Tax Practice win in Supreme Administrative Court – precedential judgment

Experts from the Tax Practice have successfully represented an FMCG sector client in a dispute over costs incurred in acquiring shares in a related company, which were subsequently sold at a price lower than the acquisition price, thereby generating a tax loss, being treated as tax costs. The tax authorities claimed that the acquisition of the shares was aimed solely at gaining a tax benefit and that it did not meet any of the criteria for the costs being included in tax costs, i.e. earning income or preserving or securing a source of income.

In a judgment of 6 December 2019, case no. II FSK 2078/19, the Supreme Administrative Court (SAC) dismissed the authority's last resort appeal against a judgment of the Voivodship Administrative Court in Gliwice, which was favourable to the taxpayer.

Administrative courts at both instances confirmed that, during the period covered by the proceedings (i.e. in 2010), the tax authorities had no grounds to question the entity’s tax settlements, even assuming that the legal transactions were carried out in order to gain a tax benefit. The SAC indicated that, in the legal regime at that time, there was no tax law circumvention clause and that neither Article 199a of the Tax Code nor Article 15(1) of the CIT Act fulfilled this function. Consequently, these regulations do not give grounds for refusing to recognise the expenditure as a tax cost due to the authorities' desire to prevent the taxpayer from gaining a tax benefit.

At the same time, the SAC agreed with the conclusion reached by the Voivodship Administrative Court in Gliwice that, in the event of the shares being sold and income being earned in this respect, the costs of acquiring the shares were tax deductible because the aim of incurring expenditure in order to earn income is met and the link between the expenditure and the income is clear and obvious. In the circumstances, it is not necessary to analyse the existence of a link between incurring expenditure to acquire shares and obtaining income from their sale (the expenditure determines the realisation of revenue).

The SAC judgment is of a precedential nature, as the SAC explicitly confirmed that, in the legal regime prior to the introduction of the general tax evasion clause, Article 15 of the CIT Act could not function as an anti-avoidance clause.

The SAC judgment is also of key importance for taxpayers in dispute with the tax authorities, particularly as regards the tax consequences of a restructuring carried out before the introduction of the GAAR clause (before July 2016). It should cool down the efforts of the revenue administration authorities, which are trying at all costs to challenge the tax settlements of taxpayers concerning periods when the tax law circumvention clause was not in force, regardless of the lack of legal grounds for this course of action.

The client was advised by DZP lawyers Artur Nowak, Partner, and Paweł Suchocki, Tax Manager.