Court fees in a lost trial as tax deductible costs
Disputes arising between contractors in the field of business activities often end in court. Court cases are often very long and are characterized by the necessity to incur significant costs and administrative fees. Unfortunately, there is always a losing side in litigation. The question arises whether administrative costs and court fees in a lost trial may constitute a tax deductible cost?
General definition of tax deductible costs
According to Art. 22 of the PIT Act, tax deductible costs are costs incurred in order to achieve income or to maintain or secure a source of income, with the exception of the costs listed in art. 23 of the Act. In the context of this definition, it should be considered whether the costs of the unsuccessful trial show a cause-and-effect relationship and whether the specific expenditure has not been included in the catalog of Art. 23 of the Act.
In the context of the issue under examination and the above definition, it is worth pointing out that the provisions of the Act do not qualify the possibility of including the court fees incurred against the result of a court case. It is only important whether the specific expenditure is related to the conducted business activity. An expense will be considered a tax deductible cost if there is a causal link between its incurring and the creation, increase or possibility of generating income.
Court fees in a lost trial
Court fees are not listed in the catalog of Art. 23, and therefore they can be classified as tax costs, as long as they are related to the conducted economic activity. This is also confirmed by letters issued by tax authorities. For example, in a letter of April 19, 2011, the Director of the Tax Chamber in Katowice, IBPBI / 2 / 423-121 / 11 / AP stated:
(...) despite the fact that the court costs incurred by the Applicant cannot be related to a specific income, they are nevertheless related to the activities conducted by him and were incurred in order to protect his interests.
However, the above rules do not apply if the costs relate to the unsuccessful process due to defects in the goods or service. In the interpretation of July 20, 2011, ref. No. IPPB1 / 415-505 / 11-2 / EC, Director of the Tax Chamber in Warsaw, investigated the situation in which the taxpayer incurred court fees in a lost trial, being defendant for damages. Regarding the classification of costs of court proceedings as tax deductible costs, he stated:
Undoubtedly, the expenditure incurred by the Applicant on account of the amount adjudged in the judgment cannot be considered as incurred in order to achieve income, because the income will not occur in this case. There is also no reason to qualify it as expenses aimed at preserving or securing the source of income. The costs incurred to maintain the source of income are the costs that have been incurred in order for the income from a given source of income to continue to be obtained and for such a source to continue to exist at all. On the other hand, the costs of securing the source of income should be considered the costs incurred to protect the existing source of income, in a manner that guarantees the safe operation of this source. The essence of this type of costs is their obligatory incurring in order to prevent the loss of the source of income in the future. The expense in question does not have such a character either.
It should be emphasized that the above interpretation related to the facts in which the taxpayer lost the process related to the defective performance of the obligation. Each case is subject to separate recognition and analysis, therefore it cannot be ruled out that in the case of the process related to the operation of the enterprise itself, the taxpayer will retain the right to include such expenses in tax costs.
A comprehensive analysis of the issue of costs incurred in the course of the court proceedings was presented by the Director of the National Tax Information in the interpretation of August 22, 2017, No. 0111-KDIB1-2.4010.200.2017.2.MM, where it was stated that the tax costs include expenses for:
- court fees and legal services in court proceedings (both in winning and losing proceedings),
- reimbursement to the client of the court costs incurred by him and the costs of legal representation (in unsuccessful proceedings),
- reimbursement to the client of the previously received payment for the service (in unsuccessful proceedings).
Importantly, in this letter, the tax authority clearly emphasized that each court fee in a lost trial should be considered individually in terms of the possibility of including the expense on this account as tax deductible costs, taking into account the details of the case and the premises of the taxpayer, as well as the claimant and find out about the court's decision with its justification.
Court fees related to legal aid during the trial
It is commonly accepted in the doctrine and jurisprudence that court fees related to legal assistance and services may be classified as tax deductible costs. It should be noted that the provisions of the PIT Act do not provide for the direct exclusion of costs related to the provision of legal assistance to business entities (including those consisting in providing legal advice, drawing up legal opinions and appearing before courts), essential for assessing the possibility of including the indicated costs as tax deductible costs will be was to determine whether the above costs were incurred in order to achieve revenues or to maintain or secure the source of revenues. Although court fees cannot be related to a specific income, they are undoubtedly related to the conducted activity and are incurred to protect and secure the source of income.
As a result, they undoubtedly constitute indirect costs of the activities carried out, which are deducted on the date they are incurred. This was also stated by the Director of the Tax Chamber in Bydgoszcz in the individual ruling of October 15, 2009, no. ITPB3 / 423-390 / 09 / MK.
Finally, any enforcement costs incurred should be addressed. In this regard, it is necessary to indicate the content of Art. 23 sec. 1 point 14 of the PIT Act, according to which enforcement costs related to non-performance of obligations are not considered to be a tax deductible cost.