Poland: No Possibility To Change The Qualification Of Revenue Upon Discharge Of An Obligation

Ruling description

In an award of 29 July 2015, the Province Administrative Court in Warsaw ("WSA") held that the company does not have the possibility to make an adjustment of revenue that was previously ascertained as a result of an inspection. The lack of such possibility results from the fact that there is no possibility to qualify such revenue otherwise in the course of an interpretation proceeding.

A company carrying on business activities involving the construction of premises for rent ("Company") applied for a written tax ruling on the corporate income tax it paid. In 2008, the Company signed a preliminary lease agreement ("Agreement") with a future lessee ("Business Partner"). Pursuant to the Agreement, the Company issued a promissory note to the Business Partner in exchange for the monies to be used to finance the construction of the premises to let. The Company agreed with the Business Partner that the monies would be returned by it in the form of deductions from the lease rent to be paid in the future. The Agreement also stipulated that in the event that the promised agreement were not executed or the lessee were in default with the payment of the amounts due, then the amounts paid by the Business Partner to acquire the promissory note would become the compensation for the Company.

In the case at hand, the last of the clauses listed above was applied since, as a result of the economic slowdown, the promised agreement was never signed. Soon afterwards, the Tax Control Authority (UKS) made an inspection at the Company and, in the course of the inspection, the Authority qualified the monies paid by the Business Partner as a compensation paid out pursuant to the Agreement. As a consequence, the Company recognized revenue on that account.

A few years later, due to improved business prospects, the Company and the Business Partner expressed their intent to execute the promised lease agreement that was originally abandoned. The Company addressed a question to the Head of the Tax Chamber in Warsaw as to the possibility to requalify the revenue that it obtained as the compensation in relation to the Agreement, and the potential revision of its tax return. According to the Company, execution of the promised agreement will result in an obligation to make an adjustment of revenue generated in 2008.

The interpreting authority did not share the Company's position, in response to which the Company made an appeal to the WSA.

The WSA dismissed the Company's appeal and expressed the view that the fact of the UKS making the inspection proceeding is crucial for resolution of the case. According to the Court, in its interpretation proceeding, the tax authority is bound by the findings made by the tax control authority. Otherwise, the individual tax ruling would be deprived of its guarantee function. Hence, it should be stated that the facts of the case established by the UKS are a definitive element that is not to be modified as a part of the application for an advance tax ruling or in the course of the interpretation proceeding. For that reason, the Company does not have the right to a potential adjustment since the interpreting authority was obligated by law to treat the revenue in question as compensation.

Comment

While the award of the WSA is correct as regards the merits of the case, it raises a number of doubts. The Company has no basis to revise the tax return. However, the source of its inability is totally different than the reason to which the Court pointed.

Under civil law, the renewal planned by the Company is not possible due to the performance of the obligation. The parties agreed that the compensation was paid, and for that reason the Company's position regarding the possibility to make the adjustment of revenue (in the form of compensation) was wrong. However, one cannot agree with the statement by the Court and the tax authority that the sole right to rectify a tax return is excluded as a consequence of issuing the results of a tax control.

Art. 81b par. 1 Clause 2 of the Tax Ordinance clearly reads that the taxpayer is entitled to rectify a tax return: a) "even after the completion of a tax inspection" and b) "even after the completion of a tax proceeding – to the extent not covered by the decision defining the amount of liability".

Additionally, the issuance of a tax inspection result does not preclude the possibility to apply for an individual tax ruling.

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