Banks cannot claim tax deductibility for reimbursements to CHF mortgage borrowers

8 January 2024 | Knowledge, News, Tax Focus

Recently, banks have questioned the tax treatment of reimbursements to CHF mortgage borrowers in the event that a CHF mortgage agreement is declared invalid by a final and non-appealable judgement.

This is because such invalidity results in both parties being obliged to reimburse each other for the payments received. This usually involves a unilateral transfer of funds by a bank, as the amounts constituting its original receivable are set off against the instalments already paid by borrowers. If such an agreement is invalidated, banks are obliged to reimburse interest, bank charges, commissions, exchange differences and other receivables.

One bank asked the tax authority whether such a reimbursement could be recognised as a tax expense, thereby reducing the bank’s revenue and income tax, and whether such an expense should be recognised when incurred.

Tax authorities order adjustments

According to the Director of the National Revenue Administration Information Centre (KIS), the invalidation of a CHF mortgage agreement means that the payments received under the agreement cannot be recognised as revenue, since the agreement was invalid from the outset, as confirmed by a court judgement, and therefore cannot produce any legal effects, which translates into the revenue previously received by banks under concluded CHF mortgage agreements.

As these invalidated agreements did not result in an increase in the bank’s assets, reimbursements to CHF mortgage borrowers cannot now be recognised as a tax expense.

In its ruling, the tax authority indicated that the bank should therefore adjust its previous tax return with regard to the revenue earned on invalidated CHF mortgage agreements, with the possibility of adjustment limited to 5 years, counting from the end of the calendar year in which the tax deadline expired.

WSA in Warsaw rules in favour of banks

In this case, the Provincial Administrative Court (WSA) in Warsaw took a different view, much more favourable to banks (III SA/Wa 1234/21).

The WSA held that civil law rules and definitions cannot be directly transposed into tax law unless so indicated, pointing out that the concept of tax expenditure is a matter of fact rather than law.

Therefore, despite the invalidation of the agreements, reimbursements to CHF mortgage borrowers should be recognised as a tax expense. According to the WSA, since the payments previously received were included in the tax return, these should be recognised as a tax expense when the payments due are returned.

NSA upholds tax authorities’ position in a precedent-setting judgement

The final and non-appealable judgement in this case was delivered on 4 December 2023 (II FSK 334/22).

The Supreme Administrative Court (NSA) disagreed with the WSA, arguing that the invalidation of CHF mortgage agreements by the court did not generate any revenue for the bank, so the related reimbursements could not be recognised as a tax expense in relation to the revenue generated.

The NSA stressed that tax expenses should be related to the revenue generated, which is not the case with invalidated CHF mortgage agreements, pointing out that the invalidation of such agreements by a civil court judgement can only result in an adjustment to revenue, without the possibility of recognising the reimbursements paid as a tax expense. The NSA thus upheld the tax authority’s position, being unfavourable to financial institutions.

Where do banks stand today

The NSA’s December judgement is precedent-setting, marking the beginning of a line of case law that is unfavourable to banks. In recent weeks, the NSA has taken a similar position in cases II FSK 1264/23, II FSK 1658/23, II FSK 1442/23 and II FSK 1443/23, in which it also overturned the appealed judgements of provincial courts and dismissed the banks’ appeals.

Importantly, judgements in such cases may have negative financial consequences for banks, particularly in the context of mass claims by CHF mortgage borrowers to have their mortgages declared void.

The negative impact is mainly due to the fact that such agreements are very often declared void after the expiry of the limitation period for a tax liability which, under applicable law, is five years from the end of the calendar year in which the deadline for payment of the tax expired.

In such a situation, taxable persons are no longer able to adjust their revenue. Consequently, depriving them of the right to treat their reimbursed payments as a tax expense, previously classified as revenue, would result in them being subject to income tax, even though they have not in fact acquired any assets, which is clearly contrary to the basic principles of tax liability.

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Jakub Dittmer

Jerzy Cyran

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