guarantees and sureties, are not considered as tax-deductible costs.
The tax authorities and the jurisprudence emphasize that the expenses defined in this provision are not a closed catalog – thus they are exemplary. In connection with the above, not only the liabilities under guarantees and sureties cannot be recognized as tax deductible costs, but also the repayment of other liabilities.
This was also stated by the Director of the National Tax Information in the individual interpretation of June 25, 2021 (no. 0111-KDIB1-1.4010.149.1.2021.ŚS), who indicated: “(…) it is reasonable to assume that the disposition of this provision also covers those liabilities, the obligation of which, as a rule, rests with the law on an entity other than the taxpayer. This is evidenced by the phrase >>repayment of other liabilities<< used by the legislator and by emphasizing that this category also includes repayment of debts arising from sureties and guarantees, i.e. institutions that by their nature constitute security for someone else’s liability and from which the obligation to pay the liability of a third party arises. Therefore, repayment of debts for the debtor should also be included in this group.”
A similar conclusion was adopted by the Director of the National Tax Information in an individual interpretation of September 6, 2018 (No. IPPB3/4510-823/15-5/S/18/DP/MS): “…the amounts spent by the Applicant to repay the mortgages on the farm owned by him on the basis of a notarial deed confirming its purchase constitute a liability for which the Applicant is materially liable as a mortgage debtor. Responsibility for this liability was acquired together with the ownership of the property. (…) Bearing in mind the fact that the Applicant assumed responsibility for someone else’s debt along with the acquisition of ownership of the real estate, the mortgage liabilities should be considered as liabilities of a similar nature to those indicated in Art. 16 sec. 1 point 10 lit. b an increase in liabilities under sureties and guarantees. (…) an entity repaying liabilities under loans taken out in its own name and for its own benefit – in accordance with Art. 16 sec. 1 point 10 lit. and the first indent – is obliged to exclude the amount of the loan (credit) capital from tax deductible costs.”
At the same time, administrative courts also seem to share the above view, as evidenced by the position adopted in the judgment of the District Administrative Court in Poznan of 20th September 2016 (file reference number I SA/Po 208/16) or in the judgment of the District Administrative Court in Warsaw of 12th September 2018 (file reference number III SA/Wa 3689/17).
Considering the above, in accordance with the approach of the tax authorities, expenses for repayment of the “original” debt are tax non-deductible costs. Thus, according to this approach, taxpayers, as a rule, do not have the possibility to deduct from their income expenses for repayment of someone else’s (often taken over) liability, even if they are able to justify it.
On the other hand, such an approach seems to ignore the rationality of taxpayers’ actions, as incurring such expenses is most often justified in terms of business and is associated with obtaining income. For example, the buyer wants to “clear” the mortgage of the purchased property in order to run its business without any obstacles, including obtaining financing. It is worth mentioning here the judgment of the Supreme Administrative Court of 27th June 2013 (file reference number II FSK 2192/11) in which it was indicated that it is important to consider the logical sequence of events determining the specific and specific actions of the taxpayer. Therefore, it is necessary to assess the rationality of a specific action to achieve income, bearing in mind that in the process of economic activities, the entrepreneur strives not only to maximize income, but also to minimize losses.
In practice, however, we should wait for a change in the approach of the tax authorities or “groundbreaking” rulings of administrative courts that would translate into a wider practice. This means that currently, when planning such a transaction, the settlement rules should be planned very carefully so as not to bear the economic burden of undeducted costs.