Financial compensation to contractors in tax deductible expenses

In the light of the outbreak of the coronavirus, businesses were often forced to reduce production or services, which had a significant impact on their relationships with contractors. In such a situation, one of the companies decided to pay financial compensation to its most important partners in order to minimize their losses.

In an individual interpretation of 27 August 2021 in case ref. 0114-KDIP2-1.4010.104.2021.1.KW. the tax office held that the expense incurred for the purposes of the above-mentioned compensations may constitute a tax deductible cost.

The compensations in question were paid by the company to its main contractors, with whom the company was particularly keen on relations. Thanks to the financial compensation, the company’s contracting parties were able to maintain their own production at such a level as to achieve previously set business objectives. By paying this compensation, the company also ensured that it was able to pursue its strategy of producing high-quality products, including by outsourcing specialised production services. The payment of the compensations was thus intended to ensure stable, long-term cooperation with the entity providing such services.

In the opinion of the tax office, the company’s actions were rational and economic from the point of view of its business activity. This is because the costs of financial compensation were incurred in order to secure a source of income in the future; thus they met the condition indicated in Article 15 par. 1 of the CIT Act. The tax office found that such action enabled the company to benefit from cooperation with long-standing, proven contractors.

Moreover, the tax office referred to the issue of the moment of classifying such expenses as tax deductible costs. The tax office considered here as correct the position of the applicant, according to which the tax deductible costs should be deducted at the time of incurring them, which is understood to be any entry in the books of account.