Energy price hedging and VAT – when do swap transactions become taxable?
Are transactions hedging energy prices through swap contracts VAT-neutral? A recent individual tax ruling issued by the Director of the National Revenue Information Service (KIS) shows that not entirely – and highlights what taxpayers should pay attention to.
A company entered into hedging agreements to limit the risk associated with changes in electricity prices. The settlement involved comparing a fixed price with a floating price, with one party then paying the resulting difference.
The Director of the National Revenue Information Service (KIS) ruled that, in such transactions, the company acts as a service provider, and the activities performed constitute a supply of services subject to VAT regulations.
Three key points confirmed by the tax authority
1. VAT exemption. Services relating to swap-type financial instruments are exempt from VAT under Article 43(1)(41) of the Polish VAT Act.
2. Taxable base. The taxable base is the positive settlement result – i.e. the amount of the difference between the fixed price and the floating price, due to the company from its counterparty in a given settlement period. If the settlements balance out, or if it is the company that makes a payment to the counterparty, no turnover arises on its part from the supply of this service.
3. VAT deduction ratio. Turnover from hedging transactions does not need to be included when calculating the VAT deduction ratio, provided these activities are of an ancillary nature. This is not determined solely by their number or value – what matters is the taxpayer’s overall business activity, including:
- the level of employee and asset involvement,
- the use of purchases subject to VAT,
- the connection between the hedging activity and the core business,
- whether the transactions constitute a permanent and necessary extension of the business.
“Hedging does not automatically fall outside the scope of VAT simply because it serves to hedge a company’s own risk. The nature of the service, the taxable base, and its impact on the VAT deduction ratio each need to be established separately” – comments Grzegorz Arczewski, Director in the VAT team at Thedy & Partners.
Practical takeaway
Companies hedging energy prices through swap contracts should separately analyse the VAT treatment of such transactions – in terms of the exemption, the taxable base, and their impact on the deduction ratio.
Contact: Grzegorz Arczewski – grzegorz.arczewski@thedy.pl