Non-Deductible Expenses Under Article 15e of the CIT Act after Changes Introduced by the Polish Deal

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Piotr WYRWA
Tax Manager at RSM Poland

Wawrzyniec ŻBIKOWSKI
Junior Tax Consultant at RSM Poland

Article 15e, in force until the end of 2021, limited the taxpayer’s right to treat expenses on intangible services purchased from related parties as tax-deductible costs. This provision caused many concerns, and it seems that they continue despite the fact that the said provision has been repealed…

Under the Polish Deal provisions, you can now deduct expenses that used to be non-deductible in previous years under Article 15e. However, these provisions fail to specify whether – and possibly how – to apply the existing deduction threshold. The most reasonable way out here seems to be an advance tax ruling.

Regulations in force and the Polish Deal

As a reminder: under Article 15e, taxpayers could not deduct any expenses on intangible services purchased from related parties.

This limitation applied to the excess of such costs over the threshold of PLN 3 million + 5% EBITDA. At the same time, pursuant to Article 15e par. 9, the amount of costs that have not been deducted in a given year could be accounted for in the following 5 years in accordance with the rules and principles specified in Article 15e and within the thresholds in force in a given year as defined in these regulations.

After the Polish Deal entered into force, Article 15e was repealed in its entirety.

However, under Article 60 of the Polish Deal, taxpayers who have already acquired the right to deduct their expenses under Article 15e par. 9 shall retain the right to make such deduction “to the extent and under the rules set forth in that provision”. Thus, the possibility to make the deduction itself is not controversial. However, the devil is in the detail.

Possible cost deduction options

The transitional provision does not make it clear whether the costs that have not been deducted shall be deducted once or whether the existing thresholds related to the taxpayer’s EBITDA should be applied. If you decide that the threshold should be applied, there will be doubts about how it should be counted.

In our view, there are three possible approaches:

Aggressive approach

Under this approach, you make a one-time deduction in 2022 of all the costs that have not been deducted to date.

This is based on the assumption that since Article 15e of the CIT Act has been repealed, it is impossible for thresholds contained therein to continue to apply. At the same time, the transitional provision explicitly allows for the deduction of expenses that have been incurred earlier.

We believe that this position may be challenged by the tax authorities and it is very risky to apply it if you do not get an advance tax ruling beforehand.

Balanced approach

This approach assumes that the deduction is made using the threshold of PLN 3 million + 5% EBITDA, yet the running costs are excluded from this calculation.

If it turns out that some of the costs cannot be deducted in 2022, they would still be deductible in the following 5 years. However, the costs incurred from 2022 onwards would no longer exhaust the limit.

This scenario is safer than the first one, although in this case you do not have a full guarantee of tax safety, as well. If you opt for this approach, it is a good idea to apply for an advance tax ruling to have it confirmed that this approach is correct.

Conservative approach

In the conservative approach, you make the deduction applying the threshold of PLN 3 million + 5% EBITDA and including the current costs in this calculation.

The difference between this approach and the balanced approach is that the current costs, incurred in 2022 and beyond, would exhaust at least part of the threshold.

Since itemizing the deduction of outstanding costs would be slower and there would be a greater chance that a taxpayer would not be able to deduct all the costs before the 5-year deadline, this option is the worst one.

With the Polish Deal in place, it is worth relying on a tax advisor for your cost deduction effort

How can you deduct costs in your organisation in order to operate in accordance with the law and not to lose money? Regardless of the approach you choose, it is definitely a good idea to apply to the National Tax Information for an advance tax ruling. If you are interested in our assistance in this respect, please contact us at [email protected].