In its interpretation application the company asked whether a consideration paid by it and due to a Belgian company for ceasing production in Belgium and transferring it to Poland is classified as its tax-deductible cost. And if yes, in which year should the company include it in its tax accounts.
In its opinion, expenses towards ceasing production activity serve the purpose of generating revenues by the company, so this connection is direct. The company explained that when the Belgian company manufactured specific goods it purchased them and re-sold (i.e. acted as a trader in this respect). After taking over the manufacturing operations it will supply a larger number of customers with these products. At the same time, as the manufacturer, it will sell them at a greater profit.
The tax authorities replied that paying a consideration to a Belgian company for ceasing production activity, constituting remuneration for stopping production in Belgium, did not meet the basic condition stipulated in Article 15 section 1 of the CIT Act, i.e. this was not an expenditure incurred for the purpose of receiving revenues or maintaining or securing a source of revenues. Consequently, it was not possible to write it off as a tax-deductible cost.
Officials observed that although an economic operation consisting in expanding operations and commencing production activity serves the purpose of obtaining revenues or securing a source of revenues, in their opinion paying another entity to cease production seems irrational and not expedient.
The argument of building a better image, e.g. in the eyes of banks, also does not affect the expediency of paying this consideration. The tax authorities noted that the Belgian company had decided to end its production operations in connection with company reorganisation. In such situation the expenditure is not aimed at obtaining revenues from the commercial activity pursued by the company. The purpose of paying such additional consideration is to compensate the seller lost revenues.
The Voivodeship Administrative Court in Bydgoszcz accepted the arguments of the company. In its opinion, the appellant’s expectations do not raise doubts in the light of life experience and are consistent with the provisions of Article 15 section 1 of the CIT Act. The company paid another company for ceasing its activity in order to be the sole manufacturer of products. This will bring its profits in the future, since by manufacturing and not just selling products it can apply a higher margin and, being the only manufacturer, is bound to increase the number of customers.
However, the Supreme Administrative Court did not repeat this position favourable to the taxpayer. It concluded that payment of a consideration to another entity for stopping production operations does not realise an objective in the form of obtaining revenues by the appellant. In the opinion of the SAC, it directly secures and protects interests of a third party, in this case the Belgian company.
The Court observed that the consideration paid was similar in character to a compensation for ceasing production and consequently for losing a source of revenues. This is attested both by the manner in which the consideration amount was determined on the basis of estimated increase of the appellant’s revenues from sales of products hitherto manufactured by the Belgian company and the actual basis of the performance connected with ceasing production operations. Such expenditures, in reality compensating losses due to production cessation and resulting loss of benefits by another entity cannot be classified as incurred for the purpose of obtaining revenues from a source in the form of production activity.
Judgement of the Supreme Administrative Court of 5 April 2016 (II FSK 308/14).
Expert’s comment - Mariusz Aleksandrowicz
The judgement of the SAC analysed here pertains to the inclusion in tax costs special expenditures connected with creating a source of revenues in connection with taking over the entire production operations of a foreign company from the group.
It would appear that such expenses should be connected with the revenues of the Polish company, or that they have been incurred in order to secure a source of these revenues. However, the SAC did not share this view. In the court’s opinion, payment of a consideration for ceasing operations would first and foremost protect the interests of a third party (a foreign company whose operations are being transferred to Poland) and as such cannot affect a source of revenues of the company. However, it appears that the court’s argumentation has been unnecessarily shuffled about. After all, every expenditure serves the purposes of at least two entities. An expenditure towards a wholesale purchase of goods for re-sale serves the revenue purposes of the vendor (compensates his loss of revenue from sales to consumers) and the purposes of the buyer. For this reason, considering Article 15 section 1 of the CIT Act, one should not focus on analysing the link between a given expenditure with the vendor’s source of revenues, but with the buyer’s source of revenues (here: domestic taxpayer). Even if the payment is a “compensation for another entity ceasing production” and is a consideration “for its loss of revenues”, this circumstance cannot determine the tax treatment of the expenditure. Only if the company incurring it has arguments to show that, in the light of the facts of the case, this expenditure actually secures its source of revenues.