That is the ruling Poznań Provincial Administrative Court gave on 28 March 2022 in case no. I SA/Po 1058/21 as it repealed a September 2021 decision of a tax authority (“TA”) regarding corporate income tax for 2013.
TA claimed the taxpayer overstated its deductions by deducting royalties for use of trademarks which TA alleged had no connection with taxpayer’s income. TA’s decision was based on the fact that the following happened on the same date:
- taxpayer (“X”) contributed non-cash assets to its subsidiary being a partnership limited by shares (“Y”), the assets comprising trademarks and trademark rights registered with Polish Patent Office;
- Y sold the trademarks to a limited liability company (“Z” ) of which X was a shareholder;
- X and Z entered into a trademark license requiring X to pay royalties as a percentage of its net revenue.
According to TA, the trademark transfer from X to Y was not intended to generate income or to preserve or secure a source of income for X but merely to obtain a tax benefit.
The court did not share TA’s view that the transactions had no genuine commercial purpose and could not be conducive to efforts to preserve or secure a source of income or potentially increase income compared to what it was previously.
The court held along the following lines:
- Any interpretation of Article 15(1) of the CIT Act should be guided by the purpose for which a given cost is incurred. Such construal guideline requires a verification of the taxpayer’s intention, i.e. if it was to generate income or preserve or secure a source of income and, thus, if there is causation reflected in the fact that the given cost has a direct or indirect impact on the potential for income to arise or increase or on the preservation or securing of an income source. Such assessment should take into account the connection between the expense and the business as well as the knowledge of causal relationships, i.e. that a cost (expense) can objectively contribute to efforts conducive to achievement of a desired goal (being to generate income or preserve or secure its source), which does not necessarily mean the goal must be achieved. Conduct which for the time being only generates expenses or even losses may be part of a business strategy and need not be inconsistent with efforts to generate income if they are intended to increase the entity’s profits over a longer perspective.
- The taxpayer’s transactions had real substance. They could not be disregarded under the law in force in 2013 as Article 24b(1) of the Tax Code was not in force at the time (having been repealed after Constitutional Court’s judgment of 11 May 2004, case no. K 4/03, Dz.U. 2004, nr 122, poz. 1288). On the other hand, the anti-avoidance rule introduced by the Act of 13 May 2016 to amend the Tax Code and certain other acts (Dz.U., 2016, 846) did not enter into force until 15 July 2016. As such, TA was not authorised argue, as it did, as if the anti-avoidance clause was applicable.
The court found that the general anti-avoidance rule did not apply under the law in force in 2013. This means tax authorities cannot, with respect to that time, disregard the legal effects of transactions whose principal purpose was to obtain a tax benefit.
Accordingly, if a transaction was valid, the tax authorities must respect the effects which the legal system attributes to it. According to the court, the taxpayer was within right and any “tax optimisation” that may have been involved cannot per se support or justify attempts to challenge the transaction’s effects under tax law.
The judgment is still open to appeal.
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