Lost trial and tax deductible costs

Business contacts are full of ups and downs. The conversation between contractors is not always arranged as if it was expected by the individual parties. It is not uncommon for tensions and quarrels to arise with serious consequences in partner relationships. As a result, counterparties cease to meet the terms and conditions set out in the contract or, what is worse, they cease to pay their liabilities. Sometimes this necessitates the initiation of legal proceedings, after which one of the parties loses the case and is then ordered to pay the court costs. Can expenses for a lost trial qualify as costs? We present the answer in the article below.

What expenses are the tax cost?

Pursuant to the regulation contained in Art. 22 sec. 1 of the Personal Income Tax Act, we can speak of a tax deductible cost when the expense was incurred in order to:

• securing the source of income,
• retain revenues,
• achieving revenues.

Moreover, this cost cannot be listed in the catalog of costs that do not constitute tax deductible costs (Art. 23 of the Act) - the so-called NKUP. This means that an expense must be economically viable to qualify as an expense.

Lost process - individual approach necessary

Due to the differences arising from the subject of the dissertation, it is worth considering an individual approach to the examples provided. The task of the taxpayer is to objectively assess whether the cost of the losing process, which he or she was forced to bear, serves to preserve, secure or generate income. This position is emphasized by both administrative courts in issued judgments, as well as tax authorities.

As an example, it is worth mentioning the final judgment of the Supreme Administrative Court of 5 March 2014 (file no. II FSK 684/12), relating to the case of the company failing to comply with the terms of the preliminary contract regarding the purchase of real estate - it was about the purchase of land on which they were to be erected production and warehouse buildings.

As agreed between the parties, the buyer could, under certain circumstances, withdraw from the contract - e.g. in the event of finding difficulties in the planned development on the basis of geological surveys.

In fact, the withdrawal from the preliminary contract was due to several reasons. It turned out that the land did not have legally regulated access to a public road and sewerage network, and that there was a high level of groundwater on the plot.

As a result, the owner of the land brought a lawsuit against the company, finding that it had breached the terms of the contract. The buyer lost the case and incurred the costs of legal proceedings.

The company planned to include such expenses in tax costs. It believed that these costs served to secure the source of revenue - if the transaction was paid for, the company would suffer a loss. Due to doubts in this matter, she applied for an individual tax ruling to the Director of the Tax Chamber in Poznań. It turned out that the costs of losing the trial cannot be included in tax costs, as they are a consequence of failure to comply with the signed contract. As a last resort, the case was referred to the Supreme Administrative Court, whose position was consistent with the opinion issued by the Tax Chamber, and therefore the costs resulting from the lost trial did not serve either to secure the source of income or to preserve it.