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A taxpayer who earns revenue from various sources should recognise tax-deductible costs with care. This was the gist of the Supreme Administrative Court's ruling of 26 November 2013, file no. II FSK 2992/11 in which the court stated that expenses relating to electricity generation business could not be deducted from revenues from sales of certificates of electricity origin (green certificates).

Background

The appellant ran an electricity generation business which was taxed at a flat rate of 5.5%. In addition, he sold green certificates. At the beginning, he treated the revenue from such sales as revenues from a business activity. Following intervention of the tax authorities, the appellant separated the sources of revenue and recognised the revenue from sales of the said certificates as capital gains, which were taxable at the rate of 19%. However, the appellant believed that he was entitled to include the costs of electricity generation – such as expenses on consumables required for power plant operation, on using a car which was a tangible asset, on repayment of bank loan interest, depreciation of power plant equipment and costs of hiring an employee – in the tax-deductible costs of sales of green certificates. The appellant claimed that the costs connected with generation of electricity could be considered directly related to the revenue from sales of green certificates.

Taxman's opinion

The tax authorities rejected the claim. They were of the opinion that the trade in green certificates was not closely and inseparably related to the electricity generation business. The sale of the certificates was a separate source of revenue for the appellant and it was unrelated to his business activity. Therefore, the costs of electricity generation were not tax-deductible costs of the sales of the certificates. Expenses inextricably related to the sales of certificates include the costs of registration, trade on the Polish Power Exchange market, costs of brokerage and commissions. On the other hand, the expenses on consumables required for power plant operation, on using a car which is a tangible asset, on repayment of bank loan interest, depreciation of power plant equipment and costs of hiring an employee, which the appellant deducted were tax-deductible costs of his business activity. Consequently, they could not be included in tax-deductible costs of capital gains.

Court's opinion

The appellant filed the case with the Provincial Administrative Court in Olsztyn. Still, the court leant towards the tax authorities. The Supreme Administrative Court upheld the PAC's ruling.

The SAC pointed out that Article 3 of the Act on Flat Income Tax on Certain Revenues Earned by Natural Persons stipulated that revenues (income) taxed with flat income tax must not be combined with revenues (income) from other sources taxable under the Personal Income Tax Act. Therefore, if the appellant used the exception in the form of flat rate taxation of revenues, then pursuant to the above-mentioned regulation he could not combine them with revenues (income) from other sources. The same rule should be consistently applied to tax-deductible costs because the separate taxation described above rules out pooling of the costs with respect to one of the revenue sources, especially that taxation of the two sources is governed by two separate legal acts. Tax-deductible costs cannot be deducted from just any revenue but are always related to a specific source of revenue. Tax deduction reduces the taxable revenues from one specific source and not just any revenue. Therefore, tax-deductible costs are closely and functionally attributable to a specific source of revenues.

Consequently, if you earn revenues from various sources it is worth checking how you allocate the tax-deductible costs. We will be glad to answer any questions if you are interested in this issue. We can also provide comprehensive tax advisory in Poland.