The difference between a donation and a tax return
When analyzing the problem from the perspective of tax law, each transfer of funds between taxpayers should be made on the basis of a specific legal title. Sometimes, however, taxpayers may have problems with the proper qualification of a specific activity. In this article, we'll show you what the difference is between a donation and a refund.
Donation based on tax law
A donation is an agreement regulated in art. 888 of the Civil Code. Pursuant to this provision, by a donation agreement, the donor undertakes to provide a free benefit to the recipient at the expense of his property.
In the light of such regulation, we can indicate several important elementary features of the donation agreement. First of all, the donation is free of charge. This means that the donor does not receive any benefit under such an agreement, understood both as an increase in assets and a decrease in liabilities.
In this case, the donation is awarded to the recipient, who is additionally not obliged to provide any consideration for the donor.
Turning to the tax law, it should be noted that pursuant to Art. 2 clause 1 point 3 of the PIT Act, the provisions of the Income Tax Act do not apply to donation agreements. Such a legal relationship is subject to inheritance and gift tax.
Pursuant to Art. 5 of the Act on inheritance and donation tax, the tax obligation is imposed on the acquirer of property and property rights. As a result, the obligation to pay the tax rests with the recipient.
It is worth noting that the recipient may take advantage of the total tax exemption under Art. 4a of the above-mentioned Act. For the exemption to apply, the following cumulative conditions must be met:
the donation was received by a spouse, descendants, ascendants, stepson, siblings, stepfather and stepmother;
the transfer of funds must be documented with a proof of transfer to the recipient's payment account, on his / her account other than the payment account, at a bank or a savings and credit union, or by a postal order;
the recipient shall report this fact to the competent head of the tax office within 6 months from the date of receiving the donation using the SD-Z2 application.
An important feature of the donation agreement is its gratuitous nature, which means that the donor does not become a creditor to the recipient, and the recipient is not obliged to provide any consideration to the donor.
Return on investment in the light of tax law
The situation of return on investment is completely different. First, let's consider when we might be dealing with such a case. For example, if a person incurs certain expenses on real estate owned by another entity, then that person may then claim reimbursement of the expenses incurred.
It should be noted that according to civil law, everything that is permanently connected with land is the property of its owner. It does not matter who finances the real estate expenditure - all its constituent parts are the property of the landowner.
From the perspective of the subject, we can speak of unjust enrichment. Let us point out that in accordance with Art. 405 of the Civil Code, who, without a legal basis, obtained a material benefit at the expense of another person, is obliged to release the benefit in kind, and if that was not possible, to return its value.
The quoted provision provides three basic conditions for the arising of a claim for the return of enrichment, namely the requirement that:
one person's property was enriched at the expense of another person's property;
enrichment and depletion were related in the sense that enrichment is the result of impoverishment, and therefore that they had a common source, and
that enrichment takes place without a legal basis.
Now consider what the tax consequences of return on inputs are. As for income tax, in accordance with Art. 11 sec. 1 of the PIT Act, the taxable income is the money and cash values received or made available to the taxpayer in the calendar year, as well as the value of received benefits in kind and other free benefits.
Therefore, personal income tax is subject to income tax (reduced by possible costs) obtained as a result of specific actual and legal activities, in which we deal with an increase in property, achieved property gain with a specific financial dimension.
Therefore, the income taxable with income tax does not include the amounts obtained on account of various types of reimbursement of own expenditure made for another entity, provided that the reimbursement actually corresponds to the amount of previously incurred expenditure. Start a free 30-day trial period with no strings attached!
This was also indicated by the Director of the Tax Chamber in Warsaw in a letter of January 31, 2017, No. 1462-IPPB4.4511.1233.2016.1.GF:
„Therefore, taking the above into account, it should be stated that the Applicant's receipt from the co-owner of the reimbursement of the expenditure incurred by the Applicant on the common property described above - consisting in the fact that the value of 1/2 of the expenditure incurred by the Applicant on the common property described above, to which the The applicant is obliged to co-owner, will be deducted from the amount of repayment for the 1/2 share in the property ownership right, the payment of which to the co-owner will be required by the Applicant in connection with the acquisition of the co-owner share as a result of the abolition of co-ownership - it will not constitute income for the Applicant in the light of art. 10 sec. 1 point 9 of the Personal Income Tax Act, because in the facts described above we do not deal with the creation of a financial gain on the part of the Applicant”.
In the light of the presented explanations, we can therefore notice that if the received return on expenditure corresponds to previously incurred expenses, then this type of event is tax-neutral. It should be emphasized that in these circumstances the person receiving the refund does not receive any new financial gain. It only comes to the compensation of the previously depleted property status. As part of the civil law, we apply the provisions of unjust enrichment to reimbursement. Turning to tax law, however, we can say that the amounts obtained from various types of reimbursement of own expenditure made for another entity do not constitute taxable tax income.
The difference between a donation and a return
Turning to the problem outlined in the introduction, it should be noted that the fundamental difference between a donation and a return on investment is the feature of remuneration or the lack of it.
A donation is a classic example of a gratuitous benefit, but in the case of reimbursement, this gratuity does not occur because one entity reimburses the other entity for the previously incurred expenditure on the asset constituting its property.
As a consequence, identifying a return with a donation is an incorrect activity. Guided by the above premise, a specific transfer of money between taxpayers should always be properly qualified. If there is a reimbursement between two natural persons, this type of activity cannot be treated as a donation. As a consequence, in this situation, the application of the provisions of the Act on inheritance and donation tax would be unjustified.
The situation is similar when we reverse the above situation. Making a donation that is free of charge cannot be considered a reimbursement of expenditure, which is generally not taxable. Such an incorrect qualification could be considered an attempt to circumvent the law.
Finally, it should be pointed out that the tax authorities, when analyzing a specific legal relationship between the parties, are guided by the purpose and intention of the parties, and not the name of a given contract adopted by taxpayers.