Taxpayers have, for many years, been uncertain as to how to approach the tax issues raised by employer-granted benefits. We present below selected examples of the latest tax authority rulings and administrative court verdicts regarding such benefits. 

1. Confusion as to how to settle fuel costs when company cars are used for private purposes - ruling dated 17 January 2019 (case file number 0115-KDIT2-2.4011.426.2018.2.ŁS)

In the ruling dated 17 January 2019 (case file number 0115-KDIT2-2.4011.426.2018.2.ŁS), the Head of the National Revenue Administration responded to the question concerning whether an employer should separately add, apart from a fixed allowance for the use of a company car for private purposes as defined in the Act on PIT, the value of the fuel used for this purpose to revenues from the employment relationship of its employees. Contrary to the applicant’s view, the tax authority’s reply to this question was positive.

The tax authority indicated that when defining, in Article 12 par. 2a of the Act on PIT, the cash value of a gratuitous performance, the legislator indicated that it was the performance to which an employee was entitled in the use of a company car for private purposes, but not on account of using this car. Therefore, according to the tax authority, the legislator did not cover, under this provision, all the costs related to using/driving a company car for the employee’s private purposes. In addition, in market conditions, a company car is made available (lent, rented) when an entity provides the car with a given amount of fuel in the fuel tank and the client is obliged to return the car with the same amount of fuel. Therefore, the charge only refers to the identical possibility of using the car. One should also bear in mind that employees use their cars differently which can be due to different distances they have to travel from home to work, or their family situation (some employees use their cars to drive their children to school, or visit elderly parents, etc.). Lastly, it was pointed out that the price of fuel purchased by the employer for the employee’s private purposes could, on many occasions, significantly exceed the value of the fixed allowance for the use of the car as defined in the provisions of law which would be contrary to the regulations included therein.

Under these circumstances, in the tax authority’s opinion, the value of the performance referred to in Article 12 par. 2a of the Act on PIT defined as the fixed allowance only covers the costs incurred by the employer with which it would be charged, irrespective of whether the employee uses the company car for private purposes, or not (i.e., for instance, running costs such as insurance, maintenance, technical inspections, or tyre re-fitting, etc.). However, using a car made available in this manner implies additional costs for the employee, including the costs of fuel, parking fees or toll charges which should be included in the tax assessment basis apart from the statutory fixed allowance as a separate gratuitous performance.

It is worth pointing out that the Supreme Administrative Court [Polish: NSA] expressed a completely different position in its verdict dated 27 September 2018 (case file number II FSK 2430/16). The Court, while confirming the standpoints expressed in numerous verdicts of provincial administrative courts, recognised that both the costs of fuel and the running costs of a company car made available to an employee for his/her private purposes were included in the fixed allowance referred to in Article 12 par. 2a of the Act on PIT. According to the Court, a significant argument for this interpretation is, first of all, the purpose of introducing the provision concerned: the drafter’s intention was to simplify the rules of determining the value of performance, where the necessity to separately determine the costs of fuel used would not adhere to this objective. The additional argument is the fixed allowance construction and determination of its amount, depending on the car’s cylinder capacity since this capacity is the parameter that primarily determines the fuel consumption.

It seems that the administrative courts have already developed a uniform standpoint which is favourable to taxpayers and remitters. Unfortunately, this standpoint is still questioned by the tax authorities which means that, should an employer adopt the favourable interpretation presented by the courts, it must take into consideration the risk of entering into a dispute with the tax authorities.

2. Controversial settlement of employee accommodation when working outside the place of residence - the verdict of the Provincial Administrative Court [Polish: WSA] in Poznań dated 23 November 2018, case file number I SA/Po 530/18

The subject of the proceedings concerning the case of case file number I SA/Po 530/18 (the verdict of the Provincial Administrative Court [Polish: WSA] in Poznań dated 23 November 2018) was the question about whether the value of expenses incurred by an employer in favour of a specific employee in the form of ensuring this employee a gratuitous accommodation (at a hotel, or rented residential premises) due to fulfilling their duties outside the employee’s place of residence, constitutes a taxable revenue for this employee.

When analysing this issue, the court recalled that this had already been the subject of the administrative courts’ considerations. The starting point for these considerations was the verdict of the Constitutional Tribunal dated 8 July 2014 of case file number K 7/13, in which the Tribunal recognised that only those performances which were provided with the employee’s consent and in his/her interest (and not in the employer’s interest) and which brought him/her a benefit in the form of increasing assets or avoiding any expense which otherwise he/she would have to incur, and this benefit was measurable and attributable to an individual employee (it was not generally available to all entities) could be recognised as an employee’s revenue.

However, the employer incurring expenses to ensure the employee accommodation in the place where he/she performs his/her work, which in the case concerned was abroad, constitutes a performance incurred in the employer’s interest. According to the court, the obligation to ensure the proper work organisation cannot only be equated with ensuring a desk, or office supplies, or covering the costs of using a company car, or the costs of any electricity consumed. This obligation must be and should be referred and analysed in the context of a particular employee’s duties, the employer’s expectations resulting from these duties and the specificity of the given job performed. In the case examined, the specificity was a mobile and duty roster type of job (employees were assigned to various construction sites) which required accommodation to be provided as well. In this context, the court also recalled the obligations imposed on the employer by the Labour Code according to which an employer is obliged to organise work in the manner ensuring the full use of work time and also allowing the employees to achieve the high performance and due quality of work, organise work in a manner ensuring the reduction of work fatigue, as well as ensure a safe and healthy working environment. Also one should not overlook the fact that an employee does not have any discretion in managing or disposing of the performance made available to him/her in the form of a residential premise, and he/he uses this premises only for a specific purpose, i.e. to fulfil his/her employee duties. In this situation, irrespective of the regulation which limits the tax exemption exclusively to allowances and other dues for an employee’s business trip and the value of performances incurred by the employer due to employees’ accommodation up to the amount of PLN 500 per month, this performances do not constitute revenue on account of “other gratuitous performances."

Despite the rationality of arguments presented by the court which was supported by the verdict of the Constitutional Tribunal, the issue of settling the costs of accommodation is still vague as is also shown by the various standpoints presented in the tax rulings. An example is the tax ruling dated 17 January 2019 (case file number 0115-KDIT2-2.4011.431.2018.2.ENB). This ruling referred to the accommodation for employees provided by an employer – a temporary work agency, which due to implementing contracts concluded with other entities (the so-called employers-users), was intended for the second temporary workers it employed within the territory of France to work for local employers. According to the authority’s opinion, in the situation described, the provisions of law did not impose, on the employer, any obligation to compensate a temporary worker for expenses, as in the case of, for instance, a business trip. Performing work
in places indicated by the employer or the employer-user cannot be equated either with a business trip or remote work. The situation presented in the application, contrary to a business trip, does not constitute a business task to be fulfilled understood as an incidental event with respect to the work agreed and usually performed within the framework of an employment relationship. According to the authority, in this situation, the employer – despite no obligation imposed on it by the generally applicable provisions of law – ensures the employees a gratuitous performance in the form of providing accommodation by which one should recognise that the value of this performance constitutes a taxable revenue for the employees.

The tax authority’s different standpoint in this case comes from classifying the type of work performed by employees who, in the authority’s opinion, cannot be recognised as mobile employees. According to the judicial decisions of administrative courts, a mobile employee is considered to be an employee working in permanent displacement conditions (trips) for whom this trip is not of an exceptional character but is a normal fulfilment of the employee’s duties (such as a sales representative, or driver). Considering the above, one can see that each situation should be analysed on a case-by-case basis, with respect to the relevant provisions of law which are not only tax regulations but also provisions of the Labour Code, as well as any factual circumstances of a given case, including the provisions of the contracts concluded with a given employee and any other entities.

3. Taxation of benefits gained in connection with participating in “incentive” programmes based on securities

Taxpayers still have doubts as to the manner of taxation of so-called “incentive”programmes and similar ones of a loyalty reward character which are usually addressed to senior management and based on shares or other securities. An example of a judicial decision in this respect is the verdict of the Provincial Administrative Court [Polish: WSA] in Poznań dated 21 December 2018 (case file number I SA/Po 680/18) concerning the incentive programme addressed to key management staff (senior management) planned to be implemented by the company.

According to the presented description of the factual state, this program is to be the remuneration system established by the company on the basis of a resolution adopted by the general meeting of shareholders. The criteria for participation in this programme will be quite extended, and the assessment of work of a senior management member, his/her seniority and the performance of the whole company will be taken into account. To implement the provisions of the programme rules, the company plans to conditionally increase its share capital and issue free bearer subscription warrants (entitling their holders to take up shares), or issue shares. As part of the programme, the company will offer senior management members free subscription warrants or the company’s registered shares. The programme will provide for the possibility of acquiring warrants/shares from senior management members to offer them to subsequent programme beneficiaries. The principles of repurchase, including the repurchase price, will be determined in the programme rules and the agreement on participation in the programme, where, as a rule, it will not be possible to dispose of these warrants/shares in favour of any third parties, except for the company. These warrants will not give their owners (beneficiaries of the programme) any corporate rights or any rights to the company’s dividend. Granting subscription warrants will constitute only a potential possibility to obtain future benefits if the rights resulting from them are exercised and the shares are taken up. The act of holding these financial instruments does not give their holders any corporate or property rights, and specifically it does not imply possessing any voting rights or any dividend either.

In the context of the presented description of the future event, the applicant asked the tax authority whether, among other things, taking up / acquiring warrants would result in generating revenue which would be subject to personal income tax. The Head of the National Revenue Administration replied to this question in the individual tax ruling in the affirmative.

However, the tax authority’s standpoint was not shared by the Provincial Administrative Court [Polish: WSA] in the verdict concerned. The court reiterated that, according to the binding provisions of the Act on PIT, revenues are money and cash values and the value of obtained inkind performances and other gratuitous performances received or placed at the taxpayer’s disposal during a given calendar year. The Act on PIT does not define the term of gratuitous and partially payable performances, specifying only the manner of their determination. The judicial decisions of administrative courts only indicate that the scope of the term of a gratuitous performance is wider than the one used in civil law. Here it covers all economic phenomena and acts in law of which implication is obtaining benefit at the expense of another entity, or all acts in law and economic events which imply gratuitous, i.e. not related to any costs or any other form of any equivalent, increment of a person’s property which is of a measurable financial character. For this reason, resolving the dispute required settling whether the applicant taking up or acquiring a warrant would obtain any measurable, i.e. expressible in cash values, free-of-charge benefit.
According to the provisions of the Code of Commercial Partnerships and Companies, in order to increase share capital, a company can issue registered or bearer securities entitling their holder to subscribe for, or take up, shares, except for pre-emptive rights (subscription warrants). The subscription warrants entitle their holder to subscribe for, or take up, shares, except for pre emptive rights. Considering the similarity of subscription warrants with options, the judicial decisions of the administrative courts indicate that granting share options to participants of incentive programmes does not generate any taxable revenue because the applicant’s property did not cover any rights (increments of property representing a specific sum of money) which could be disposed by it as their owner. When granting the options (similar to the factual state of the case concerned), it is not possible to value this increment and consequently, recognise the revenue on account of receiving the option as required under Article 11 par. 2a point 4 of the Act on PIT. The applicant receiving this option cannot be sure whether the right of the share held by him/her will be ever factually converted into any real increment (e.g. holding shares of a given value) because his/her personal situation might change. In addition, according to the binding provisions of law, the requirement to determine the issue price or the manner of its calculation only becomes updated if subscription warrants are to be issued for consideration. This type of situation will not take place in the case mentioned since it was indicated in the request that as part of the programme described, the subscription warrants or the company’s registered shares would be offered to its members gratuitously.

Considering the above, the court recognised that the tax ruling was incorrect: contrary to the tax authority’s statements, both the subscription and acquisition of warrants by a taxpayer would not result in generating any revenue on account of gratuitous performances. This is because neither the subscription nor the acquisition of the subscription warrants is connected with gaining any measurable (as expressed in cash values) increment of any financial character.

The verdict in question is the next one in which the court stresses the necessity to precisely construe the provision which makes the generation of taxable revenue on the part of a third party on account of gratuitous performances conditional upon the factual receipt of these performances and the possibility of precisely determining their amount.

4. Provision of additional funds for trips for employees from a company’s Social Benefits Fund

In the ruling dated 31 December 2018 (case file number 0113-KDIPT2-3.4011.611.2018.1.ID), the Head of the National Revenue Administration replied to the request as to whether the amount of providing additional funds for trips from the resources of a company’s Social Benefits Fund (CSBF) is, for an employee, old age pensioner, or members of their families, a taxable revenue in the meaning of Article 12 par. 1 of the Act on PIT.
It followed from the factual state that according to the CSBF’s regulations as applicable to the applicant, the resources from the CSBF can be earmarked for providing additional funds for multiday nature and country trips which were, in fact, organised by the applicant. The purpose of organising these trips was to integrate employees which had a positive impact on their mutual relationships and work efficiency. Participants were free to decide whether to participate in these trips which were generally available to all those who were entitled to use the CSBF.

Due to the limited number of seats in the coach, the Social Commission granted the eligible persons co-funding for the trip, according to the principles defined in the Company Social Benefits Fund Act and the CSBF’s Regulations binding in the Company. The trips were organised by travel agencies which, as a result of tender proceedings, calculated the general cost and the cost per person of the trip. The cost of the trip (according to the specification prepared by the Company) consisted of, among other things, the costs of transport, board, accommodation, and entrance fees to visited places. The travel agency issued invoices for “organising the trip”. Employees and pensioners paid for themselves and their family member according to the table of fees enclosed with the CSBF’s Regulations. The remaining amount of the cost of this trip was co-financed from the CSBF’s funds. The company collected and remitted, from the co-financed amount, the advance on personal income tax recognising this co-financing of the trip as “other gratuitous performance” according to Article 12 par. 1 of the Act on PIT, and the co-financed amount was exempted from taxation, according to Article 21 par. 1 point 67 of this Act, only up to the amount of PLN 1,000.00.

However, according to the interpreting authority, it follows from the assessment of the factual state taking into account the content of the verdict of the Constitutional Tribunal dated 8 July 2014, case file number K 7/13, that the objective criterion – any increment of property (benefit) on the employee’s part – is not met if an employer proposes its employees to attend integration meetings or trainings even if they are organised outside the employees’ place of work (off-site events). In this case, even if an employee attends a meeting (conference, training) voluntarily, no benefit arises on his/her part, even in the form of saving an expense. However, without the real element in the form of the employee receiving any benefit, no revenue is generated on his/her part. The event which would be connected, as the Act stipulates, with generating a tax obligation does not occur. Should there be no concrete and individually assigned performance, there are no grounds to determine its amount either. Therefore, participation in an integration meeting (off-site event) offered by the employer to the employee does not mean that this employee receives any revenue because there are no grounds to recognise a performance which is addressed to all, to individual participants as their measurable benefit.

5. General interpretation on applying 50% of revenue earning costs to royalties

The provisions of the Act on PIT state the possibility of applying the favourable 50% rate of revenue earning costs to those employees who create works as part of the types of activities listed in Article 22 par. 9b of that Act (among other things, in the scope of R&D activities, or computer programmes) and, in exchange for disposing of copyrights to their works, receive a royalty (constituting part of their remuneration). The tax authorities’ rulings concerning the conditions justifying the application of 50% of the costs are, however, ambiguous and often contradictory; thus, they do not clarify the existing doubts. It is also easy to see that the Head of the National Revenue Administration has recently increasingly challenged the applicants’ standpoints leading to unfavourable rulings for taxpayers.

In this situation, on 3 January 2019, the Ministry of Finance decided to publish an announcement on commencing tax consultations with respect to a draft general ruling on the possibility to apply the 50% rate of revenue earning costs to part of the remuneration received under an employment relationship on account of disposing of copyrights. The draft of this ruling was also made available.

This draft includes explanation concerning:
(i)  creating, under the employment relationship, a work which is subject to copyright and the consequences related to the employer accepting it,
(ii)  the necessity to possess evidence confirming that the employee created the work which is subject to copyright,
(iii)  the necessity to explicitly separate any royalties from any other components of the employee-author’s remuneration.

The draft general ruling presented by the Ministry shows that the employer can apply a percentage or quota royalty with respect to the employee’s remuneration where this royalty must relate to a specific employee’s work (works).

It is worth noting that the general ruling concept is to ensure the tax authorities’ uniform application of tax regulations. The Ministry of Finance’s general ruling, which has been issued ex officio or upon request, stipulates certain general guidelines and commentaries on tax regulations. Importantly, such ruling also has a protective value – according to the binding provisions of law, complying with the general ruling cannot be detrimental to anyone who complies with it. From this perspective, we should expect that the planned general ruling will improve the security of taxpayers who follow the principles presented therein.

The general ruling is scheduled to be issued in the near future.