NSA: penalties for withdrawal from a contract may be a cost
If a taxpayer, when terminating a contract - for which he must pay a contractual penalty - incurs a smaller loss than he would have incurred if he had complied with the terms of the contract, he is entitled to include the penalty paid as a tax cost, according to a judgment of the NSA (ref. II FSK 68/21).
In the case analysed by the court, the taxpayer, by deciding to withdraw from the agreement (which involved the necessity of paying a contractual penalty), retained more financial resources than if he had executed the agreement without economic justification (e.g. at a loss).
– The NSA ruling is very important, as in practice the tax authorities very often apply a broad definition of contractual penalties subject to exclusion from tax costs – emphasises Aleksandra Kodłubaj, a consultant at Thedy & Partners.
In its ruling, the NSA noted that the legislator excluded the possibility of recognising only strictly specified types of contractual penalties as tax costs. If the legislator’s will had been to exclude in genere the possibility of recognising contractual penalties as tax deductible costs, he would have expressed it by formulating the exclusion differently. At the same time, in the NSA’s opinion, if a rational legislator does not list the contractual penalty for withdrawal from an agreement among the contractual penalties excluded from the tax deductible costs, it may be included in the tax deductible costs, provided that it meets the prerequisites specified in Article 22(1) of the PIT Act.
– The NSA also emphasised that economically rational decisions taken initially under certain conditions, due to a negative change in circumstances or the development of business activity, may result in the need to take measures aimed at preserving or securing sources of revenue and incurring expenses that may be classified as tax costs in this connection – concludes Aleksandra Kodłubaj.