Liquidation of investments in foreign fixed assets and tax settlement

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In the course of their business activity, entrepreneurs often use fixed assets that do not constitute their property. Before using them, they incur expenditures aimed at adapting them to their needs. The problem with tax settlements appears at the moment of ceasing to use a given fixed asset for which expenditure has been made.

Pursuant to the provisions of both Income Tax Acts, depreciable fixed assets are owned or jointly owned by the taxpayer, acquired or manufactured on their own, complete and fit for use on the date of acceptance for use:

  • structures, buildings and premises owned separately,

  • machines, devices and means of transport,

  • Other items

- with an expected period of use longer than one year, used by the taxpayer for the purposes related to his business activity or put into use on the basis of a rental or lease agreement.

Fixed assets are also, irrespective of their expected period of use, investments in foreign fixed assets accepted for use, hereinafter referred to as "investments in foreign fixed assets" (Article 22a (2) (1) of the PIT Act).

The concept of investment in a foreign fixed asset

The concept of "investments in foreign fixed assets" has not been defined in the income tax laws. In practice, it is assumed that these are expenditure incurred to improve a fixed asset that is used on the basis of a lease, tenancy or other agreement.

As follows from the introductory explanations to the regulation of the Council of Ministers of October 3, 2016 on the Classification of Fixed Assets (Journal of Laws No. 242, item 1622), improvements in foreign fixed assets (this is how investment in foreign fixed assets is defined by also the Accounting Act) should be classified into appropriate groups (from 0 to 9), depending on the fixed asset they relate to.

Thus, when determining the amount of the depreciation write-off, you can use the depreciation rates specified for a given type of fixed asset in the list of rates.

Expenses classified as an investment in a foreign fixed asset cannot be included directly in tax deductible costs, but can include depreciation write-offs made on the initial value of the investment in a foreign fixed asset.

The investment is not fully amortized

The problem arises when a given investment has not been fully amortized. In such a situation, Art. 23 (1) (6) of the PIT Act, according to which tax costs do not constitute losses resulting from the liquidation of non-fully depreciated fixed assets, if these assets have lost their economic usefulness due to a change in the type of activity.

This provision restricts taxpayers' right to include as tax deductible costs losses arising from the liquidation of non-fully depreciated fixed assets only when the fixed assets have lost their economic usefulness due to a change in the type of activity. This means that the loss of economic usefulness for other reasons results in recognizing the loss related to the liquidation of the fixed asset as tax deductible costs.

The concept of "liquidation of a fixed asset" cannot be identified only with the physical annihilation of a thing. This concept may also mean its donation, sale, technical or technological wear, withdrawal of a fixed asset from the register or disposal of a fixed asset in a different way.

In our opinion, in the event of discontinuation of the use of a fixed asset, the loss resulting from the liquidation of an investment that is not fully depreciated in a foreign fixed asset may be recognized as a tax deductible cost, if it is not related to a change in the nature of the business. The concept of liquidation of a fixed asset should be understood broadly, i.e. not only as its destruction, but also as withdrawal from use or transfer (e.g. donation of outlays made to the owner in the fixed asset).

This position is also confirmed by the judicial decisions, an example of which is the judgment of the Provincial Administrative Court in Rzeszów of March 21, 2017 (I SA / Rz 103/17). The court found that the applicant's position was correct that the liquidation of the fixed asset was caused by an attempt to limit losses from the conducted business activity, i.e. it resulted from economically justified actions of the taxpayer, aimed at maintaining or securing the source of income referred to in Art. 10 sec. 1 point 3 of the Act, therefore the loss resulting from the liquidation of a non-fully redeemed fixed asset is included in the tax deductible costs.

Moreover, the Provincial Administrative Court noted that in the rulings of the Supreme Administrative Court, the concept of liquidation was interpreted in a broad sense as not only the physical destruction of a fixed asset, but also the transfer of a fixed asset to another entity through donation or sale, changing the method of conducting business activity, liquidation of a fixed asset due to its technical wear, technological or "moral" and withdrawing it from the register of fixed assets.

It should be emphasized that the vast majority of tax authorities present a different position, an example of which is the letter of the Director of the Tax Chamber in Warsaw of May 9, 2011, No.IPPB3 / 423-154 / 11-2 / JG, which reads:

(...) The Company is not entitled to include the non-depreciated part of an investment in a foreign tangible asset as tax deductible costs due to the fact that these write-offs will not meet the general rule resulting from art. 15 sec. 1 of the Corporate Income Tax Act, i.e. the existence of a rational cause-and-effect relationship between the costs incurred and the revenues obtained, as these premises will no longer be used in its business activities (...).

Perhaps the aforementioned judgment will contribute to a change of position by the tax authorities for the benefit of taxpayers.