How to apply Article 15e of the CIT Act in business activities based in Special Economic Zones?

Since the introduction of Article 15e to the CIT Act as of 1 January 2018, the possibility of recognising certain expenditures incurred for related entities or entities from the countries applying harmful tax competition as tax deductible costs has been limited.

In compliance with the actual legal state, the taxpayers operating in capital groups are obliged to exclude the expenditures for acquisition of intangible services from tax deductible costs, such expenditures being – to give examples – advisory, management and control services, advertising services, or the expenditures for obtaining guarantees or sureties up to the statutory limit of PLN 3 million and 5% of the EBITDA.

The opportunity for avoiding the aforementioned limitations is that the taxpayers obtain the decision concerning the Advance Pricing Agreement (APA) which confirms that the method and manner of calculation of the aforementioned costs comply with the arm’s length principle. Having such a decision issued is the basis for the deduction of the costs under Article 15e of the CIT Act in their entirety, without the application of the limit provided for in the provision.

The issue of classification of the services subject to Article 15e of the CIT Act and the issue of calculation of the limit were the subject matter of numerous interpretations and judgements, which – in the end – creates a relatively uniform line of interpretation.

Yet, the taxpayers who run business activities outside and inside special economic zones and thus take advantage of the income exemption from the tax (CIT) on account of the business activity covered by a relevant permit still encounter numerous doubts as to the application of the limitation of Article 15e of the CIT Act. 

In compliance with the wording of Article 15e (4) of the CIT Act, the provisions of Article 7 (3) of the CIT Act are applicable to the revenues and costs referred to in Article 15e (1) of the CIT Act, i.e. the provisions stipulating that the assessment of taxable income should not take into account, among others, the revenues from the sources exempt from the tax and the tax deductible costs relative to those revenues. Pursuant to Article 17 (1) (34) or Article 17 (1) (34) (a) of the CIT Act, the taxpayers operating in the SEZ take advantage of such an exemption.

Thus, the question has arisen whether the SEZ–based entrepreneurs should – when calculating the limit under Article 15e of the CIT Act – take into account the revenues and costs connected only with the taxable business activities or – pursuant to the same rules as other non-SEZ entities – the entirety of the revenues and costs. This issue has become the subject matter of interpretations and judgements issued by voivodeship administrative courts which are not uniform. 

The line of judicial decisions differs depending on the instance. The position of tax authorities is basically different from the approach presented by the majority of administrative courts.

The opinion of the Head of the National Revenue Information presented in the issued individual interpretations (e.g. dated 14 January 2020, records No. 0111-KDIB2-1.4010.499.2019.2.PB, dated 10 July 2019, records No. 0111-KDIB1-2.4010.216.2019.1.BG, dated 12 December 2018, records No. 0111-KDIB1-3.4010.552.2018.1.MST) reveals that the taxpayers operating in the SEZ should assess the revenues and tax deductible costs pursuant to the same rules as other entities that do not run business activities in Special Economic Zones. Only the income generated by them – provided that certain conditions are fulfilled – may be subject to exemption from taxation. Therefore, in order to calculate the income, it is necessary to assess the tax deductible costs while taking into account the limitations arising from Article 15e of the CIT Act.

A similar position was adopted by the Voivodeship Administrative Court in Gliwice in the judgement dated 25 March 2020 (records No. I SA/Gl 1299/19) which also referred to the historical interpretation, stating that the regulations concerning the exemption from taxation of the SEZ-based income had been adopted earlier in the regulation on cost limitation and that the legislator – when introducing Article 15e of the CIT Act – did not provide for any special rules for SEZ-based entities.

Whereas, a different position is taken by the majority of administrative courts (Voivodeship Administrative Court in Wrocław, dated 16 July 2019, records No. I SA/Wr 356/19, Voivodeship Administrative Court in Cracow, dated 10 July 2019, records No. I SA/Kr 577/19, Voivodeship Administrative Court in Gdańsk, dated 8 May 2019, records No. I SA/Gd 439/19), which generally emphasise that:

• the costs which are allocated to the revenues from the business activities run within the SEZ should be excluded from the costs subject to limitation (the limitation should apply only to the costs of intangible services connected with the taxable business activity);
• a taxpayer running business activities in the SEZ should calculate the EBITDA limit only on the basis of revenues and costs relative to the taxable business activity;
• the application of the regulations concerning the limitation of the costs in the SEZ seems to be unjustified since ultimately this type of income is exempt from taxation. 

All judgements cited hereinabove (together with the judgement of the Voivodeship Administrative Court in Gliwice) are not final and binding, and the line of interpretation which is not uniform will be settled most likely by a judgement issued by the Supreme Administrative Court. The issue of stating which approach to the application of Article 15e of the CIT Act by the entrepreneurs operating inside and outside the SEZ will be more beneficial is ambiguous as well. The aforementioned depends on, among others, the value of intangible services acquired from related entities or the value of the income exempt from taxation and taxable income.

When observing the portfolio of the taxpayers operating in the SEZ, it may be noticed that a majority of them are entities operating in big capital groups for which the purchase of intangible services from related entities is often a significant transaction. Therefore, the decisions as to further steps should be made individually by such taxpayers, after prior calculation of the influence of those three variables on their situation, as well as the possibility of selecting the most beneficial solution in terms of taxation. Nevertheless, it seems – at present – that the optimum solution in such a case is to file a request for being issued an individual interpretation.

Katarzyna Darska, Senior Manager in Transfer Pricing Team at KPMG in Poland
Natalia Księżarek, Senior Consultant in Transfer Pricing Team at KPMG in Poland