Abandoned investments and PIT and VAT

Service-Tax

Before the investment is launched, it consumes a lot of money, not only of the taxpayer's own work. However, the investments are not always completed. In such a situation, there is a problem with their settlement under tax law. Check how abandoned investments will affect tax obligations.

Abandoned investments and PIT

Pursuant to Art. 5a point 1 of the PIT Act, investments are defined as fixed assets under construction within the meaning of the Accounting Act. On the other hand, the Accounting Act in Art. 3 sec. 1 point 16 defines fixed assets under construction as fixed assets in the period of their construction, assembly or improvement of an existing fixed asset.

Expenses incurred in connection with the investment are not directly recognized as tax deductible costs. They increase the value of the investment, influencing the future initial value of the fixed asset that will be created (produced) after the investment is completed. Expenses incurred on completed investments, as a result of which fixed assets will be produced, will, as a rule, become tax deductible costs through depreciation write-offs.

Therefore, the problem arises when a given investment ceases to be continued. The costs of abandoned investments are, according to Art. 22 sec. 5e of the PIT Act, a tax cost on the date of sale or liquidation of the investment. However, the legislator did not introduce a legal definition of the term "investment liquidation" into tax regulations, therefore, when interpreting the provisions on liquidation, the language interpretation of this concept should be used.

Bearing in mind the above regulations, it should be stated that the expenses incurred on an unfinished investment may be classified as tax deductible costs in two situations:

  • sale of an unfinished investment,

  • liquidation of abandoned investment.

Sale of investments

Basically, the sale, settlement of the sale of an unfinished investment does not cause problems. At the time of the investment, the taxpayer may include the expenditure on the investment in the tax deductible costs.

Example 1.

The taxpayer was building a production hall. He incurred investment expenses in the amount of PLN 100,000, which he did not include as costs, and they were to increase the initial value of the fixed asset. Due to financial problems, he decided to sell the started investment for PLN 150,000. In such a case, the sales income will amount to PLN 50,000 (PLN 150,000 - PLN 100,000).

Investment liquidation

Tax regulations do not contain a legal definition of investment liquidation, the meaning of the term liquidation in Polish should be used. Since "liquidate" means: "cause something to cease to exist or become invalid, delete, dispose of something", the tax authorities require that the liquidation be "physical" in nature. The condition for recognizing the expenditures of a discontinued investment as tax deductible costs is also that the effect of expenditures incurred on the discontinued investment is not used in the future.

In our opinion, we can talk about the liquidation of an investment when the taxpayer makes a decision about the permanent deletion (removal) of a fixed asset under construction from the records of assets. Such a position was confirmed by the director of the Tax Chamber in Bydgoszcz in the individual ruling of August 6, 2013, ITPB1 / 415-644 / 12/13-S / WM, where we can read:

(...) Bearing in mind the content of the quoted Art. 22 sec. 5e of the Personal Income Tax Act and the content of the judgment of the Provincial Administrative Court in Bydgoszcz, it should be stated that the costs of the discontinued investment incurred by the Applicant may be deducted as tax deductible costs in a situation where the Applicant has definitely decided that the effect of the expenditure incurred on the abandoned investment will not be used in the future.

Therefore, taking into account the position of the Court in the case at hand and bearing in mind the facts presented in the application for an individual interpretation, it should be stated that on the date of the decision to liquidate the abandoned investment, the Applicant may include the cost of this investment as tax deductible costs, provided, however, that that the decision is final and that the effect of the expenditure incurred on the discontinued investment will not be used in the future (…).

A similar position can be found in judicial decisions, an example of which is the judgment of the Supreme Administrative Court of June 25, 2013, ref. No. II FSK 2225/11.

Abandoned investments and VAT

Joke. 86 sec. 1 of the VAT Act shows that the taxpayer has the right to reduce the amount of tax due by the amount of input tax to the extent that the goods or services are used to perform taxable activities.

It follows from the above that the right to reduce the amount of tax due by the amount of input tax is granted when certain conditions are met, i.e. the deduction is made by an active registered VAT taxpayer and when the goods and services on the purchase of which the tax was charged, are used for taxable activities. The condition enabling the taxpayer to exercise the right to deduct input tax is the relationship between the purchases and the taxable activities performed, i.e. the consequence of which is the determination of the tax due (the emergence of a tax liability).

The relationship between purchases and the taxpayer's activity may be direct or indirect.

If we are dealing with the sale of an investment, the creation of which VAT was deducted, the sale is subject to taxation, therefore the VAT should not be corrected.

The problem arises in the case of abandonment of investment. In such a situation, when the taxpayer has abandoned the investment for objective or independent reasons, VAT should not be corrected either. This was confirmed by the Director of the Tax Chamber in Warsaw in a letter of June 18, 2014, file ref. IPPP3 / 443-287 / 14-2 / ​​IG where we can read.

(…) Further continuation of the investment for reasons beyond the control of the Company is not supported by economic and business considerations, and its implementation could significantly affect the financial condition of the Company. Based on these premises, the Company has permanently and irrevocably resigned from continuing the investment and does not intend to use the incurred and abandoned investment outlays for other purposes in the future. Taking such a final decision does not mean that the abandoned investment will be used for exempt or non-taxable activities.

Bearing in mind the above-mentioned legal provisions, the presented circumstances of the case, as well as the case law of the Court of Justice of the EU, it should be stated that if the Applicant had the right to reduce the tax due by the amount of the input tax on the incurred expenses related to the work on the reconstruction and extension of its own production building , when these expenses are incurred, and then for reasons beyond the control of the Applicant, the above-mentioned the purchases were not used to conduct activities subject to VAT, the Applicant did not lose the right to deduct and was not obliged to make a one-off or long-term input tax adjustment related to the above-mentioned investment (...).