Michał Gosek

Tax adviser (Poland)
Associate Partner
Phone: +48 61 624 49 39

Income from business activity carried on in a special economic zone in Poland (SEZ) on the basis of a relevant permit is exempt from tax (Article 17(1)(34) CIT Act); however, the level of state aid granted in the form of such exemption may not exceed the amount of state aid for the enterprise, admissible in regions eligible for maximum aid, according to separate regulations.

At the same time, the above tax exemption applies exclusively to income from business activity carried on in a SEZ (Article 17(1)(4) CIT Act). 

Since the legislator has not defined the term “business activity carried on in a SEZ” taxpayers often find it difficult to determine which of their revenues should be classified as revenues earned in a SEZ, and thus included in the calculation of tax-exempt income. The above problem may be illustrated by revenues from insurance compensations.

The interpretation of the term “revenue earned from business activity carried on in a SEZ” and the classification of insurance compensations received by the enterprise as such revenue have been addressed in numerous judgements of administrative courts and advance tax rulings of tax authorities. This is because insurance compensations often represent revenues directly related with manufacturing activities conducted in a SEZ under a zone permit, but are not explicitly mentioned in that permit. 

Advance tax ruling of 27/02/2018 issued by the Head of the National Tax Information Service

In this context, the advance tax ruling of 27/02/2018 issued by the Head of the National Tax Information Service (file no. 0111-KDIB1-3.4010.29.2018.1.IZ) deserves particular attention. A taxpayer asked the tax authority whether a compensation to be received by his company from the insurer should be treated as revenue from business activity carried on in a SEZ and thus included in income exempt from taxation by virtue of Article 17(1)(34) CIT Act. 

According to the information provided by the taxpayer, the taxpayer's business activity in the SEZ consisted of precision and deep pressing and other metal component processing activities, based on the permit of 26/06/2006. Apart from manufacturing, the taxpayer's operations in the SEZ included commercial and service activities related to the products manufactured in the SEZ and specified in the permit according to the Polish Classification of Goods and Services (PKWiU). 

The company received a complaint about a product manufactured and sold by it as part of its activities in the SEZ (zone activities). The company accepted the complaint and undertook to pay the complaint costs based on the debit notes issued by the customer. 

The company had an insurance policy covering in particular the refund of claims payable to third parties under commercial transactions. Thus, the company was to receive from the insurance company a full or partial refund of the complaint costs. 

The taxpayer was of the opinion that the insurance compensation should be regarded as revenues from zone activities. However, the tax authorities did not share this view.

When is income exempt from tax?

According to applicable law, to be tax-exempt as per Article 17(1)(34) income must be earned from business activity carried on in a SEZ based on and within the scope of the zone permit. What is important, both these conditions must be met jointly. Consequently, revenues from zone activities not specified in the permit will be treated as revenues from activities conducted outside the SEZ and will thus be taxable

No consistent approach of tax authorities

Tax authorities differ in their opinion about whether to classify insurance compensations as zone activities. Initially, both tax authorities and administrative courts were of the opinion that insurance compensations which a company receives for costs directly related with its zone activities represent income from zone activities conducted under the zone permit and may therefore be included in tax-exempt income (e.g. advance tax ruling of 25/08/2015 issued by the Director of Tax Chamber in Łódź, file no. IPTPB3/4510-184/15-2/IR or advance tax ruling of 24/08/2011 issued by the Director of Tax Chamber in Katowice, file no. IBPBI/2/423-612/11/AP).

But more and more often, tax authorities rule that insurance compensations received by the taxpayer do not count as revenues from zone activities. According to the above-mentioned ruling issued by the Head of the National Tax Information Service, tax exemption as per Article 17(1)(34) CIT Act is not a personal exemption, i.e. it does not cover all income earned by a company carrying on business activity in a SEZ under a permit, but only the income from activities covered by and directly specified in the permit. Thus, the Head found that insurance compensations for claims raised in connection with commercial transactions do not represent income from zone activities and may not be treated as tax-exempt.

Are all rulings unfavourable to taxpayers?

Although currently most of the rulings on the treatment of insurance compensations as tax-exempt income are unfavourable to taxpayers, some administrative courts represent a view that tax-exempt revenues from zone activities are by no means limited to revenues earned from the sale of goods or services specified in a given permit. For example, such an opinion was presented in the judgement of 16/02/2016 issued by the Provincial Administrative Court in Rzeszów (file no.SA/Rz 3/16, non-final judgement). 

According to the judging panel, the exemption as per Article 17(1)(34) CIT Act is not a personal exemption, but it should refer to business activity and not the types of revenues from that activity. This is all the more so as the tax exemption refers directly to income from zone activities and not to products specified in the permit. As part of its zone activities, a company may generate revenues directly from the final product the manufacture of which is covered by the permit, but it may also earn other revenues related indirectly with its manufacturing operations in the zone. If insurance compensations received by the taxpayer for defective products manufactured in the zone are exclusively connected with the zone activities the income from which is tax-exempt, then such compensations should also be tax-exempt.

A similar approach was presented by the Director of Tax Chamber in Bydgoszcz in his advance tax ruling of 12/11/2014 (file no. ITPB3/423-366b/14/MK). In the opinion of the above tax authorities, compensations received from insurance companies result from and are inseparably connected with the taxpayer's zone activities. Therefore, they will be tax-exempt according to Article 17(1)(34) CIT Act because they classify as income generated in a SEZ.

Receiving insurance compensations is not business activity

In our opinion, the approach taken by the Head of the National Tax Information Service in his advance tax ruling of 27/02/2018 is too rigorous and at odds with business reality. First of all, it is impossible to enumerate all transactions that generate revenues from zone activities. Receiving insurance compensations cannot be treated as a separate activity and included in the zone permit as one of zone activities. So it would be hardly possible to indicate even one company that has insurance compensations included in its zone permit.

The tax authorities also entirely disregard the fact that a company's tax profit (loss) from zone activities is made up not only of the operating profit (loss) but also of extraordinary gains and losses strictly connected with the company's business. Insurance compensation received by the company should be therefore classified as revenue directly and inseparably connected with the company's zone activities because they are a side effect of those activities (thus resembling auxiliary activities), and not the outcome of the company's purposeful actions. Insurance compensations, although unpredictable, are a constant and inherent element of risk involved in the taxpayer's business operations. Unfortunately, in its current rulings, the Supreme Administrative Court does not share this view and argues that considering the definition of business activity set forth in the Freedom of Economic Activity Act, there are no grounds for extending the taxpayers' business activity to other categories exclusively for the purpose of the tax exemption provided for in Article 17(1)(34) CIT Act (e.g. judgement of the SAC of 05/05/2016, file no. II FSK 763/14, or of 20/06/2017 file no. II FSK 711/17). 

However, as there is no established line of judgements and tax authorities differ in their approach to this issue, we believe that taxpayers have a real chance to defend their standpoint according to which insurance compensations are tax-exempt revenues. They must nevertheless take account of the risk of dispute with tax authorities which may go as far as the Supreme Administrative Court.

If you have any additional questions or doubts concerning the issues discussed in this article, please contact our experts in Cracow, Gdansk, Gliwice, Poznan, Warsaw and Wroclaw who will be happy to help you.