What are the tax consequences after receiving a subsidy?

Service-Tax

People who are just starting a business must take into account certain costs. Few new entrepreneurs can afford to finance them on their own. Then they have the option of using the subsidy. How should the subsidy be accounted for in terms of taxation? Are the expenses financed with the subsidy a cost and does the entrepreneur bear any tax consequences after receiving the subsidy? We answer!

Financing of fixed assets with subsidies

Pursuant to Article 14 para. 2 point 2 on PIT, subsidies spent on the purchase of fixed assets and intangible assets (on which depreciation are made) or on their own production does not constitute income from business activity. Therefore, the calculated depreciation write-offs on fixed assets acquired from funds received from subsidies will not constitute tax deductible costs.The only exception to this rule arises when the fixed asset is financed with both subsidy and own funds. Then, part of the depreciation is included in the costs proportionally to the own contribution.

Other expenditure financed by the grant

Also on the basis of article 14 sec. 2, paragraph 2, the received financial resources from subsidies, if they are not used to acquire or produce fixed assets, shall be deemed to be income from economic activity. However, this income is exempt from income tax.

According to Art. 21 of the Personal Income Tax Act, which indicates the income exempt from income tax, the following are listed:

  • paragraph 121) one-off measures granted to an unemployed person to take up the activities referred to in article 1. 46 sec. 1 point 2 of the Act on employment promotion and labor market institutions
  • point 129) subsidies, within the meaning of the provisions on public finances, received from the state budget or the budgets of local government units
  • point 136) payments for the implementation of projects under programs financed with European funds, received from Bank Gospodarstwa Krajowego, with the exception of payments received by contractors
  • point 137) funds received by a project participant as aid granted under a program financed with the participation of European funds, referred to in the Public Finance Act (Journal of Laws No. 157, item 1240 and of 2010, No. 28, item 146)

Therefore, regardless of whether the subsidy is paid in two ways as part of:

  • payments - which are used to determine the spending of European funds, and
  • special-purpose subsidy - national funds

or under one source, the income it constitutes is exempt from taxation with personal income tax.

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So what about the costs?

The fact that depreciation write-offs on fixed assets financed with subsidies cannot be treated as tax deductible costs has already been established. On the other hand, can expenses be included in costs, e.g. for equipment or purchase of goods financed with a subsidy? Here it is necessary to cite art. 23 of the PIT Act, which says that the following are not considered tax deductible costs: ”56) expenses and costs directly financed from the income (revenues) referred to in Art. 21 sec. 1 points 46, 47a, 47c, 47d, 116, 122, 129, 136 and 137; ”. According to the regulations, expenses financed by subsidies or payments from European funds cannot be treated as tax deductible costs.

However, there is one exception here. In art. 23 point 121 of Art. 21, which says about the means constituting the income tax-exempt, granted from the Labor Fund on the basis of art. 46 sec. 1 point 2 of the Act on employment promotion and labor market institutions. Art. 46 of the Act on employment promotion and labor market institutions
"1. The staroste from the Labor Fund may: (...) 2) grant the unemployed one-off funds for starting a business, including the costs of legal aid, consultations and advisory services related to undertaking this activity, in the amount specified in the contract, not higher however, than 6 times the average wage (...). " Therefore, the type of expenses is listed here, which, despite being financed from funds exempt from income tax, may be qualified as an expense. The catalog of expenses incurred to start a business is not closed, so it can also include the purchase of equipment and goods which, in accordance with the position adopted above, may constitute tax deductible costs, bearing in mind the exclusion of fixed assets and intangible assets.

Of course, it should be remembered that the basis for classifying an expense as tax deductible costs is the cause and effect relationship between the expenses incurred and the income obtained from business activity, as well as the proper documentation of the expenses incurred.

Including expenditure financed with a subsidy (referred to in Article 46 (1) (2) of the Act on employment promotion and institutions) to KUP becomes controversial when funds from the Employment Office come from various sources and are, inter alia, co-financed by EU funds. Is then to treat them as expenses not constituting a cost in accordance with paragraph 137 of Art. 21 or, however, in accordance with point 121) included in KUP. Even the opinion of the tax authorities is divided on this matter.

Revenues from the Labor Fund in accordance with Art. 106 of the Act on employment promotion and labor market institutions are also European funds, so if they are included in Art. 21, point 121 as separately distinguished funds, it can be concluded that if the expenses financed with them were not KUP, they would also be distinguished in Art. . 23 of the PIT Act, and because they are not, it can be concluded that expenses financed from one-off funds received from the Poviat Labor Office intended for the purchase of equipment (property not included in fixed assets), goods or services related to starting a business may constitute the cost of obtaining income from business activity.

Tax consequences after receiving a subsidy - VAT

As far as VAT is concerned, it does not matter that the purchases were financed by a subsidy. Therefore, regardless of whether the beneficiary of the subsidy purchased goods, equipment or fixed assets, it is possible to deduct VAT on general terms. It should be remembered that in the case of subsidies from the employment office, the deduction of VAT often requires its return to the PUP account (depending on the provisions in the contract). Of course, this applies to taxpayers registered as active taxpayers of value added tax.