Free benefit - taxation of the use of someone else's equipment

One of the types of taxable income is the so-called income from gratuitous benefits. The tax obligation in this respect also applies to taxpayers conducting business activity. In the context of free benefits, it is worth considering how to interpret the situation in which a taxpayer uses equipment belonging to a contractor when this equipment is used free of charge to produce goods for the lender. Read what is the free benefit and what tax consequences arise from the use of someone else's equipment.

Free benefit - rules of income taxation

Often, entrepreneurs do not realize that various types of free benefits from other entities may result in the need to recognize tax revenue on this account, and then pay the tax.

Let us point out that in accordance with Art. 14 sec. 2 point 8 of the PIT Act, income from non-agricultural business activity is the value of received benefits in kind and other free benefits, calculated in accordance with art. 11 sec. 2-2b, subject to the provisions of paragraph 2. 2g and art. 21 sec. 1 points 125 and 125a.

The provisions specifying the rules for determining the amount of income from gratuitous benefits (Art. 11 par. 2–2b) indicate that the monetary value of benefits in kind, subject to par. 2c and art. 12 sec. 2-2c, shall be determined on the basis of market prices used in the course of goods or rights of the same type and species, taking into account, in particular, their condition and degree of wear and the time and place of obtaining them.

On the other hand, the monetary value of other free benefits is determined:

1. if the subject of the service are services falling within the scope of the economic activity of the service provider - according to prices applied to other recipients;

2. if the subject of the benefits are purchased services - according to the purchase price;

3. if the subject of the benefits is the provision of a flat or building - according to the equivalent of the rent that would be payable in the event of concluding a lease agreement for this premises or building;

4. in other cases - on the basis of market prices used in the provision of services or the provision of items or rights of the same type and species, taking into account in particular their condition and degree of wear and the time and place of making available.

If the benefits are partially payable, the taxpayer's income is the difference between their value determined according to the principles referred to in paragraph 1. 2 or 2a and the payment borne by the taxpayer.

As a result, in a situation where the contractor makes his equipment available to the taxpayer without remuneration, he should recognize the revenue from free benefits in the amount of the market price corresponding to the paid rental of such equipment, taking into account in particular their condition and degree of wear and the time and place of making available.

The use of someone else's equipment without the need to pay a salary is generally treated as income from free benefits giving rise to a tax obligation in the field of PIT.

Free benefit - essential elements of income

It should be noted that the issue of recognizing income from free benefits is not an unequivocal and obvious event. The key in this respect is to define and define the condition of free of charge.

It is worth noting that the provisions of the PIT Act do not explain how to understand the concept of "gratuitous benefit".

In this regard, one should follow the linguistic interpretation which takes precedence. According to the colloquial and linguistic meaning, performance is an obligation to perform or transfer something to someone else, as well as what is performed or transferred on account of such obligations, or an obligation to perform or transfer something to someone else. On the other hand, the adjective "gratuitous" means the following: not requiring payment, one for which one does not pay; free.

Considering the above, it can therefore be concluded that in general language the phrase "gratuitous performance" means the fact of making or transferring something to someone else's benefit, without demanding payment in return (reciprocity).

Consequently, the essence of the free service is that the entity receiving the service is not obliged to perform any mutual service.

From the available jurisprudence, we can additionally derive the thesis that the concept of free benefits should be understood as all legal events and economic phenomena that result in gaining benefits at the expense of another entity or all those legal and economic events in the activities of legal persons that result in free of charge - i.e. not related to costs or any other form of equivalent - contributing to the property of this person, having a specific financial dimension.

As a result, taking the above into account, in order to consider a given service free of charge, the following conditions must be met:

• the effect of a given action is gaining benefits only by one of the parties to a given relationship,

• the effect of a given action is a cost incurred only by one of the parties to a given relationship,

• the benefit has a specific financial dimension.

Income from gratuitous benefits does not arise if the benefit received by the taxpayer is related to the receipt of an economic benefit by the person meeting the service. Any manifestation of reciprocity excludes the possibility of recognizing that free benefits have been provided.

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Free benefit - tax consequences of using someone else's equipment

Summarizing our considerations so far, we can therefore state that the key feature of a gratuitous service is that the recipient of such a benefit is not obliged to perform any consideration.

It does not matter that the possible mutual benefit is equivalent. Similarly, it does not matter whether the performance of the other party is pecuniary or non-pecuniary.

The equivalence of benefits is determined by all the circumstances and economic dependencies occurring in a given transaction.

As also emphasized by the Supreme Administrative Court in the resolution of a panel of seven judges of the Supreme Administrative Court of November 18, 2002 (file no. FPS 9/02): the concept of "gratuitous service" has a broader scope than in civil law. It includes not only a service in the civil meaning, but also all economic phenomena and legal events that result in gaining benefits at the expense of another entity or all those legal events and economic events in the activities of legal persons, the result of which is free of charge, i.e. not related to costs or any other form of equivalent, giving the person property, having a specific financial dimension.

When transferring these explanations to the problem analyzed by us, it should be pointed out that if a taxpayer uses someone else's equipment to produce goods only for the borrowing contractor, we cannot speak of a free-of-charge benefit, because the entities are obliged to certain mutual benefits to each other.

As a consequence, we can indicate that there is no tax effect (for both parties to the transaction) when the recipient transfers certain devices to the manufacturer free of charge, however, with the proviso that the indicated devices will be generally used for production purposes for the recipient providing the equipment.

Example 1.

The contractor concluded an agreement with the taxpayer under which he will provide his fixed asset free of charge in the form of a machine for the production of fasteners, in return for which the taxpayer will produce these elements only for the contractor at the price specified in the contract. In these circumstances, therefore, it cannot be assumed that the taxpayer is generating income from gratuitous benefits because the taxpayer is obliged to provide consideration.

The issue of income from free benefits depends on specific factual circumstances and the content of the contract binding the parties. The fact of determining mutual benefits between the parties means that the use of someone else's equipment does not require recognition of income from free benefits.

The issue of income from gratuitous benefits is a complex topic that requires an analysis of specific relationships binding contractors each time. It may turn out that due to certain mutual benefits, the fact of using someone else's equipment will be a tax-neutral event for the taxpayer.