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Michał Gosek

Tax adviser (Poland)
Associate Partner
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Enterprises pursuing a business activity within special economic zones in Poland (SEZ) under a permit are exempt from tax on income generated from such activity (Article 17(1)(34) CIT Act). SEZ enterprises very often increase their investment to extend the existing enterprise or extend and upgrade the existing plants. In such a case, enterprises most frequently try to obtain subsequent SEZ business permits. This helps them achieve a faster return on investment, but at the same time complicates their accounting work. 

The unclear issue is how entities operating in the SEZ under several permits should keep their records: may they keep joint records for tax-exempt activity pursued under all permits they hold and separate records for CIT taxable activity to calculate income (loss) subject to CIT and the income (loss) generated from the business activity carried on within the SEZ under permits (and therefore non-taxable)? There are many enterprises which operate within SEZs under several permits and this issue bothers most of them as evident from a large number of applications for advance tax rulings in this regard.

A twist in the line of rulings

For quite a while tax authorities used to take a taxpayer-friendly view according to which taxpayers were allowed to calculate joint exemption limits also if they held several permits. This viewpoint is presented in the ruling issued by the Director of Tax Chamber in Katowice of 10 October 2013 (file no. IBPBI/2/423-829/13/JD). However, that line of rulings began to change in 2015. Since then tax authorities have argued that if the amount of the state aid is directly related to the state aid granted by way of a specific permit, the taxable income (tax loss) should be calculated for the business activity conducted under that permit. As a consequence, the taxpayer's books must allow him not only to account for revenues and tax-deductible costs from the exempt activity separately from those from the taxable activity, but also to determine the profit(loss) generated under the individual permits. This approach was confirmed, for example, in the advance tax ruling of the Minister of Finance of 28 October 2016 (file no. DD5.8221.19.2016.DZQ).

The advance tax ruling of 11 May 2018 by the Head of the National Tax Information Service

In this context, the advance tax ruling of 11 May 2018 issued by the Head of the National Tax Information Service (file no. 0111-KDIB1-3.4010.109.2018.2.AN) deserves particular attention. 

The application was filed by a limited liability company operating within a SEZ under two permits obtained in 2009. Both investment projects were located on the same real properties. The scope of activity pursued under the first permit overlapped with the activity pursued under the other permit.

The taxpayer asked tax authorities whether a company entitled to a tax exemption (being the total of two state aid limits) under two permits must keep one set of records and determine its taxable and tax-exempt revenue based on those records.

The taxpayer believed that he must keep one joint set of records for all the tax exempt activity carried on under two permits and separate records for the taxable activity. At the same time, in the taxpayer's opinion, the company should discount the total state aid amount it obtained (i.e. the actually enjoyed CIT exemption under two permits in total, first as of the date of obtaining the first permit, and once the state aid limit available under the first permit is used up, as of the date of the second permit).Tax authorities agreed with the taxpayer.

Exemption criteria

Income from business activity carried on in a SEZ by legal persons or individuals under a zone permit is exempt from income tax on the terms and conditions set forth in the CIT Act and PIT Act, respectively (in accordance with Article 12 SEZ Act). To be able to enjoy the exemption the taxpayer must earn income from the activity carried on in the scope defined in the permit referred to in Article 16(1) SEZ Act. However, the exemption applies only to the income earned in the zone (Article 17(1)(34) and Article 17(4) CIT Act). 

Bearing in mind the current tax law, it must be noted that according to Article 9(1) CIT Act, taxpayers must keep their accounting records in line with separate regulations in a manner allowing proper determination of profit (loss), taxable base, and amount of the tax due in the tax year. Moreover, they must include in the records of tangible and intangible assets all information necessary to calculate the depreciation/amortisation charges. At the same time, according to Article 7(3)(1) and Article 7(3)(3) CIT Act, when determining taxable income, the taxpayer should not take into account the income from sources located in Poland or abroad, if such income is exempt from tax, and tax-deductible costs incurred to earn the tax-exempt income. Also, in accordance with Article 7(4) CIT Act, when determining the loss, the taxpayer should not take into account the revenues and tax-deductible costs referred to in paragraph 3 of that Article. 

What records must be kept?

The analysis of the above regulations allows us to conclude that taxpayers who carry on business in a SEZ under a permit, the income from which is tax-exempt, are obliged to keep only such records that will allow determining the amounts of tax-exempt and taxable income. However, the lawmakers do not require the separate presentation of the profit(loss) for tax purposes from the business activity carried on under each permit.

The zone regulations lead to the same conclusions. According to §5(5) of the Regulation of the Council of Ministers on state aid granted to enterprises operating under a permit for a business activity in special economic zones (the "SEZ Regulation"), tax exemption applies exclusively to income from business carried on in a SEZ. If an enterprise pursues business also outside the zone, the in-zone activity must be organisationally separated, and the exemption amount should be determined on the basis of data from the organisational unit which conducts the business activity exclusively within the zone.

Moreover, it should be noted that the content of the permit referred to in Article 16(1) SEZ Act does not suggest that the tax exemption should apply only to the income earned from a business activity associated exclusively with an investment project implemented under the permit. 

Summing up, for the purpose of calculating the taxable income (or the loss generated from the taxable activity) and the income (loss) generated from the business activity carried on within a SEZ, the enterprise should keep joint records for the exempt activity pursued under all three permits it holds and separate records for the activity subject to CIT. As there are no regulations which oblige enterprises to keep separate records for each of the investment projects implemented in the SEZ, the laws in force should not be interpreted broadly. Consequently, income generated from zone activity should be exempt from tax as follows: first, the enterprise should use state aid limit available under the permit issued on the earliest date, and after it is used up – the limit available under another permit. 

However, the latest rulings issued by tax authorities and administrative courts are inconsistent in this regard. In its judgement of 26 July 2017 (file no. I SA/Po 1355/16) the Provincial Administrative Court in Poznan ruled that the taxpayer must keep records in a manner which allows separate determination of the profit(loss) generated under each of the permits. A similar approach was taken by the same court in its ruling of 2 February 2017 (file no. I SA/Po 850/16). For the taxpayer it means that he would have to keep separate accounts for his every investment project implemented in the SEZ. At the same time some courts present a different approach (e.g. the ruling of the Provincial Administrative Court in Gliwice of 7 March 2017; file no. I SA/Gl 1194/16 (final ruling) or the ruling of the PAC in Poznan of 5 April 2017, file no. I SA/Po 1303/16). As you can see, different rulings are issued in the same period even by different panels of judges of the same administrative court.

Nature of the income tax exemption

In our opinion, however, it is hard to dismiss the viewpoint represented by tax authorities and accepted by some judging panels according to which if the permit is always for one specific investment project and if the allowed state aid should be determined separately under each permit, it means that the taxpayer must keep separate records for each of the investment projects implemented in the SEZ. Income tax exemption applies only to income from a specific source, that is from a business activity carried on in the SEZ under a permit. Undoubtedly, it is in the taxpayer's interest to keep records in a manner which allows tax authorities to verify expenditures defined in the terms and conditions of the permit. However, tax laws do not oblige taxpayers to keep records for each of the permits that they hold. 

In this context, the advance tax ruling issued by the Head of the National Tax Information Service looks very positive. At the same time, it is worth noting that this authority has lately presented the same viewpoint in several cases (e.g. in the letter of 26 March 2018, file no. 0111-KDIB1-3.4010.96.2018.1.MST). So there is hope for a twist in the recent line of unfavourable rulings. 

If you have further questions or doubts concerning the issues discussed in this article, please contact Rödl & Partner experts.

3.07.2018