On January 1, 2018 the Parliament introduced Article 15e of the Polish Corporate Income Tax Act (“CIT Act”), which imposes limits on tax-deductible expenses incurred by Polish taxpayers on certain intangible rights and services for the benefit of related parties. Although they have been effective for over 18 months, introduced provisions continue to cause much controversy. This is triggered by both the lack of precision in the new provisions and the lack of clarity in their practical application that is based largely on pro-fiscal policy.
The fact that nearly 900 individual tax rulings have already been issued on the application of the Article 15e of the CIT Act, combined with a number of cases pending before administrative courts, shows how serious the problem is. The official guidelines issued on April 23, 2018 by the Minister of Finance are of little help. The following article looks at the most important current trends in disputes between the taxpayers and the tax authorities over the application of the Article 15e of the CIT Act.
One of the most frequent methods used by the Director of the Polish National Tax Information ("DNTI") when assessing whether particular expenses may be regarded as tax-deductible under the Article 15e of the CIT Act is to request applicants to specify PCGS codes for the services covered by taxpayers' enquiries made to DNTI. Such practice of the tax authorities should be assessed negatively. Requiring the purchaser of highly specialised and often comprehensive services from its group companies to specify PCGS code for service is, in fact, requiring it to do something that the purchaser is not statutorily required to do. In case of certain services, e.g. IT services, comprising various individual services, determining the PCGS code may be impossible, or the risk of a mistake (made by the taxpayer, of course) in the classification is very high. It may be the case that when taxpayer determines code of service, which is required in an application for an individual tax ruling, then even if the determination is approved by the tax authorities, the taxpayer cannot be sure that it will be protected by the tax ruling. It may also be the case that the taxpayer will not be able to rely on the tax ruling based on the PCGS codes determined by itself, as the tax ruling may only partially confirm the taxpayer's determination, and the invoices it receives from its related parties might be issued for the full service, instead of being divided into "sub-services".
One of the biggest points of controversy is the determination of certain IT services as cost limited services under the Article 15e of the CIT Act based on the PCGS classification. For example, taxpayer obtained tax ruling (dated 10 May 10, 2019, no. 0111-KDIB1-3.4010.40.2019.4.BM), where, when requested by DNTI, the taxpayer classified IT network management services as network management services (PCGS code 62.03.11.00). As result, the tax authorities determined that such services were advisory services or management services. This practice leads to ridiculous situations, as the substance or nature of the service concerned no longer matters, and the tax-deductibility of the service is limited only because it is classified as falling within the scope of "management services” or “advisory services", which are listed within cost limited services.
There is also disagreement over the tax authorities' view that sales agency (intermediary) services fall within advertising, advisory or similar services, which are subject to cost deductibility restrictions (tax ruling dated June 17, 2019, no. 0111-KDIB2-1.4010.136.2019.2.AR). In the tax authorities' classification of such expenses, which in many cases are crucial for certain distribution models (e.g. selling through network of foreign sales agents), it is surprising to note that DNTI does not understand that it is necessary to incur such agency expenses to be able to earn profits in such business models. Interestingly, if sales revenues are result of activities based on rights granted under licence, the tax authorities are virtually unanimous in accepting the fact that the licence fees incurred by the taxpayer are directly linked with the taxpayer's activities, with the exclusion of the limitations provided for in the Article 15e (under section 11 of such an Article). However, the tax authorities do not accept this exclusion in the case of agency (intermediary) services (tax ruling dated May 30, 2019, no. 0114-KDIP2 3.4010.97.2018.1.PS, repealed by the Judgement of the District Administrative Court in Warsaw of May 23, 2019, ref. no. III SA/Wa 1888/18). Equally, there can be no approval for DNTI’ fairly common practice of ignoring the view established by case law regarding withholding tax cases as regards intangible services, or case law regarding the context of "similar services" (i.e. “services similar to eligible services”).
As the Article 15e of the CIT Act has been effective for over eighteen months and, in many tax rulings, the tax authorities have disagreed with taxpayers, numerous court cases dealing with these provisions have been issued.
Amongst cases considered by the administrative courts regarding certain types of expenses on group services, it is worth referring to few judgements concerning expenses which are quite frequently incurred by entities operating within groups of companies with centralised model of intra-group services.
For example, in relation to IT services, District Administrative Court in Poznań repealed the tax authority's ruling and noted that the use of words such as “management” or “administration” in the name of service may not be decisive in classifying the service as one of the services listed in the Article 15e of the CIT Act (Judgement of the District Administrative Court in Poznań of March 13, 2019, ref. no. I SA/Po 991/181).
There are also judgements which relate to purchasing (procurement) support services. However, there is no agreement among courts on this subject. Some of the judgments take the side of taxpayers by finding that such services are not subject to taxdeductibility restrictions (Judgement of the District Administrative Court in Poznań of February 6, 2019, ref. no. I SA/Po 900/18). However, there are also judgements which take an opposite side (Judgement of the District Administrative Court in Gliwice of April 10, 2019, ref. no. I SA/Gl 24/19).
There is no agreement among courts in the case of sales agency (intermediation) services (Judgement of the District Administrative Court in Kraków of November 14, 2018, ref. no. I SA/Kr 1006/18), favourable to taxpayers; versus Judgement of the District Administrative Court in Gliwice of July 4, 2019, ref. no. I SA/Gl 579/19). Another interesting case law refers to special economic zones and the calculation of expense limits. In these cases, courts have held that the application of Article 7 section 3 subsection 1 of the CIT Act (which provides that tax-free revenue is not included in income calculation) means that when calculating costs for the purposes of Article 15e of the CIT Act, expenses on intangible services incurred as part of (assigned to) business activities carried out in special economic zones are not included (Judgement of the District Administrative Court in Wrocław of July 16, 2019, ref. no. I SA/Wr 356/19; Judgement of the District Administrative Court in Gdańsk of May 8, 2019, ref. no. I SA/Gd 439/19; Judgement of the District Administrative Court Gorzów Wielkopolski of January 16, 2019, ref. no. I SA/Go 521/18).
As practice shows the application of the provisions that limit tax-deductibility of expenses incurred on services purchased from related parties raises many questions and carries the risk of questioning taxpayers' settlements by the tax authorities. Such situation is not helped by DNTI's tax rulings, mostly following pro-fiscal policy and those based on non-exhaustive list of services subject to tax-deductibility limitations, which leads to long-lasting court cases. Moreover, there are not any judgements of the Supreme Administrative Court, which adds the discomfort for the taxpayers faced with two options: to continue struggling to prove they are correct or to follow “safe” strategy consisting in tax payment and subsequently claiming it back. It is important to note at this point that the only certain method for the taxpayers to secure their jeopardised expenses is the APA procedure. However, bearing in mind the draft law on the resolution of double taxation disputes and on advance pricing agreements addressed on August 29, 2019 to parliament’s first reading, which also proposes changes to the CIT Act, in order to secure cost deductibility for 2018, the APA applications should be filed with the Head of the National Tax Administration by the end of 2019. It should be noted that the latest version of the draft law contains no provisions on simplified pricing agreements, therefore it is not very likely that such agreements will come into force in the nearest future.
1 This and the other judgments referred to in this article were not final at the time of writing.
Tomasz Lewicki, Senior Manager in the International Tax Team at KPMG in Poland
Przemysław Sołtysiak, Senior Consultant in the International Tax Team at KPMG in Poland
© 2019 KPMG Sp. z o.o. jest polską spółką z ograniczoną odpowiedzialnością i członkiem sieci KPMG składającej się z niezależnych spółek członkowskich stowarzyszonych z KPMG International Cooperative (“KPMG International”), podmiotem prawa szwajcarskiego. Wszelkie prawa zastrzeżone.