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.

24/05/2022

B2RLaw as a partner of CEE VC Summit 2022

Together with Vestbee we would like to invite all startups and VC funds for the biggest event dedicated to VC […]

MORE
09/05/2022

B2RLaw commits to Greener Litigation

With a leading, and one of the largest disputes practices in Poland, B2RLaw is the first Polish law firm to […]

MORE
06/05/2022

B2RLaw advises Partners for Growth on multi-million USD international Venture Debt transaction

B2RLaw acted as Polish legal counsel to Partners for Growth (PFG) on its cross-border USD 25 million Venture Debt financing […]

MORE
26/04/2022

B2RLaw advises Fortress REIT on another logistics transaction regarding property in Zabrze

B2RLaw has advised South African-based Fortress REIT Limited on another logistics and warehousing acquisition, regarding property in the Silesia region […]

MORE
12/04/2022

B2RLaw recommended in the Legal500 ranking 2022

We are proud to announce that in this year’s edition of The Legal 500 we have been recommended in 5 […]

MORE
04/04/2022

B2RLaw appoints Piotr Szelenbaum as Partner to lead Capital Markets and Public M&A practices

B2RLaw has appointed well-regarded lawyer Piotr Szelenbaum to lead its Capital Markets and Public M&A practices. Piotr has over 25 […]

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