The cost of amicable termination of the employment contract is a tax cost, and the advisory costs of purchasing shares may be settled within the so-called “operating” costs – these two noteworthy rulings were made on 14th February in the Supreme Administrative Court.
Costs of termination of the employment contract (file ref. number II FSK 1697/20)
The company was engaged in the production of clothing. As part of this activity, it concluded an employment contract with an employee. As a result of organizational changes, it was necessary to terminate the employment contract. The employee enjoyed special protection against termination of the employment contract, therefore the company entered into negotiations with him in order to conclude an agreement on termination of the employment contract.
Such an agreement has been concluded. The employee received compensation – in connection with the termination of cooperation with the company and for the satisfaction of all claims. The employee could count on the basic salary for at least 47 months. Meanwhile, the parties agreed on compensation in the amount corresponding to the value of remuneration for approximately 30 months of employment.
The company asked the question whether this expenditure may constitute a tax deductible cost in CIT.
According to the company, the answer should be positive.
The tax authority considered such a position to be incorrect, pointing out in particular that the compensation paid to the former employee does not meet the requirement of connection with income, the occurrence of which is necessary to recognize the expense as a tax deductible cost.
This position was challenged by the District Administrative Court in Warsaw, which overturned the challenged interpretation.
The court of first instance referred to the jurisprudence of the Supreme Administrative Court (in particular, the resolution of 25th June 2012, file reference number II FPS 2/12) from which it concluded that the analyzed costs are CIT tax costs. In particular, the District Administrative Court found that the company’s actions served to reduce the globally recognized costs and expenses and was economically justified, rational and purposeful.
The authority filed a cassation appeal against this judgment, but the Supreme Administrative Court did overruled it.
The Supreme Administrative Court agreed in full with the opinion of the District Administrative Court. The court of second instance indicated that the authority itself admitted that the analyzed expenditure was intentional. In the opinion of the Supreme Administrative Court, the connection with revenues occurs here by reducing the company’s costs. The DAC rightly referred to the above-mentioned resolution of the Supreme Administrative Court, although the subject of dispute there were fees related to the lease agreement, and here it is about termination of the employment contract. It is not without significance here that the payment to the employee is made in accordance with the provisions of the labor law and is not of a sanctioning nature.
Expansion costs (file ref. number II FSK 1969/20)
The case concerned a number of costs, referred to by the company as “expansion costs” – related to broadly understood consulting, due diligence, translations, business trips, notarial fees, etc.
The applicant incurred these costs in connection with the purchase of shares in a Spanish company – although they were not directly related to their purchase (as opposed to, for example, the price). The company indicated that its interest in taking over the Spanish company resulted from the desire to expand and develop (gaining access to new sales markets, or taking control over the portfolio of industrial property rights). In addition, the company would gain a potential customer for paid support services provided to companies from the group. The company also declared that the acquisition of the Spanish company was not carried out with the intention of further resale of the acquired shares, but in order to expand its operations and ultimately increase revenues from its core business.
The company asked the question whether the indicated expansion costs should be allocated by the company to operating income, i.e. to income from sources other than capital gains?
According to the company, the answer should be positive.
The tax authority considered such a position to be incorrect, indicating in particular that these costs should be accounted for as tax deductible costs from capital gains.
This position was upheld by the District Administrative Court in Warsaw, which dismissed the complaint.
The court of first instance agreed with the authority’s arguments, emphasizing that they are related to the purchase of shares, although this relationship is indirect.
The company filed a cassation appeal against this judgment, and the Supreme Administrative Court upheld it, repealing the judgment of the District Administrative Court and the impugned interpretation.
The Supreme Administrative Court emphasized at the outset that doubts in such cases result from the introduction of two sources of revenue in 2018. Further, the Court of the second instance emphasized that there is no dispute as to the fact that the analyzed costs are tax costs and, at the same time, are not costs directly related to the acquisition of shares (Article 16 sec. 1 point 8 of the CIT Act).
As regards the merits, the Supreme Administrative Court decided that these costs should be allocated to the “operational” source. The company emphasized that the purpose of the purchase of shares is economic, i.e. the possibility of selling products on new markets, or gaining access to broadly understood “know how”. The court of the second instance also referred to two judgments of the Supreme Administrative Court (reference number II FSK 37/19 and II FSK 1695/20) emphasizing that he agrees with the views contained therein.
Finally, it was indicated that there may be situations in which the costs will relate to both sources of revenue and it will not be possible to separate them precisely – then they should be allocated proportionally.