A loss in statutory activity – exempt from taxation under Article 17 par. 1 pt. 4 of the CIT Act – is not a tax loss, but a balance-sheet and economic loss.

The dispute in this matter concerned the foundation’s obligation in CIT for 2009 and the interest on advance payments for that tax. According to the treasury office, the taxpayer unjustifiably demanded that income be settled with the loss arising from statutory activity. Officials had stated that a loss in statutory activity – exempt from taxation under Article 17 par. 1 pt. 4 of the CIT Act – is not a tax loss, but a balance-sheet (economic) loss. The foundation did not agree with such an interpretation of the regulations. In a complaint to the Regional Administrative Court in Wrocław, it accused the treasury office of breaching the constitutional principle of trust, involving a varied understanding of the same statutory terms, and specifying the tax obligation, as well as wrongly maintaining that expenses for non-statutory purposes correspond to the value of the income subject to taxation.

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EXPERT’S COMMENT

Marta Ignasiak, tax advisor at FKA Furtek Komosa Aleksandrowicz:

The ruling in question concerns two issues which are essential for taxpayers from the third sector – the manner of calculating income in the event of conducting activity excluded or exempt from taxation (e.g. statutory activity of foundations and associations), and the extent to which income is intended for statutory purposes within the meaning of Article 17 par. 1 pt. 4 of the CIT Act. One must agree with the court that the loss incurred on activity which is exempt should not influence the amount of tax calculated on taxable activities. Above all, if only some “income” of the foundation is exempt from tax, this does not mean that some of its “losses” can be taken into account in the taxation basis. For tax purposes individual income or loss is calculated, and this calculation takes specific revenue and costs into account or excludes others, for example when the income from a given source is exempt from tax (cf. Article 7 par. 3 pt. 1 and par. 4 of the CIT Act). The book “loss” from statutory activity should therefore be understood merely as the sum total of specific revenues and tax deductible costs, and as such – under the above regulations – cannot influence the amount of total income for taxation or the total loss achieved by the foundation. The court did not pay greater attention to this issue of providing income for statutory purposes. Indirectly, however, it accepted that paying interest on budget receivables and incurring other expenses which do not constitute tax deductible costs do not entitle anyone to apply the exemption under Article 17 par. 1 pt. 4 of the Act. In effect, the equivalent value of such expenses must be regarded as revenue for taxation, recognition of the cost in that value being prohibited at the same time.