VAT in Incentive Schemes – the Supreme Administrative Court passes an important ruling
On 9 October 2024, the Supreme Administrative Court (“NSA”) issued an important ruling (case no. I FSK 89/21) on whether the reimbursement of costs related to a share-based incentive scheme operated by the organizer (parent company) for key employees of a subsidiary is subject to VAT.
The ruling is of particular relevance to companies that operate incentive schemes based on financial instruments within capital groups (Article 24(11) et seq. of the PIT Act) and affects the current market practice of accounting for incentive schemes based on financial instruments.
Facts
The case concerned a financial institution (the “Company”) which requested an individual ruling as to whether the reimbursement of the cost of an incentive scheme organized by a parent company in a capital group, in the part corresponding to the value of shares issued and distributed to its employees, was exempt from VAT or at least eligible for an exemption under Article 43(1)(41) of the VAT Act.
Following a series of rulings unfavorable to the Company (a negative ruling identified by ref. 0114-KDIP4.4012.445.2019.1.IT and a decision of the Province Administrative Court (hereinafter: “WSA”) in Warsaw with the ref. no. III SA/Wa 2491/19), the case was finally brought before the NSA.
Reimbursement of costs as provision of services subject to VAT
In the judgment, the NSA ruled that if the company reimburses the organizer for costs related to the issue of shares as part of an incentive scheme, such reimbursement constitutes remuneration for the service of organizing the scheme.
In the NSA’s view, it is irrelevant under the provisions of the VAT Act whether a mark-up is added to the remuneration. What matters is the direct link between the services provided by the organizer and the remuneration received by the company.
No exemption from VAT
The NSA also disagreed with the Company’s view that the reimbursement could be exempt from VAT. The NSA took the view that the company did not acquire financial instruments for itself or for its employees, nor did it act as an intermediary in the process of employees acquiring shares, by paying a remuneration corresponding to the value of the shares. Consequently, the reimbursement does not fall within the scope of the exemption provided by the Act.
What does this mean for entrepreneurs?
The NSA’s ruling may have a significant impact on the practice of the tax authorities and, therefore, on the approach to the VAT classification of cost reimbursements related to such schemes and, consequently, on the way in which incentive schemes are accounted for by companies.
In light of the above ruling, companies using share-based incentive plans should analyze their VAT accounting procedures and policies to ensure that they are in line with the recent rulings and, in particular, that no VAT liability has arisen on the taxpayer’s side.
If you have any questions or doubts about the tax implications of share-based incentive schemes and how they should be accounted for, please contact us.
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