On January 17, 2012 the Supreme Administrative
Court held that companies in breach of passenger car
leases may treat liquidated damages due upon earlier
termination of operation lease agreement as a
deductible operating expense when the car was used
by a board member who was later removed (court
file no II FSK 1365/1310).
The Court enumerated several factors in determining
what constitutes an operational expense. The Court
looked at whether (1) the expense that was incurred
is actual amount, (2) whether it is related to the
economic activity, (3) whether it was incurred in
order to obtain revenue, maintain or protect revenue
sources and (4) whether it was properly documented
and has not been excluded on the basis of the Article
16 paragraph 1 of the Corporate Income Tax Act..
The Court further held that factor most heavily
weighted in the determination of whether liquidated
damages may be regarded as an operational expense
is whether it “was incurred to obtain revenue,
maintain or protect revenue sources”. An expense
will not be disqualified as an operation expense on
the lone grounds that the company did not achieve
the desired economic effect (revenue production).
The court reasoned that where a reasonable and
rational economic decision was made in clear
connection to revenue production, after a negative
change in circumstances a party may need to take
actions to maintain or protect revenue sources. The
concept of this fact need not be in expenses incurred
in order to “maintain or secure sources of revenue”.
It is important to assess the expenditure as the tax
cost and take into account the logical sequence of
events that cause specific actions of the taxpayer (the
conclusion of lease contract, changing economic
conditions, the reasons for withdrawal from the
contract resulting in a payment of liquidated
damages) and their impact on the achievement of revenue, maintenance or protection of revenue
sources, as well as the dynamics of economic
processes and phenomena in which occurs the
change of initially taken decisions, and that this
change is associated with maintenance or protection
of revenue source.
The Court has made it clear in its decision that
contrary to some previous glossary and
jurisprudence, under the current provisions of law
the taxpayer paying liquidated damages or
compensation is generally acting in order to obtain
revenue. Liquidated damages or compensation may
have a relationship with the revenue, not to mention
the view of maintaining or securing sources of
revenue. In addition, the execution of an existing
obligation by payment of a penalty or compensation
is not always associated with a reduction in income.
In the present case from an economic point of view,
breaking the lease agreement and payment of a
penalty was beneficial both for the taxpayer (as the
income reached was higher than possible to achieve
in case of continuation of the lease agreement) and
for the State Treasury (as from the higher income the
taxpayer will pay a higher tax).
MILLER, CANFIELD,
W. BABICKI, A. CHEŁCHOWSKI I WSPÓLNICY SP.K.
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81-366 Gdynia
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developments of selected areas of law. For this reason the information contained in this publication should not form the basis of any decision as to a particular course of
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