DSK helped a client whose tax authorities questioned the inclusion of PLN 1.5 million in tax costs.

The case concerned a company from the new technology industry that signed a contract for the construction of an innovative device. After some time from the start of the work, it turned out that due to the high degree of technological advancement, the construction of the device in the shape required by the customer was not possible. A further attempt to implement the project would turn out to be unprofitable and could threaten the company’s financial liquidity. For this reason, it decided to terminate the contract and pay a penalty of PLN 1.5 million provided for in the contract. This amount was included in the company’s tax deductible costs.

The tax authorities, during the inspection conducted in the company, questioned the inclusion of the amount of the contractual penalty in the tax costs. They argued that this expenditure is not intended to generate revenue, maintain or secure its source. According to the tax authorities, the lack of a cause and effect relationship with the company’s revenue meant that the contractual penalty could not be included as a tax expense.

Eventually, the case went to court. The company asked the DSK Law Firm for support in the pending proceedings. Thanks to the actions of the employees of the Law Firm, the administrative court agreed with the company. The argument in favor of classifying the contractual penalty as tax deductible costs was the fact that the decision to terminate the contract (and consequently to pay the contractual penalty) was aimed at securing the source of revenue, which was the company’s business activity. Further implementation of the project would involve large financial outlays and, in the final analysis, due to the lack of technological possibilities of making the device, would not bring any revenue, and could even lead to a deterioration of the company’s financial condition.

The above argumentation convinced the administrative court, which resulted in the issuance of a decision favorable to the company, allowing to classify the contractual penalty in question as tax costs.