The Polish Investment Zone offers great opportunities, but it also poses many questions. Ascertaining properly the level of expenses and the moment they are incurred may prove a considerable challenge. Any mistakes made in such matters may prove very costly. This is because the decisions granting support make the public aid conditional on a proper settlement of the costs of a new investment. No wonder then that an increasing number of companies are opting for an additional protection in the form of a private tax ruling.

This lesson has been learnt by a company which, in accordance with a decision issued by a Special Economic Zone, was to incur costs amounting to nearly PLN 25.5 million by the end of 2020. It appeared simple at first. The investment absorbed over PLN 29 million. Due to a deteriorating financial condition, the company decided, however, to sell certain machines and equipment to a leasing company. Yet, the company continued to use those fixed assets under a financial lease arrangement. The total value of the transaction exceeded PLN 8 million.

What is a qualifying cost?

Under these circumstances, the company wondered whether the net price of the fixed assets under a lease agreement will qualify as a cost eligible for the support. The price comprises the down payment, lease instalments and residual value.

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Under the regulation on public aid to certain enterprises for new investments, in the case of financial lease qualified costs include the price of acquisition of assets other than land, buildings and building structures.

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The company persuaded the Head of KIS that the price of acquisition is the same as the purchase price (i.e. the sum due the seller). Hence, all the above liabilities under lease should be taken into account. The Head of KIS agreed with this line of reasoning.

When can a cost be deemed as incurred?

The Company’s position was that the date the costs are incurred is the date of the leased fixed assets being entered in the records. However, the tax administration did not agree with that position. In the authority’s opinion, ‘incurring’ means an expense being actually made. A mere declaration on the intention to incur a cost or obligation to incur it in the future will not suffice.

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The moment an investment cost is incurred, in calculating the level of received or admissible public aid, must be determined in accordance with the cash accounting principle, i.e. by recognising the moment the cost is actually incurred for the purposes of cash accounting (the moment of payment)

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The above position is in harmony with the hitherto adopted line of ruling of the tax authorities. Nevertheless, a different approach can be encountered in courts’ case law concerning special economic zones.

The tax ruling in question exemplifies the level of risk the taxpayers doing business in a special economic zone have to face on a daily basis. For failure to satisfy the conditions set out in a support decision may result in the decision being set aside. Sale-and-lease-back may seem an attractive solution for companies facing liquidity issues. However, exercising this option should be preceded by an analysis of its tax implications.

Private ruling of Head of the National Revenue Information Service of 28 June 2021 (case no. 0111-KDIB1-3. 4010. 154. 2021. 1. AN).

Wojciech Jasiński, Tax Consultant, ATA Tax Sp. z o.o.

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