2020 brought two major rulings in personal income tax-related matters. The importance of the rulings stems from the fact that the issues to which they pertain have long been object of non-uniform approach of tax authorities.
2020 brought two major rulings in personal income tax-related matters, namely:
- employee's flat-rate revenue from using a company car for private purposes (case file DD3.8201.1.2020); and
- applying 50% tax-deductible costs to revenues from royalties (case file DD3.8201.1.2018).
The importance of the rulings stems from the fact that the issues to which they pertain have long been object of non-uniform approach of tax authorities.
This article present the primary statements of the two rulings which are of particular importance to PIT payers and remitters.
Employee's flat-rate revenue from using a company car for private purposes
The main challenge related to the flat-rate approach to employees' revenue from the use of a company car for private purposes lied in determining whether the flat-rate income within the meaning of the Polish PIT Act covered fringe benefits associated with the use of a company vehicle (such as fuel cards or servicing costs). In fact, an important number of individual rulings issued by the Head of the National Revenue Administration Information Center challenged inclusion of the fuel costs covered by the employer into the employee's flat-rate revenue.
This issue was eventually resolved by the Minister of Finance. In his general ruling, the Minister stated that the costs related to maintenance and general use of a vehicle, borne by the employer who makes the vehicle available to the employee for their private use, shall be classified as flat-rate income referred to in Article 12(2a) of the PIT Act.
The Minister of Finance pointed out that the goal of regulating the issue of car fringe benefits through the PIT Act was to facilitate the method of calculating the amount of the related revenue.
Interpretation of the provisions which would give rise to the need of further calculation of the amount of revenue from the fuel used for private purposes etc. would be contrary to the intention of the legislator, who sought to simplify the revenue calculation method. The Minister of Finance supported the uniform stance displayed by administrative courts in their judgments, according to which the flat-rate value of the car fringe benefit covers the employer's costs related to the maintenance and general use of the vehicle, such as: fuel, insurance, tire replacement, current repairs or periodic inspections, which the employer, as the vehicle's owner, must incur to ensure that the car is operational and authorized to participate in road traffic.
It should be emphasized, however, that under the general ruling some additional charges, such as parking fees or highway tolls shall not be treated as benefit-derived amounts covered by the flat-rate revenue. In fact, the Minister of Finance stressed that the Act refers solely to benefits relating to the use of a company vehicle, which in principle do not cover any derivative costs of travel by car.
Applying 50% tax-deductible costs to revenues from royalties
The second ruling provides conditions which shall be met in order to apply 50% tax-deductible costs to revenue earned on account of exercising and disposing of copyright or related rights under an employment contract or other civil law contract.
In principle, the ruling is in favor of taxpayers, as the presented principles seem to be aimed at facilitating the use of the solution.
Pursuant to the general ruling issued by the Minister of Finance, in order to qualify the remuneration as royalty subject to 50% tax-deductible costs, the following conditions must be met:
- creation of a work being the subject of copyright, conditioning the use of copyright by the author and enabling the disposal of proprietary copyright to the work;
- providing objective evidence that a work protected by copyright was created;
- making clear distinction between the royalty and other components of the remuneration, except for a situation where 50% tax-deductible costs can be applied to the entire remuneration of the author.
Furthermore, it must be noted that the Minister's ruling does not provide for the principles of determining the amount of the royalty due, as it remains within the contractual freedom of the parties.
Additionally, pursuant to the ruling, the royalty for a given work may be paid out before the work is created (e.g. in the course of its creation).
The ruling sorted out some controversies that have arisen over the years. Importantly, it was stated that:
- in order to apply 50% tax-deductible costs, copyrights must be transferred to the employer (it often happens that in the employee-employer relationship the copyright is automatically vested in the employer, hence, the issue of copyright must be properly regulated by contract in advance);
- it is not sufficient to provide a joint declaration of the employer (or a different entity) and the employee (a party to a civil law contract) stating that creative activity has been performed, unless it specifies the kind of work created or being under creation (i.e. it is necessary to link the royalty with the act of work creation);
- it is insufficient to specify in the employment contract the percentage of time dedicated to creative activity or to establish it on the basis of the work time records, because such a distinction does not indicate whether any work was actually created or was under creation (i.e. also in this case it is necessary to link the royalty with the act of work creation);.
- the parties to the contract may adopt any rules for determining the royalty. The contract may explicitly indicate the amount of the royalty due or provide for the principle of determining the royalty as a percentage of the total amount of remuneration, however, the royalty must remain in connection with a specific work (or works defined by type). Therefore, determination of the author's fee may also rely on the time spent by an employee-author on creation (or the process of creation) of a work (e.g. via timesheets), along with relevant documentation containing records of particular works.
The activities of the Minister of Finance should be assessed positively. The general rulings presented herein are to provide for unification of the tax authorities' approach and increase the trust put in them by the public. It should be kept in mind, however, that there are still many points of dispute related to PIT that should also be dealt with by way of general rulings. We all hope that this form of dispelling the doubts of remitters, taxpayers and tax experts will be increasingly used by the Minister of Finance.
Author: Leszek Marciniak, Manager, Tax, Global Mobility Services, KPMG in Poland