Are expenses incurred before a decision to purchase a property has even been made considered tax-deductible – even if the purchase does not ultimately go ahead? We took the case all the way to the Supreme Administrative Court and secured a favourable ruling.
Client's situation
Our client was involved in investment activities – he purchased land and developed it for future letting. To this end, he worked with a company specialising in property acquisition: negotiating with owners and carrying out preparatory and analytical work prior to the decision to purchase (or enter into a long-term lease) land.
This firm issued monthly invoices for the services provided. All these expenses were incurred prior to signing the contract with the property owner, prior to obtaining planning permission and prior to the commencement of works. Some of these activities – due to economic, legal or environmental considerations – did not result in the acquisition of land or the construction of a building.
The issue
One of DMS TAX’s tasks was to assess, amongst other things, whether the company could treat these expenditure as current tax-deductible costs, or whether it should recognise them as fixed assets under construction – and whether, should the company decide not to proceed with the purchase of the property, the expenses incurred could be treated as costs.
Our approach
The main point of contention concerned the classification of expenditure on analytical services which influenced the decision to purchase the land. In our view – regardless of whether the property was ultimately purchased – these expenses should constitute tax-deductible costs and could not be treated as abandoned investments within the meaning of Article 16(1)(41) of the CIT Act.
To safeguard this position, the Client applied for an individual tax ruling. The tax authority deemed it incorrect; consequently – acting on behalf of the company – we challenged the ruling and subsequently defended our position before the Supreme Administrative Court.
The right to claim actual operating costs has been retained
The Provincial Administrative Court in Wrocław overturned the interpretation, ruling that our position was correct. The authority lodged a cassation appeal, which the Supreme Administrative Court dismissed. The Court pointed out that the prohibition on deducting expenditure on an abandoned investment does not cover the costs of a project that was abandoned before it had even commenced.
The client has thus secured the right to account for the actual costs of carrying out investment activities on an ongoing basis – including those relating to projects that did not result in a purchase. For an entity analysing multiple locations simultaneously, this is a significant, recurring cost item.
What this means
It is worth noting that the disputed Article 16(1)(41) has been deleted from the CIT Act and has not been in force since the start of 2009. The case, however, remains a prime example of the defence of the right to claim investment preparation costs – right up to the highest administrative court.