Contractual penalty as tax deductible cost

As practice shows, contractual penalties are more and more often reserved in contracts between entrepreneurs. The issues related to the recognition of contractual penalties in the costs of obtaining contractual penalties have caused interpretation problems for many years, which usually results in disputes with tax authorities, and often even ends in court.

Contractual penalties and the Civil Code

The provisions on contractual penalties can be found in the provisions of the Civil Code. This institution serves to protect the interest of the creditor in the event of improper performance of the obligation by the debtor.

The provisions of the Civil Code provide for the possibility of stipulating in the contract that the compensation for damage resulting from non-performance or improper performance of a non-pecuniary obligation will take place through the payment of a specific amount, i.e. a contractual penalty. In the event of non-performance or improper performance of the obligation, it is due to the creditor in the amount reserved for this situation, regardless of the amount of the damage suffered. It replaces the compensation that the creditor may claim under general rules.

Any expenditure incurred in order to generate income or to maintain or secure a source of income may be considered a tax expense. It cannot be included in the costs of expenses directly excluded from the catalog of costs. However, according to Art. 16 sec. 1 point 22 of the CIT Act and Art. art. 23 sec. 1 point 10 of the PIT Act, it follows that contractual penalties and damages are not tax deductible costs, including behind:

• defects of the delivered goods,
• delay in delivering goods free from defects,
• delay in removing defects in goods.

If an entrepreneur who has paid a contractual penalty for purposes other than exchange ones directly in the tax laws, at the same time demonstrates the relationship between this expense and the income obtained, he may include the amount paid out as tax costs.

Penalty for delay in delivery of goods

Contractual penalties for delayed deliveries of goods are not listed in the catalog of expenses not considered costs. Therefore, the penalty imposed for delayed delivery of goods can be classified by the taxpayer as tax costs.

Such a position was confirmed by the director of the Tax Chamber in Katowice, in letter no. IBPBI / 2 / 423-1141 / 10 / MS, of December 3, 2010, where we read: (...) contractual penalties for delay in deliveries of goods, as not covered by the material scope of Art. 16 sec. 1 point 22 of the Pdop Act, as a rule, are not excluded from tax-deductible costs. Therefore, it should be considered that since these penalties will constitute the fulfillment of the obligations contained in the contract, and the Company will in fact take steps to avoid or minimize them, as being related to the revenues generated, they may constitute tax deductible costs, pursuant to Art. . 15 sec. 1 of the Pdop Act (...).

Penalty for damage to the goods

As a rule, penalties for damage to goods during transport cannot be considered tax deductible as they relate to defective performance of the service.

Such a position was confirmed by the Director of the Tax Chamber in Bydgoszcz, in the individual interpretation, ref. No. ITPB1 / 415-91 / 14 / MW, from May 7, 2014, where we can read (...) If, therefore, the service in the delivery of the goods was performed, and in the course of its performance, the transported goods were damaged and the carrier was obliged to pay compensation for the damaged goods, then Art. 23 sec. 1 point 19 of the Personal Income Tax Act. This means that the expense related to the payment of compensation for defective performance of the contract of carriage, which resulted in damage to the transported goods, may not constitute a tax deductible cost.

To sum up, the compensation paid by the applicant as related to a defect in the transport service provided to the contractor may not constitute a tax deductible cost in his business (...).

One of the situations where the damage to the goods occurred as a result of a random event with due diligence of the taxpayer, expenses for the penalty can be classified as costs.

A similar position was taken by the director of the Tax Chamber in Gdańsk in the decision of May 31, 2005, no. BI / 005-0958: (...) In the light of the above, the compensation paid by the Company to the contractor for damaged or destroyed cargo in transport, if it occurred, for example, as a result of a random event, should be considered as a tax deductible cost for business activity within the meaning of Art. 15 sec. 1 of the Corporate Income Tax Act. Also, sanction fees, contractual penalties for holding a container or stopping a means of transport under loading or unloading, resulting from contracts concluded by the Company with contractors, do not constitute a defect of the forwarding service and will constitute tax deductible costs pursuant to Art. 15 sec. 1 of the Act of February 15, 1992 - on corporate income tax - (...) The above-mentioned expenses are related to the forwarding services provided by the Company to the ordering parties and the revenues shown in this respect, therefore they should be qualified as tax deductible costs on the date of their accounting, i.e. upon receipt of debit notes from the principals (...)

Example 1.

The transport company transported goods from Warsaw to Poznań. During transport, the goods were damaged because the goods were not properly secured. In such a situation, the contractual penalty paid may not constitute a tax deductible cost.

Example 2.

The transport company transported goods from Warsaw to Poznań. During transport, the goods were damaged because the car was involved in a road accident through no fault of its own. In such a situation, the penalty may be a cost.