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Michał Gosek

Tax adviser (Poland)
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The 2018 amendment to the Polish Corporate Income Tax Act has introduced many important changes to the tax deductibility of certain business expenses. One of the most important changes is the limitation of the tax deductibility of expenses incurred by taxpayer for purchases of intangible assets and services from associated enterprises. Those changes also affect entities operating in special economic zones in Poland.

Unfortunately, this is another case where the legislator has created a law that is vague and ambiguous, which is confirmed by a large number of applications for private advance tax rulings filed by taxpayers in the first half of 2018.

Advance tax ruling of 29/06/2018 by the Head of the National Tax Information Service

Special attention should be paid to the private tax ruling issued by the Head of the National Tax Information Services on 29/06/2018 (file no. 0111-KDIB2-1.4010.205.2018.1.AP) to a limited liability company ("company", "applicant") operating in a special economic zone (SEZ). 

According to the facts and circumstances of the case, as part of its business activity, the applicant signed licence agreements to purchase the right to use the intellectual property and know-how regarding the technology applied in the production of automotive steering systems and their components. The company concluded the aforementioned agreements with its associated entities within the meaning of transfer pricing regulations.  The agreements covered the right to obtain all information necessary to design, manufacture, test, install and use the manufactured goods, including the right to use: concepts and technical drawings of the products, specifications of materials and tools, data and procedures regarding thermal conductivity, installation models, parameters and descriptions of production machinery, process parameters and quality assurance and testing procedures. The agreements entitled the applicant to produce, use and sell the products made using the intangible assets covered by the agreements.

The contractual royalty was calculated as a percentage share agreed between the parties of the company's total revenues from the sale of the products. Thus, the royalty payable to the licensor depended on the number of the products sold by the company. 

The company was not sure whether the limit specified in Article 15e of the CIT Act applied to the tax deductibility of the royalties it paid for the right to use the aforementioned intangible assets.

The applicant believed that the above expenses were direct manufacturing costs, so they were not subject to the aforementioned limit because they met the limit exemption prerequisites referred to in Article 15e(11)(1) CIT Act. The tax authorities agreed with the taxpayer. 

The lawmakers introduced the aforesaid limitation of tax-deductible costs by adding Article 15e to the CIT Act. In the justification of the new provisions, the legislator emphasised that their aim was to counteract aggressive tax optimisation schemes applied by multinational groups.

What costs are to be excluded from tax-deductible costs

According to Article 15e of the CIT Act, starting from 1 January 2018, taxpayers are obliged to  exclude from tax-deductible costs the costs of: 

  • advisory services, market research, advertising, management and control, data processing, insurance, guarantee and surety services and similar,
  • all kinds of licence fees and royalties for the use or the right to use rights or assets (called intangible assets) including:
    • copyrights or similar proprietary rights;
    • licences;
    • industrial property rights, including the inventor's patenting rights to inventions, rights to utility models, trade marks, service marks, trade names, designations and indications of origin;
    • value equivalents of disclosed industrial, commercial, scientific or organisational knowledge (know-how);
  • transfer of the risk of debtor's insolvency in terms of debt receivables due to loans other than loans granted by banks and credit unions, including under derivatives agreements and similar

– incurred directly or indirectly for the benefit of associated enterprises or entities having their place of residence, registered office or management board in a territory or country applying harmful tax competition, in the part in which the total amount of such costs exceeds 5% of the company's operating profit in a tax year.

What is operating profit?

Operating profit is the surplus of the total of revenues from all revenue sources, less interest income, over the total of tax-deductible costs reduced by the value of depreciation and amortisation charges and interest recognised under tax-deductible costs in the tax year. This surplus can be otherwise called EBITDA, which means the earnings of an enterprise before interest on interest-bearing liabilities (loans, bonds), taxes, depreciation of tangible assets and amortisation of intangible assets. 

At the same time, according to the principle saying that the treatment of risk should be commensurate with that risk, the legislator introduced an amount exempt from the limit so that the limit applies only to the surplus of the costs specified in that provision exceeding in total PLN 3 million in a tax year. This means that taxpayers may include in tax-deductible costs PLN 3 million + 5% EBITDA (calculated according to the rule laid down in the CIT Act) in expenses incurred for the aforementioned intangible assets and services.

Taxpayers are in particular not sure about the following exemption introduced by the legislator:  the limitation referred to in Article 15e CIT Act does not apply to the costs of services, fees and amounts due included in tax-deductible costs directly connected with the goods manufactured or purchased or services provided by the taxpayer.

Direct and indirect costs

It may seem that, in order to correctly apply Article 15e CIT Act, the taxpayer has first to determine whether a given expense for intangible assets and services is a tax-deductible cost and then to verify if that cost is a direct or indirect cost (as per Article 15 CIT Act). 

At the beginning of 2018, tax authorities started to issue private tax rulings to address future transactions in which taxpayers, expecting tax authorities' pro-Treasury approach, tried to make the fees for using trademarks, manufacturing know-how, utility models or trade names dependent on the number of goods manufactured by them in a given period. In the above scenario the licence price was included in the calculation of the unit price of the goods manufactured using the licence. The possibility to exempt such expenses from the limitation provided under Article 15e CIT Act was confirmed by, among others, the following private tax rulings of the Head of the National Information Service:

  • tax ruling of 19/02/2018, file no. 0111-KDIB1-1.4010.192.2017.1.BK;
  • tax ruling of 22/03/2018, file no. 0115-KDIT2-3.4010.376.2017.1.JG;
  • tax ruling of 28/03/2018, file no. 0111-KDIB1-2.4010.89.2018.1.BG.

Also in the case presented in the private tax ruling analysed above the fee (royalty) agreed between associated entities was calculated based on the revenues from the sale of finished goods. Any changes in the revenue automatically affected the amount of the royalty. Importantly, the royalty was agreed as a percentage of revenues and did not have to be included in the unit price of the goods – it is enough if the cost could be identified as an objective factor influencing the price of goods or services. 

As the applicant rightly noticed, neither the CIT Act nor any regulations implementing that act define the costs directly related to the goods manufactured or purchased or services provided by the taxpayer, as referred to in the aforementioned exemption provision. 

The CIT Act includes only and exclusively the term "costs directly related to revenues". Those terms are not identical: "costs directly related to revenues" is much narrower than "costs directly related to the goods manufactured or purchased or services provided by the taxpayer". The latter term comprises any and all costs that are incurred for the manufacture or purchase of goods or provision of services and that eventually affect the final price of those goods or services. The interpretation of tax provisions requires in the first place their linguistic interpretation. When analysing the phrase "related to the manufacture/purchase" in linguistic terms, we should look for a link between the cost and the manufacturing/purchase activity. Thus, the cost in question affects the final price of the product and is de facto included in that price.

Taxpayer-friendly interpretation

In the case concerned, such costs should also include the expenses incurred by the applicant under the contracts concluded with its associated enterprises. This is because the company uses the acquired technologies and rights for its business purposes and would not be able to manufacture goods without those technologies and rights. Consequently, the use of the acquired intangible assets directly contributes to the production of goods and to the revenues from the sale of those goods.  

The Head of the National Information Service accepted the applicant's arguments. In our opinion, such a standpoint deserves full appreciation. It is reasonable and very favourable to taxpayers.  At the same time, it is in accord with the objective pursued by the legislator when introducing the new provisions, that is, the limitation of tax deductibility of all expenses incurred for intangible, consulting services etc. (even those not directly related with the manufacturing or purchasing of goods). 

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.

20.08.2018