Poland: Revenue from business in special economic zone; deduction of VAT in cross-border transactions and residential leases

The KPMG member firm in Poland prepared a report that includes summaries of the following recent decisions of the Supreme Administrative Court.

• The Supreme Administrative Court assessed whether funds received in the form of damages or compensation may be treated as revenue from business activity conducted in a special economic zone (SEZ). According to the court, “tax-exempt income” is only income earned from business activity conduced in SEZ within the scope of the relevant zone exemption decision. Consequently, damages or compensation cannot be treated as revenue (income) from business activity conducted in SEZ. Similarly, satisfying a counterparty’s claim cannot be treated as expense under Article 16(1)(22) of the corporate income tax law. This is because the provision clearly relates to penalties and damages for improper performance, and not to penalties and damages related to non-performance or partial non-performance. The case identifying information is: case ref. no. II FSK 13/21.
  
• The Supreme Administrative Court examined the case of a company acting as a party to cross-border transactions in which it purchased services from non-residents. The entity inquired whether it could deduct the input value added tax (VAT) in the same accounting period in which the tax liability for imported services arose, also in situation when the output VAT would be included in the appropriate tax declaration submitted within three months following the end of the month in which the tax liability arose in relation to the purchased services. The Court referred to the judgment issued in the case C-895/19, in which the CJEU confirmed that the provisions of the EU 112 Directive are to be interpreted as precluding national legislation which makes the exercise of a taxable person’s right to deduct input tax in the same accounting period as that in which the tax due was payable on the transaction subject to the tax due on those transactions being entered in the appropriate tax declaration submitted within three months following the end of the month in which the tax liability arose. According to the Court, this also applies to the presented facts and shapes interpretation of Article 86(10b)(3) of the VAT law. The case identifying information is: case ref. no. I FSK 2121/19.
• The Supreme Administrative Court examined the case of a joint-stock company planning to enter into lease agreements for residential premises, which would then be made available to the company’s employees, contractors or counterparties. According to the court, the jurisprudence has developed an interpretation, in line with which non-existence of a specific taxable transaction does not always have to mean the loss of the right to deduct VAT. Although in the case of expenses classified as general overhead there is no direct link between purchasing goods/services and taxable sales, when they constitute a price component of products offered by the taxpayer, thus remaining in direct relationship with that taxpayer’s taxable business activity, the right to deduct expenses incurred on account of such a purchase should be granted to the taxpayer to the extent that such general activity gives the right to deduct VAT. This means that although expenses incurred in connection with renting residential premises for the company’s employees and contractors are not directly reflected in the company’s turnover, incurring them is a condition for obtaining VAT-taxable turnover by securing the source of revenue. Consequently, the company may deduct input tax related to incurring such expenses. The case identifying information is: case ref. no. I FSK 542/19