Contractual penalties may constitute tax-deductible costs; tax authorities may not extend the scope of exemptions under Article 16 of the CIT Act.
Expenditure on contractual penalties may constitute tax-deductible costs; tax authorities may not extend the scope of exemptions under Article 16 of the CIT Act
In its judgment of 3 July 2025, the Supreme Administrative Court (NSA) referred to the rules for classifying contractual penalties as tax-deductible expenses. The Court’s assessment concerned the interpretation of Article 16(1)(22) of the CIT Act, i.e. the type and scope of contractual penalties excluded from tax-deductible costs.
Background
The subject of the dispute was the possibility of classifying a contractual penalty for delayed performance of services for the contracting authority as a tax-deductible expense. The contract provided for financial penalties for exceeding the agreed response times and resolution of service requests.
Due to the delays in the performance of services, the customer charged the company a contractual penalty, which was then deducted from the remuneration due by way of an agreement.
The company argued that the contractual penalty charged – as it was not related to the defectiveness of the services provided, but only to the delay – should constitute a tax-deductible cost.
However, the Director of National Tax Information took a different view, finding that the delay also constituted a defect within the meaning of Article 16(1)(22) of the CIT Act.
The position of the tax authority was subsequently upheld by the Provincial Administrative Court in Warsaw, which pointed out that even an unintentional delay constitutes a defect in the service, excluding the possibility of classifying the expense as a tax-deductible cost.
Position of the Supreme Administrative Court
The Supreme Administrative Court clearly emphasised the need for a strict interpretation of Article 16(1)(22) of the CIT Act, which refers to the exclusion from tax-deductible costs of contractual penalties related to defects in goods or services. The Supreme Administrative Court noted that this provision covers only penalties that are clearly indicated in its content, i.e. those relating to defective performance within the meaning of the Civil Code, and not all types of penalties occurring in business transactions.
In a situation where a contractual penalty relates to a delay in the performance of a service or delivery, and not to the defect in the performance itself, this provision does not apply. As a result, not all contractual penalties are automatically excluded from tax-deductible costs under Article 16(1)(22) of the CIT Act, but should be assessed according to the general rules contained in Article 15(1) of the CIT Act, which allows expenses incurred for the purpose of maintaining or securing a source of income to be included in costs.
What does this mean in practice?
This is another ruling of the Supreme Administrative Court which, in practice, questions the pro-fiscal approach to the exclusion from tax-deductible costs of all contractual penalties between contractors.
In the case of businesses where contracts are subject to numerous and various types of contractual penalties, this gives taxpayers the opportunity to include some of them in their tax-deductible costs, thus reducing their CIT liability.
Importantly, this ruling is particularly relevant in the case of large volumes of contractual penalties paid by the parties to a transaction, as it translates into real tax savings.
Next steps
In industries such as IT, construction or manufacturing, it is worth reviewing the amount and titles of contractual penalties paid by the company. As practice shows, this may allow for the ‘costing’ of even a significant portion of them (reduction or recovery of overpaid CIT).
Our experience shows that contractual penalties are described in very different ways, so the analysis should also refer to their nature under civil law in order to be able to correctly classify them for income tax purposes.
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