Top searches

PL

Resources

Can a penalty fee for the early termination of a lease agreement be classified as a tax-deductible cost?

06/07/2020

 

A Company, which was leasing service premises under a lease agreement concluded for a definite period, decided to terminate the lease early because it was unprofitable. This could have happened to anyone, especially during the coronavirus epidemic.

When the parties terminated the lease agreement, they agreed that the company would pay a lump-sum penalty fee to the lessor.

On 29 December 2015, the Director of the Tax Chamber in Warsaw, acting on behalf of the Minister of Finance, issued an individual interpretation for the company, No. IPPB3/4510-833/15-2/DP, in which he considered the position of the company regarding the possibility of including the fee paid for the early termination of the lease agreement as a tax deductible cost.

The Company filed a complaint against this interpretation of the tax law with the Provincial Administrative Court in Warsaw (WSA), which, in its judgment, annulled the contested individual interpretation and ruled that Article 15 (1) of the CIT Act obliges it to take into account the whole context of the taxpayer’s economic activity, as it is only from this perspective that it can be assessed whether the expenditure was incurred for the described purposes or not.

It is important to note that the intention of the taxpayer to reduce losses and not only to increase the profits generated by a certain part of company’s activity justifies the view that the expense is deductible.

Losses reduce income and therefore, reducing or eliminating a loss leads to increased income. Incidentally, this view is apt and can be used in a number of issues in disputes with the tax authorities.

The Head of the National Revenue Administration submitted a cassation appeal against the verdict of the Provincial Administrative Court in Warsaw, which was dismissed by the Supreme Administrative Court.

The Supreme Administrative Court shared the position of the Provincial Administrative Court in Warsaw, stating that, if the termination of a lease agreement and the payment of a fee on that account creates a more favourable situation for the taxpayer resulting in an increase in income, then such action should be considered economically justified and the expense incurred for the additional fee is related to maintaining or securing the source of income.

The Director of the National Tax Information Office shared the taxpayer’s argument that the company, by paying the lessor a fee for the early termination of the lease agreement, sought to preserve and secure its sources of income, and the main purpose of the transaction was to improve its financial standing as continuing to lease the service premises under the existing agreement proved to be unprofitable.

To sum up, a fee paid for the early termination of a lease agreement may be classified as a tax deductible cost if the circumstances of the case and the taxpayer’s motivation indicate that the purpose of the action taken was to secure and preserve sources of income pursuant to Article 15 (1) of the CIT Act.

It is important to properly document these circumstances and to implement certain ways of demonstrating such circumstances.

Marcin Malinowski
Advocate

Kinga Karaszewska
Advocate trainee

 

View more resources

Catch up on the very latest B2RLAW
announcements and news here.

20/01/2021

B2RLaw advises PKO VC and RKK VC on joint investment in PAPU.io

B2RLaw has advised venture capital funds PKO VC and RKK VC on a joint equity investment into Papukurier Sp. z […]

MORE
20/01/2021

Do tax authorities abuse the law by initiating penal fiscal proceedings?

As indicated by the case law of the Supreme Administrative Court[1] (hereinafter as the “SAC”), the answer to this question […]

MORE
18/01/2021

B2RLaw advises global consulting firm Vox Financial Partners on the acquisition of Delv Global

B2RLaw has advised Vox Financial Partners, a global consulting firm that supports financial institutions in the planning, resourcing, and delivery […]

MORE
14/01/2021

B2RLaw grows Real Estate & Construction Practices with the appointment of senior specialist and associate hire

Krzysztof Marzyński, a senior real estate and construction specialist, has joined B2RLaw as Of-Counsel. Krzysztof has over 16 years of […]

MORE
13/01/2021

B2RLaw advises Next Road Ventures on its investment in SaaS tool TrustMate

B2RLaw has advised CEE venture capital fund Next Road Ventures on its venture capital investment in SaaS tool TrustMate. Founded […]

MORE
07/01/2021

B2RLaw advises on the formation of Poland focused fund Stability Capital

B2RLaw has advised founders Paweł Malon and Marek Jakubów on the formation of Warsaw based Search Fund, Stability Capital. A […]

MORE

Get in touch

Not sure who to contact? Let us help you find the right lawyer.

This site uses cookies to improve your experience More information.

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.

Close