A contractual penalty for early termination of a lease contract may be qualified as a cost.
In today’s Rzeczpospolita, Agata Dziwisz comments on the judgment of the Supreme Administrative Court regarding the qualification of payments as tax deductible costs, related to early termination of a lease contract:
Tax authorities often take the view that payments related to early termination of a lease contract do not constitute tax deductible costs for tenants, especially if taking the form of compensation or a contractual penalty. The authorities most often classify such expenses as not related to earning revenue, or maintaining or securing its source. In the said judgment, however, the Supreme Administrative Court favoured a positive assessment of the tax consequences of terminating a commercial lease contract, accepting that such expenses may be qualified by the tenant as tax deductible costs if the contract is terminated based on an economically rational decision. This means a situation in which the termination of the contractual relationship is more profitable for the taxpayer than the performance of the contract. The court further took into account the fact that the termination of the contract was associated with the landlord being prohibited from running competitive activity under pain of making specific payments to the tenant.
The Supreme Administrative Court has previously presented a similar position, e.g. in its judgments of 27 March 2019 (II FSK 292/16) and 26 April 2019 (II FSK 1248/17). This jurisprudence of the Supreme Administrative Court is not only favourable for taxpayers, but also especially pertinent in the era of the COVID-19 epidemic and the resulting impact on commercial space tenants. It is right to conclude that the taxpayer who, after analysing the financial aspect of a lease contract, makes a reasoned decision to terminate it, should be entitled to settle the resulting expense as a tax deductible cost. After all, businesses are entitled to minimize losses, and early termination of such contracts in certain situations may bring them more benefits than their further performance without economic purpose.
The full article is available on the Rzeczpospolita website.