Legislative changes

On 30 April 2018, the so-called Constitution of Business enters into force (with the reservation of a small number of provisions entering into force at later dates). The Constitution of Business is a packet of five Acts, newly regulating the domestic trade market, which key Act is the one dated 6 March 2018 – the Traders’ Act.

The Constitution of Business comprises of the following Acts:

1. the Act dated 6 March 2018 - the Traders’ Act, which aim is the substitution of the currently binding Act dated 2 July 2004 on the Freedom of Business Activity.

2. the Act dated 6 March 2018 - on the Ombudsman of Small and Medium Traders. In principle, the Ombudsman is an independent and apolitical body which task is safeguarding the rights of traders guaranteed in the Constitution of Business.

3. the Act dated 6 March 2018 - on the Central Register and Information on Business Activity and the Information Point for Traders. The Act is aimed at the improvement of the operation of the Central Information and Register on Business Activity (CEIDG) and the Single Point of Contact, which will be replaced by the Information Point for Traders (PIP).

4. the Act dated 6 March 2018 - on the Principles of Participation of Foreign Traders and Other Foreign Persons in Business Trading on the Territory of the Republic of Poland, is a comprehensive regulation of the principles of participation for foreign traders and other foreign persons in business who are trading on the territory of Poland by way of grouping these principles in a single planned Act.

5. the Act dated 6 March 2018 - introductory provisions of the Act - the Traders’ Act and other Acts on Business Activity. This Act introduces changes to 190 Acts, including various tax Acts and other regulations related to them, as a consequence of the passing of the Acts belonging to the Constitution of Business packet. It also repeals the Act dated 2 July 2004 on the Freedom of Economic Activity (which was replaced by the new Act dated 6 March 2018 - the Traders’ Act) and the Act dated 4 July 2010 on the provision of services on the territory of the Republic of Poland.

One of the most important solutions implemented within the framework of the Constitution of Business is the specification, within the framework of the Traders' Law, of a catalogue of principles regulating the relationships between the traders and the State. The most important general principles arising from the Traders' Law comprise of:

-the principle of freedom of business activity,

-the principle that "what is not prohibited by law, is permitted",

-the principle of the presumption of honesty of a trader,

-the principle of the "friendly interpretation of provisions” (in dubio pro libertate),

-the principle of determining the factual doubts to the benefit of the trader,

-the principle of legal certainty,

-the principle of strengthening trust, impartiality, and equal treatment,

-the principle of the speed of action,

-the principle of the provision of information.

The abovementioned principles are to act as guidelines for the administration in respect of the relationships with "traders", i.e. any persons involved in business activity. We hope that these principles will positively shape the practices of the administration in the future, including the tax administration, in its relationships with taxpayers.

Judical Decisions

1. In decision no. II FSK 23/16 dated 23 January 2018, the Supreme Administrative Court found that any expenses incurred in connection with insurance purchased in order to secure the sources of upkeep of a taxpayer in the situation where this taxpayer has been deprived of gaining income, has not been incurred in order to obtain revenues from business activity. According to said Court, the expense incurred in connection with this insurance was of a personal nature and served the personal needs of a taxpayer and, consequently, cannot be regarded as a business activity revenue generating cost.

The matter concerned a physician who ran his individual private practice. He concluded an insurance contract so that (in the event of being unable to work) he would be able to cover the obligations towards the ZUS [Social Insurance Institution], as well as the costs of the replacement required in the contracts concluded with him. The insurance provided a one-off payment of a benefit on account of death or a permanent damage to health, as well as the payment of a monthly benefit in the event of not being able to conduct business activity for reasons specified in the agreement. In response to the applicant’s question as to whether it was possible to treat an insurance premium in respect of said insurance as a revenue generating cost in the meaning of the PIT Act, the Court's position in this respect was that “there is no link between the cost and the revenue. The expenses incurred for the payment of a voluntary insurance as a security against a total temporary incapacity for work as a result of an illness or an unfortunate accident cannot be regarded as revenue generating costs incurred in connection with business activity.”

Although the matter concerned an insurance against a total or temporary incapacity for work, in respect of a natural person, it seems that corporate entities can also face similar arguments in the event of their acquisition of similar insurance. We need to point out the well-grounded, negative practices of the relevant authorities consisting in the exclusion of so-called D&O insurance from revenue generating costs. A question arises as to whether the decision in question will affect the practice of regarding the so-called business interruption insurance as revenue generating costs. Certain characteristics of a part of business interruption insurance products can be the reason for the argument that there is no direct relationship between the costs incurred (i.e. a premium) and the statutory object of incurring a given cost (obtaining revenues from a source of income, or retaining, or securing, the source of income).

2. By way of the decision dated 29 November 2017, ref. no. III SA/Wa 3577/16, the Provincial Administrative Court in Warsaw settled the dispute in respect of the determination as to whether the value of specific benefits for an employee (accommodation, cost of travel, medical insurance and assistance, accident and third party civil liability insurance, costs of a visa and other immigration documents) financed by an employer would constitute for the employee revenue under a work relationship in the meaning of the PIT Act if incurring these expenses is directly linked to the discharge of this employee’s work-related duties.

The Provincial Administrative Court, in its decision issued in favour of the claimant employer, dismissed a previously issued negative tax interpretation. The Court pointed out that the reason for the dismissal of the erroneous interpretation was the position of the Constitutional Tribunal expressed in the judgment dated 8 July 2014, ref. no. K 7/13. The Tribunal, in its judgment, stated that an employee's revenue can comprise of these performances which, firstly, have been fulfilled upon the consent of this employee (i.e. the employee voluntarily benefitted from them), secondly, that they have been fulfilled in this employee’s interest (and not in the employer’s interest) and which yielded benefits to this employee such as an increase of the employee’s assets, or the limitation of the tax which would otherwise be payable, and thirdly, that this benefit is tangible and attributable to an individual employee (which means it is not generally available for all entities). It followed from the factual state specified in the application for an individual interpretation that the claiming company had decided that its employee was to work abroad in connection with the performance of a contract concluded by that company. In the analysed situation, the fact was that the employer incurred expenses in order to provide accommodation for its employee in a performance incurred for the benefit of the employer, due to the fact that the employer would tangibly benefit from the adequate and effective rendering of work by the employee. The provisions of law do not oblige an employee to incur expenses for their employer, connected with rendering work. All the costs connected with the employee’s rendered work is covered by the employer. Consequently, the Court shared the position of the claimant company that the expenses incurred were directly connected with the performance of work-related obligations arising from the employment contract but were not connected with the personal objectives of the employee.

The above decision led, therefore, to another ruling (after a positive decision from the Supreme Administrative Court, no. II FSK 2387/12) concerning the issue in question, which source was in the ground-breaking judgment of the Constitutional Tribunal. We hope that not only the courts, but also the authorities providing interpretations will begin to acknowledge and accept the arguments put forward in this judgment.

3. In its decision dated 18 December 2017, file no. I SA/Wr 936/17, the Provincial Administrative Court in Wrocław analysed the problem as to whether, within the framework of replacement performance executed by a general contractor, the relevant activities are taxed between the general contractor, and the subcontractor. In other words, whether a general contractor renders a service to a subcontractor.

The Court has taken the view that the activities rendered by a general contractor have not been entrusted to a subcontractor, but constitute a consequence of the contractual liability of the subcontractor on account of an inadequate performance of the agreement. The above resulted in the occurrence of damage on the part of the creditor (the general contractor) and an obligation to be compensated by the debtor (the subcontractor) (which follows from the relevant provisions of civil law).

Consequently, the Court has not shared the position of the Director of State Tax Information contained in the relevant interpretation, distinguishing the activities made within the framework of a substitution performance, depending on whether this substitution performance is carried out by a general contractor (in the case where the subcontractor does not acknowledge any negligence attributed to it), or whether these works are entrusted to a third party entity. According to the Court, this issue boils down to the technical issues of damage repair which, in both cases, results in the occurrence of costs. The actions undertaken within the framework of substitution performance and the settlement on that account are not materialised in the form of tax-related activities between the contractor and subcontractor; the subcontractor only incurs an economic burden of the damage suffered by the general contractor as a result of an action, or omission, on the part of the subcontractor. The aforementioned relationship does not comprise of any actions which would be subject to the tax on goods and services (VAT).

It should be underlined here that a similar issue was the object of the determination of the Supreme Administrative Court dated 9 September 2016, file no. I FSK 262/15, in which the court took the view that “The costs of replacement performance carried out by a third party are not subject to the tax on goods and services. (...) The costs of replacement performance carried out by a general contractor using its own resources are not subject to that tax, either."