Record of contractual penalties in the KPiR - how to keep it?

Contractual penalties are the amounts stipulated in the contract due to one of the parties for failure to perform or improper performance of the obligations by the other party. Most often, these are penalties for late performance of the subject of the contract or for improper performance due to the quality of performance. How should the records of contractual penalties be included in the KPiR? Check!

Record of contractual penalties in the creditor's records

Receipt of a contractual penalty constitutes tax revenue recognized on a cash basis - i.e. upon receipt. Pursuant to Art. 14 sec. 2 of the PIT Act, income includes all received damages and penalties, including contractual penalties. It does not matter whether, in the case of the debtor, the penalty was tax deductible or not. The received contractual penalties are recorded by the taxpayer in the KPiR as other revenues.

Record of contractual penalties in the debtor's records

In the case of the debtor, the contractual penalties incurred by him will not always constitute tax deductible costs.

Pursuant to Art. 23 sec. 1 point 19 of the PIT Act, contractual penalties for:

• defects of the delivered goods,
• defects of works and services performed,
• delay in delivering goods free from defects,
• delay in removing defects in goods or performed works and services.

Penalties concerning the above-mentioned titles result from the debtor's fault and therefore cannot constitute tax costs. This does not mean, however, that other types of contractual penalties, which the legislator does not mention in the above article, may always constitute tax costs. In order for the expenditure related to the payment of the contractual penalty to be included in the costs, it must first of all be incurred, which means that only the penalties paid are included in the costs, according to the cash method. The costs of obtaining revenues will not be charged but unpaid contractual penalties. This expense may also not be on the list of costs not recognized as tax deductible costs referred to in article 1. 23 sec. 1 of the PIT Act, and in addition:

• there must be a cause-and-effect relationship between the expenditure incurred and the receipt of income,
• incurring this expense must be justified from the point of view of the conducted activity,
• the assumption that due diligence was maintained in preventing damage (no defects and delay in their removal) is met.

An example of contractual penalties that are classified as tax deductible costs are primarily penalties for delayed performance of a contract, e.g. untimely delivery of goods or untimely performance of works or services (an example of an assessment of the situation according to tax authorities is the Tax Interpretation: IBPBI / 1 / 415-370 / 10 / WRz). It is important that the imposed penalty and the resulting expenditure are in a cause-and-effect relationship with the generated revenues, e.g. payment of a contractual penalty will enable the continuation of cooperation with a given contractor, and therefore also generating revenues, which is also confirmed by the relationship with the conducted activity.

Costs incurred on account of contractual penalties to be recognized as tax deductible costs are recorded in the KPiR as other expenses.

To sum up, the contractual penalties received will always constitute tax revenue, while the contractual penalties paid will be tax-deductible only if strictly defined conditions are met.