1. The Tax Authorities are not authorised to challenge a tax loss incurred more than five years previously.
On 6 November 2017, the Supreme Administrative Court passed a resolution (no. II FPS 3/17), according to which a tax loss incurred in 2007 and deducted from income for the years 2008 – 2012, can only be challenged by the tax authorities up to the end of 2013.
It clearly follows from the arguments of the resolution that it is not possible to conduct tax proceedings and decide on the amount of the loss in tax proceedings incurred by legal persons for the tax year in which it was incurred in the situation where the period of prescription of a fiscal obligation in respect to that year has lapsed.
Moreover, in the explanatory statement, the Court determined that: “The principle of equality points out the need to maintain uniformity in taxation by way of the introduction of a universal and proportional taxation. The universality of taxation means the taxation of all remitters with a given tax on the same principles which also means that the principle of the expiration of tax liabilities as a result of the lapse of the period of limitation should be specified for all of the remitters of a given tax in the same manner. Consequently, the acceptance, within the framework of the interpretation of law, of the different approach to the prescription of the results of tax settlements of income tax taxpayers concerning the occurrence of a tax obligation, or the occurrence of a tax-exempt income, or a tax loss - would result in an interpretation incompliant with the Constitution and with the principle of a democratic state under the rule of law, as well as the principles of equality and justice arising from it.”
The above resolution should ultimately eliminate the doubts concerning finding a tax loss incurred by a given taxpayer as final upon the lapse of the period of limitation of a tax obligation for the year affected by a given loss.
2. Compensation for the dissolution of an agreement can, in certain situation, constitute an income generating cost.
In its judgment dated 27 October 2017 (no. II FSK 2754/15), the Supreme Administrative Court determined that it was possible to treat the expenses incurred in connection with the payment of a compensation for the dissolution of a lease agreement, as an income generating cost, if its purpose was maintaining, or securing, the source of revenues. In its explanatory statement the Court stated that: “The source of income of a given taxpayer is affected both by the expenses incurred in connection with the payment of a contractual penalty for the dissolution of an agreement concerning a given place, (or) places of conducting business activities, and also those revenues which the taxpayer can obtain as a result of a transfer of a given activity to another place, which actually means for a given taxpayer the opportunity to conduct a more profitable activity. The assessment of securing the source of income should not, in this case, be limited to a one-off occurrence, but should also take into account and consider a given expense (e.g. a contractual penalty) within the whole of the source of the revenue which can incur expenses and obtain revenues from other places of conducting business activity.”
The above position is different from the one shared by the tax authorities which, as a rule, in their tax interpretations, contests the taxpayer’s right to treat contractual penalties as revenue generating costs.
3. Accounting regulations do not affect the principles of tax treatment of incurred expenses.
In its judgment dated 17 October 2017 (II FSK 2447/15), the Supreme Administrative Court put an end to the doubts concerning the impact of accounting regulations on fiscal principles for the settlement of expenses by income tax remitters. It followed from the description of the factual state that a company intended to account for any expenses incurred for the commission and bonuses for acquiring subscribers as one-off income generating cost, although in the accounting (balance-sheet) approach they are accounted for over time by way of cost accruals.
The Court stated that “by virtue of Art. 15 Sec. 4e) in conjunction with Art. 15 Sec. 4d) of the CIT Act, any expenses incurred for the commission and bonuses paid for the acquisition of new subscribers, as costs of an indirect nature, can be accounted for as a one-off revenue generating cost at the moment of incurring these costs. At the same time, in order for these costs to be so deducted, it is immaterial how the company accounts for these costs in the balance-sheet. Whether the company accounts for these costs through time by way of costs accruals (as planned by the company), or treats them as a cost deducted on a one-off basis, from the perspective of law it is possible, bearing in mind the principles specified in Art. 15 Sec. 4e) of the CIT Act, in conjunction with Art. 15 Sec. 4d) of the CIT Act, to treat these costs, on a one-off deduction basis - as revenue generating costs.”
This judgment once more confirms the principle that the function of accounting ledgers is registering business operations and their relevant financial operations, and the entries in these accounting ledgers cannot create or modify the provisions of material tax law.