According to the Civil Code, under a donation agreement, the donor shall provide a free benefit to the recipient at the expense of their property. The basic feature of a donation is lack of equivalence – which means the donor receives nothing in return for they have provided. So, a donation is any benefit of a disinterested and non-equivalent nature or, in other words, made without any expectation of receiving any benefit from it.
In line with Article 16.1 (14) of the Corporate Income Tax Act, donations do not constitute tax-deductible costs. an exception is made for the production costs or purchase prices of foodstuffs donated to public-benefit organisations that are intended for of charitable activities carried out by such organisations.
However, the Corporate Income Tax Act provides for an option to deduct donations made in a given tax year from the tax base, which reduces the tax due. Such a deduction requires specific subjective and objective conditions to be met: the donation must be transferred to an appropriate entity and for an appropriate purpose.
Donations made to Polish public-benefit organisations (or those operating in the territory of the EU or EEA member states) are eligible for this deduction. They are referred to in Article 3.2 and 3.3 of the Act on Public Benefit Activities and Volunteer Work. As for the subject matter, the donation should be transferred for purposes within the sphere of public tasks (these are listed in Article 4 of this Act).
Donations that meet these conditions may reduce a taxpayer’s taxable base at the end of the tax year. However, there is a limitation: for CIT payers, the amount of the deduction may not exceed 10% of the annual income. This does not apply to tax-exempt income, for instance income subject to a zone exemption.
The subject of the donation may be cash and in kind.
As for expenses for socially responsible activities (CSR activities), tax laws do not introduce any detailed solutions regarding the possibility of deducting them or recognising them as tax-deductible costs. However, in practice – also in individual tax law interpretations – a view is firmly established that CSR expenses may be classified as tax-deductible costs.
The important part in this respect is that such expenses must comply with the general principles for being recognised as tax-deductible under Article 15.1 of the Corporate Income Tax Act: they must be incurred to generate revenue or to maintain or secure the source of revenue. Also, a CSR expenditure cannot be included listed in Article 16.1 of the Corporate Income Tax Act, that is, it cannot be excluded from tax-deductible costs (in particular as “business entertainment costs”).
From the point of view of tax consequences, it is crucial to distinguish CSR expenditure from donations. So, on top of demonstrating the ‘equivalence’ aspect, in order to label a given expense as tax-deductible costs, the taxpayer should first of all be able to prove that the cost is incurred in order to achieve revenue or to maintain or secure the source of revenue.
It seems that such an example of such a goal may be the building of relations among current or future employees or developing the recognition of social priorities and the taxpayer’s activities in this regard among potential clients. Moreover, the CSR costs should be properly documented, also in the scope of proving the connection with obtaining revenue or securing its source. This is where company-adopted CSR strategies may be useful, or where policies prove helpful for spending money on socially responsible initiatives.
Business entertainment costs
Given the nature of CSR expenses, to classify them as tax-deductible costs, it is crucial to distinguish them not only from donations, but also from the so-called business entertainment costs.
Business entertainment costs are specifically excluded from tax deductible costs under Article 16.1 (28) of the Corporate Income Tax Act. The tax laws do not introduce a definition of business entertainment costs, yet the term has been defined in the case-law of administrative courts (although mostly in different social and business circumstances).
The case-law describes business entertainment as an activity aimed at creating and consolidating a positive image of the taxpayer towards other entities. Therefore, it is primarily any action targeting the existing or potential contractors of the taxpayer or a third party in order to create the expected image of the taxpayer for the purpose of facilitating the making of a contract or establishing favourable conditions for making it.
Given how the business entertainment is understood, taxpayers should be carefully assessing expenses that qualify as tax-deductible costs. There are situations where tax authorities challenge certain costs that are part of CSR projects. As a consequence, some costs are confirmed as tax deductible, whilst others are labelled by the tax authorities as business entertainment costs.
In addition to the general principles introduced by the Corporate Income Tax Act and the practice of tax authorities, the Act also contains detailed provisions to be applied within specific time limitations.
Such regulations were introduced, for example, during the pandemic and recently in connection with the Russian invasion of Ukraine.
Under currently valid regulations related to the aid for Ukraine, tax-deductible costs may include the costs of manufacturing or the purchase price of goods or rights being the subject of donations made, among others, to Polish or Ukrainian organisations involved in public benefit activities, for the purposes of counteracting the effects of war. Tax-deductible costs are also those incurred on account of free benefits that have been incurred to counteract the effects of hostilities on the territory of Ukraine.