Expenditures on purchases of greenhouse gas emission allowances are not indirect costs within the meaning of corporate income tax regulations.

As a result of consolidated processes the company has taken over a thermal power plant by way of merger through acquisition. It has therefore become its legal and tax successor. At the same time, as a result of succession, it has become a party to a contract from 2011 for the delivery and collection of energy media, gaseous fuels and other products, constituting the basis for sale to another company of CO₂ emission allowances on behalf of the thermal power plant. In December 2014, the company was divided by separation. Both the assets separated from the company and remaining after the division constituted the organised part of the enterprise. The 2011 contract was indicated in the draft terms of division as assigned to the separated assets of the company. Therefore, the rights and obligations from the contract were transferred to the company as part of the division succession. The delivery of the CO₂ emission allowances took place after the division (in April 2015). In April 2015, the company redeemed the acquired CO₂ emission allowances as the obligated entity within the meaning of the Act on the System of Trading in Greenhouse Gas Emission Allowances. The redemption was connected with emission prior to the division of the company.

The taxpayer asked whether it would be entitled to classify the expenditures on the acquisition of the CO₂ emission allowances as tax-deductible costs.

The tax authorities replied in the negative. In the opinion of the tax authorities the applicant as the acquiring company does not enter into the right to recognise expenditures on the acquisition of the CO₂ emission allowances as tax-deductible costs, since the redemption of those allowances was connected with emission of greenhouse gas prior to the division. In view of the direct character of this cost, it is not connected with the applicant’s revenues.

The company appealed against the interpretation. It challenged the conclusion that the disputed expenditures constituted direct costs. In its opinion the costs of acquisition of the CO₂ emission allowances – even if their redemption was connected with greenhouse gas emission prior to the division – could have been deducted (incurred) only by it as the acquiring company.

The Province Administrative Court (PAC) in Gliwice dismissed the appeal. The Court observed that the dispute concerned the legal and tax assessment of the nature of the costs incurred for purchasing the CO₂ emission allowances. The PAC stressed that, in accordance with Article 93c of the Tax Ordinance, legal succession (partial general succession) should be understood as a continuation – as of the separation date – of tax settlements of the divided company, and not as a takeover by the acquiring/newly formed company of all tax settlements of the separated part of the enterprise from the period prior to the division. In the Court’s opinion this means that the object of the disputed succession cannot be the obligation to recognise revenues and the right to settle costs pertaining to the period prior to the separation date.

The VAC emphasised that producing a specified amount of electrical energy or heat entails the emission of a specified amount of carbon dioxide. The producer is obligated to hold a sufficient number of carbon dioxide emission allowances enabling the actual emission of carbon dioxide resulting from the volume of current production to be covered or, in other words, enabling electrical energy or heat to be produced while emitting a specified amount of carbon dioxide. This means that it is possible to determine which quantity of electrical energy or heat has been produced causing carbon dioxide emission covered by specific emission allowances. Consequently, it is possible to identify the units of energy and thus the revenues from its sale to which the expenditures on the acquisition of specific emission allowances pertain.

The Court confirmed the interpretation of the tax authorities that the value of emission allowances submitted for redemption constitutes operating cost of the core activity. Therefore, it should be classified as costs directly connected with the revenues from sale of products obtained by the company, which should be recognised in accordance with Article 15 par. 4-4b and 4c of the CIT Act.

Judgement of the Province Administrative Court in Gliwice of 13 December 2016. (I SA/Gl 634/16).

Edited by: Aleksandra Tarka (RP).

Expert’s comment

Mariusz Aleksandrowicz, partner, head of the Tax Department at FKA Furtek Komosa Aleksandrowicz

The judgement in question explains the rules of partial succession with regard to the costs of acquisition of gas emission allowances incurred prior to the separation date. One has to agree with the Court’s position that tax succession means a continuation – as of the separation date – of tax settlements made by the divided company. This continuation should include tax settlements which are connected with the allocated assets. Thus, the acquiring/newly formed company does not take over all tax settlements of the divided company, but only the settlement of revenues and costs arising and deductible as of the date of separation.

However, these rules do not explain the method of allocating expenditures on the acquisition of allowances which, although pertaining to the gas emission year, become definitive only in connection with the redemption of the allowances effected during the next tax year. Assuming that without incurring expenditures on purchasing the allowances the electrical energy producer would not be able to achieve revenues, they should be classified as costs directly connected with revenues, i.e. costs which should be recognised by the company (here: the divided company) in the year in which the relevant revenues were received (see also judgement of the PAC in Warsaw of 8 February 2016, II SA/Wa 1007/15). However, there are also judgements which do not question a different classification and method of settlement of this type of expenditure (see judgement of the SAC of 9 June 2015, II FSK 1237/13). It should be remembered that incurring such expenditures does not guarantee or enable the earning of any specific revenues, but only protects the company against the consequences of failing to perform certain regulatory obligations provided under legal regulations. These are circumstances indicating the existence of an indirect connection of these expenditures with revenues.