Investment costs incurred in the Special Economic Zones have to be settled on the cash basis

The right to the tax exemption is obtained by the taxpayer only when he actually incurs capital expenditures by paying for purchased fixed and intangible assets. Such was the ruling of the Supreme Administrative Court (hereinafter referred to as: SAC) in the judgment of 20th December 2017, Ref. file no. II FSK 3178/15, which corresponds with the case law unfavorable for taxpayers.

The dispute over which the SAC leaned in the commented judgment came down to the issue whether the expenditure made by an entrepreneur operating in a Special Economic Zone (hereinafter referred to as: SEZ) can be considered as incurred already at the moment of inclusion in the accounting books or only when the actual expenditure is made. Such dispute is being caused by the fact, that neither the Act of 20th October 1994 on Special Economic Zones nor the Regulation of the Council of Ministers of 10th December 2008 On public aid granted to the entrepreneurs operating on the basis of the permission to operate in a Special Economic Zone clearly indicate the proper date for the settlement of expenses. The content of § 6 paragraph 1 of the abovementioned Regulation, in accordance to which as the expenditures eligible for aid shall be considered investment costs (…) borne in the zone during the validity of permission (…), does not lead to unambiguous conclusions when the expenditure shall be considered as incurred.

In the commented judgment, which seems to be now the overriding judicial line of administrative courts, the SAC indicated explicitly, that the right moment to recognize expenditures as incurred is the moment of their payment, not the moment of recognition in the taxpayer’s books. By incurring, in the court’s opinion, shall be understood the actual expenditure of the expense, and not just its calculation. Otherwise, entrepreneurs would be able to use public aid excluding the requirements imposed by the law, e.g. by including investment expenditures of the value specified in the permit in the accounting books, on the basis of accounting documents, without actually incurring them within the deadline set out in the permission.

According to the Supreme Administrative Court, the incurring of expense can only be spoke of when the actual flow of funds occurs, and not when they are expressed in a given quantity, which is clearly indicated by systemic, purposeful and linguistic interpretation of § 6 paragraph 1 of the Regulation. As a consequence, entrepreneurs operating in the SEZ should settle the incurred costs with the cash method and not with the accrual method, which is more favorable for them.