Iwona Łaska-Rutkowska

Tax adviser (Poland)
Senior Associate
Phone: +48 22 244 00 56

On 24 August 2016, the Provincial Administrative Court in Łódź issued taxpayer-friendly rulings that various expenses incurred by an enterprise operating in a special economic zone in Poland for purchase of a majority interest in another company may be regarded as the so-called shared costs (file no. I SA/Łd 551/16 and file no. SA/Łd 552/16). Consequently, the expenses should be allocated to both the tax-exempt activities and the taxable activities in accordance with the rules laid down in Article 15(2) and (2a) of the Corporate Income Tax Act (the "CIT Act"), that is the so-called revenue-based allocation key. 

A company operating in a SEZ purchased a majority interest in a French company. Then it asked the tax authority whether the transaction costs could be considered shared costs and, therefore, allocated in accordance with the so-called allocation key to the exempt and non-exempt business activities.

The company indicated in the application that the purchase of shares in the French company should increase the production in the SEZ conducted under a zone permit, and, therefore, also the tax-exempt revenue. However, the company could not tell how the transaction costs would affect the revenues exempt from income tax and to what extent they would affect the non-exempt revenues.  

The company was of the opinion that its share purchase costs were subject to Article 15(2) and (2a) of the CIT Act because they were connected both with revenues from tax-exempt sources as well as revenues from other sources. The transaction costs borne by the company, like expenses for legal, tax, accounting and financial advice (including due diligence) and the analysis of the transaction's profitability should have been considered shared costs. Therefore, in order to determine the value of the transaction costs attributable to the business exempt from income tax, the company would have to use the so-called allocation key (Article 15(2) and (2a) CIT Act). 

The Director of the Tax Chamber in Katowice in his advance tax ruling of 16 February 2016 (file no. IBPB-1-2/4510-164/16/AP) found the company’s standpoint incorrect. In his justification he concluded that the purchase of shares in the French company would not lead to the increase of tax-exempt income (that is the income from the activity in the SEZ), and therefore, Article 15(2) and (2a) did not apply. The company did not agree with the tax authority's interpretation and filed a complaint with the Provincial Administrative Court in Łódź that the provisions of the substantive and the procedural law were violated.

The PAC in Łódź reversed the appealed advance tax ruling, coming to the conclusion that the company's complaint was justified. According to the PAC, the tax authority interpreted the tax law wrongly, among others because it based its ruling only on one sentence from the facts and circumstances described by the applicant (namely the sentence in which the company said that the scope and range of its activity in the SEZ would not change) and, thus, concluded that the company's expenses would not contribute to the increase in tax-exempt income. 

The PAC pointed out that even if one of the applicant's claims might raise doubts, the facts and circumstances should be looked at in their entirety described in the application. In the application as well as in the justification the company concluded that the purchase of shares in the French company would not only strengthen its market position but should also contribute to the growth of the company's production in the SEZ, and, therefore, to the increase in tax-exempt revenue.

According to the PAC in Łódź it was clear that in the presented facts and circumstances the transaction costs incurred by the company did affect and would continue to affect the tax-exempt revenue from the business in the SEZ. 

The ruling is not legally binding yet. We must hope that this standpoint, favourable to enterprises operating in SEZs, will hold. Please note also that this is one of few rulings concerning the accounting for costs connected with the purchase of an external entity by a company operating in a SEZ. 

If you plan to conduct such transactions in the future, we recommend that you thoroughly analyse their implications on your tax-exempt business in the SEZ so that you are able to allocate the transaction costs to the tax-exempt and the taxable activities properly.

If you are interested in more details on this matter, please do not hesitate to contact us. We would be glad to assist you in this area. Our tax advisers in Rödl & Partner offices in Cracow, Gdansk, Gliwice, Poznan, Warsaw and Wroclaw will be glad to help. They will also answer your other questions about taxes, and will provide legal advice in Poland on conducting a business within a SEZ as well as any other aspects of your operations.