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Limits on the Amount of Costs Related to Purchasing Certain Rights and Services

Pursuant to the Act of 27 October 2017 Amending the Acts on Personal Income Tax, Corporate Income Tax and the Act on Flat-Rate Income Tax on Selected Incomes Earned by Individuals, the document was compounded by means of adding Article 15e.

The primary purpose of the regulation is to limit the deductibility of the tax costs incurred to purchase certain services from related entities or entities having their seat in countries engaged in harmful tax competition. Determining which particular services are subject to the limits has now become a matter of major significance for those who are responsible for keeping company accounts, as the list of services contained in the Article is non-exhaustive. The phrase “and benefits of similar nature” that the legislators employed in the wording of its provisions has caused considerable uncertainty with regard to the actual scope of services subject to the limits.

On 24 April 2018 the website of the Polish Ministry of Finance published a communication which featured explanations regarding the abovementioned Article, provisions of which set out services such as: advisory services, market research, advertising, management and control, data processing, insurance, guarantees and sureties, and services of similar nature. The Ministry of Finance pointed out that none of these phrases had been given a statutory definition, and that they were not specifically stipulated in the general tax law. Considering the above, in order to interpret them properly, taxpayers should rely on their vernacular meaning and the Polish Classification of Goods and Services.

The communication also stipulated that advisory services will also refer to business advisory. Therefore, the following management services shall be limited: strategic advisory, finance management, market management, management of human resources, production management, services in the field of interpersonal relationships. However, the provision does not apply to specialist advisory services, such as: legal services, accounting services, recruitment and staff acquisition.

Similar doubts arose about properly interpreting the scope of advisory services – the Ministry also pointed to the lack of the statutory definition of the term. The authority advises to rely on the jurisprudence of the European Court of Justice concerning advertising services based on the Council Directive 2006/112/WE dated 28 November 2006. Consequently, advertising services are deemed to include any action that involves circulating information regarding the existence of a business and the quality of the product or services it offers, carried out with the aim of increasing their sales. One might be under the impression that the subsequent sections of the Ministry’s communication takes account of the fact that the extended definition of advertising services might be considered too far-reaching. The term will not cover certain expenses of promotional nature, loyalty programs, organizing receptions, banquets, press conferences, congresses, seminars, and contests.

While performing a tax risk analysis of the abovementioned regulations it is important to be mindful of the exceptions to the rules set out in Article 15e of the CIT Act. Should the purchased services be directly related to the services rendered by the purchaser or to its production, the costs will not be limited. An analogous situation should take place in the case of costs reinvoiced to other entities. In their explanations the Ministry also featured an example of an advisory company purchasing advisory services from a related entity to use them in the performance of services – such costs, being directly sales-related, will not be limited.

It is also important to remember of the materiality threshold of PLM3m, up to which the limiting regulations do not apply.

To sum up, the new regulations intentionally make use of vague terms so as to allow tax authorities to apply them as extensively as possible. The matters they refer to, namely transactions with related entities, might expose taxpayers to the risk of being denied individual tax rulings. As a result, taxpayers’ decisions on the fiscal aspects of running their businesses will be laden with material tax risk.

Ryszard Grzelczak
Tax adviser no. 12670

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