Payment as part of a court settlement with partial liability for defectiveness is a tax non-deductible cost. Such a ruling was made on 22nd February 2023 in the Supreme Administrative Court (file reference number II FSK 1901/20).
The applicant was an entrepreneur who performs, among others Industrial floors. As part of one of the contracts, there was a dispute regarding the defect in the floor. The applicant decided that he was partial responsibility for the defective performance of the construction service and agreed to pay the contractor in the amount of PLN 250,000 together with the costs of the proceedings. In the course of the proceedings, the applicant specified this benefit as resulting from a settlement, not compensation.
The applicant asked the question whether the above amount would constitute a tax cost in PIT (during the proceedings before the authority, the question of the costs of proceedings was withdrawn).
According to the applicant, the expenditure meets the general conditions of Article 22 sec. 1 of the Polish PIT Act. The applicant also stated that Article 23 sec. 1 point 19 of this Act, which excludes the amounts of contractual penalties and compensation from tax costs, will not apply here.
The tax authority decided that such a position is incorrect – since the obligation to pay results from the defective performance of the floor, the above exclusion from tax costs will apply.
The District Administrative Court in Bialystok agreed with this position.
The court of first instance decided that the applicant had committed neglect when providing services, and the purpose of incurring the expenditure was not to increase income but to liberate himself from liability. The DAC did not question the fact that the settlement had saved the applicant from the risk of paying more compensation, but he stated that even the recognition that the taxpayer’s proceedings were rational, in itself, did not determine the recognition of the expenditure as intentional in terms of preserving or securing the source of income. The court of first instance also considered that the payment was compensation.
The Supreme Administrative Court agreed with the first instance court and the applicant dismissed the cassation complaint.
The Supreme Administrative Court decided that if the applicant was sued and agreed as part of the settlement to pay, considering his partial responsibility as a defective construction service, it is logical to the conclusion that the authority extended – this is compensation related to the defectiveness of the works performed. Therefore, the authority correctly determined the expenditure as a tax non-deductible cost. The fact of taking payment in the settlement does not change these circumstances. The Supreme Administrative Court agreed with the authority that the basis for payment is Article 471 of the Polish Civil Code (improper performance of the obligation). Hence, arguments for settlements (in place of compensation) are unfounded. The issue of compact settlement does not matter, as is the (only) partial responsibility of the applicant. The Supreme Administrative Court also made it clear that a broader discussion could concern legal costs, but this thread was withdrawn by the applicant.
