Expenses for team-building events, insofar as they relate to the participation of a colleague (B2B), do not constitute a tax cost

Troublesome entertainment expenses

By way of introduction, in accordance with the provisions of the Corporate Income Tax Act and the Personal Income Tax Act, entertainment expenses, in particular those incurred for catering services, the purchase of food and beverages, including alcoholic beverages, are not considered tax-deductible costs.

Both administrative courts and tax authorities, when defining the term ‘entertainment’ – due to the lack of a statutory definition – refer to its dictionary meaning, according to which ‘entertainment’ constitutes an activity aimed at creating and consolidating a positive image of the taxpayer in the eyes of other entities. In this sense, entertainment is primarily an activity directed at the taxpayer’s existing or potential business partners or third parties with the aim of creating the desired image of the taxpayer in order to facilitate the conclusion of a contract or to create favourable conditions for its conclusion. In such a situation, entertainment expenses are costs incurred by the taxpayer to create a positive image of themselves, highlighting their wealth and professionalism.

At the same time, the classification of each case, in this context of expenditure incurred on business associates, should be assessed separately, depending on the specific circumstances (as held by the Supreme Administrative Court in a resolution of 7 judges dated 17 June 2013, file ref. II FSK 702/11).

What the case concerned

In the case in question, the applicant was a Polish software developer. In connection with its business activities and the associated personnel management strategy, the applicant wished to organise team-building events aimed at fostering integration among the company’s employees, staff working in teams, and associates (individuals on B2B cooperation agreements).

The need to organise team-building events stemmed from the fact that the company organises work in mixed teams – employees working alongside contractors – and from the fact that it has branches spread across Poland. The teams within which projects are carried out consist of people working in a single branch and office, people working as self-employed contractors outside the company’s offices, and people employed in various branches in different cities. For this reason, these individuals often do not have the opportunity to meet in person and bond.

In an individual ruling issued on 21 June 2018 (ref: 0111-KDIB2-3.4010.103.2018.1.KB), the Director of the National Tax Information Service deemed the company’s position to be incorrect, stating that:

With regard to expenses related to the participation in team-building meetings of natural persons who are not employed by the Company but merely provide services to it as part of their business activities (B2B cooperation agreements), it should be noted that these expenses cannot be recognised as tax-deductible costs. Given that the Applicant has only business ties with these individuals as equal partners, it cannot be considered that team-building meetings contribute to increasing revenue or securing its source.

In view of the above, it must therefore be concluded that expenses related to the organisation of team-building events, insofar as they concern natural persons conducting business activities, bear the hallmarks of entertainment, are aimed at creating a positive image of the company in the eyes of contractors and business partners, highlighting its affluence and professionalism, i.e. to create the desired image of the Applicant for the potential conclusion of a contract or to create favourable conditions for its conclusion. Consequently, the expenditure incurred in this regard, pursuant to Article 16(1)(28) of the CIT Act, cannot be recognised as tax-deductible costs.

Favourable ruling by the Provincial Administrative Court

The Provincial Administrative Court in Rzeszów took a different view (favourable to the applicant) of the case. In its judgment of 29 March 2022, ref. no. I SA/Rz 94/22, the Court overturned the interpretation, ruling that:

(…) in the context of the facts set out in the application and the grounds of the complaint, it must be concluded that the basis for excluding from the claimant’s tax-deductible costs the expenses incurred for the organisation of team-building events, in the part relating to the claimant’s colleagues, cannot be their classification as entertainment expenses.

The complainant’s question regarding the inclusion of the expenses incurred by her in connection with the participation of associates in team-building events in tax-deductible costs was raised not in the context of the company creating direct conditions for cooperation with them, but in the context of those persons’ participation in the performance of duties by the complainant’s individual teams, comprising employees and associates. In this situation, therefore, it must be concluded that the appellant’s doubts concerned the impact and effects achieved by it in connection with the incurrence of the expenses in question, not in the relationship between the company and them, but in the context of the impact of such activities on the overall results achieved by the appellant within the framework of its operational activities.

(…) the authority unjustifiably classified the expenditure incurred on integration costs, in the part relating to associates, as entertainment expenses, excluded under Article 16(1)(28) of the CIT Act from the company’s tax-deductible costs.

However, the Supreme Administrative Court

Supreme Administrative Court (judgment of 19 October 2022, ref. II FSK 572/22), the arguments of the company and the court of first instance were not persuasive, according to which the integration of the entire team affects the quality of their work, allows for the integration of employees with colleagues (forming teams), improves the atmosphere, and also has a positive impact on the performance of tasks, which consequently affects the company’s revenue. In the court’s view, the tax classification of the expenditure is a separate matter, and this requires it to be allocated to entertainment expenses, thereby disqualifying the expenditure in question from tax-deductible costs.

The Supreme Administrative Court’s ruling leaves much to be desired

The Supreme Administrative Court’s tax-focused approach in this and other similar cases may raise questions, particularly as the court has previously sided with taxpayers, for example regarding business lunches, as in the judgment of 20 October 2022, ref. II FSK 531/20. In this case, one might have expected the court to take a more comprehensive and ‘real-world’ view of the matter under consideration, particularly from the perspective of current business realities

Author

Mateusz Kowalski

Radca prawny, Senior Associate

I specialize in Polish tax law, particularly income taxes, as well as international tax law. My experience includes, among others. providing ongoing tax advisory services, preparing legal and tax opinions, drafting requests for individual interpretations, conducting tax reviews. I gained professional experience in Warsaw law firms.

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