The tax treatment of contractual penalties has long been one of the most disputed areas in CIT practice. Although the regulations themselves remain unchanged, their interpretation continues to evolve—recently, increasingly in favor of taxpayers.
In March 2026, the Head of the Polish National Revenue Administration revised an unfavorable interpretation concerning a contractual penalty for delays in performing warranty obligations, as well as related interest and litigation costs. It was concluded that all these expenses may constitute tax-deductible costs as part of normal business risk.
The case concerned a company carrying out infrastructure projects in the energy and technical sector, including the delivery, installation, and commissioning of uninterruptible power supply (UPS) systems, as well as warranty services. Under one of the contracts, the company duly performed its main obligation, as confirmed by an acceptance protocol. However, a dispute arose regarding the nature of periodic inspections—whether they were to be provided free of charge within a lump-sum remuneration or as paid service activities. The client imposed contractual penalties for delays in performing warranty inspections, and the regional court upheld the claims. The company paid not only the contractual penalty but also statutory interest and litigation costs, including interest. It then requested a tax ruling on the classification of these expenses.
The company argued that the penalty did not relate to defective goods or services, but rather to delays in performing warranty-related obligations. Therefore, such penalties should not fall within the exclusions listed in Article 16(1)(22) of the CIT Act. It also pointed out that the risk of incurring penalties is a natural element of executing large infrastructure contracts, and that expenses related to disputes and their resolution remain connected to its business activity. Since the penalties, interest, and litigation costs were actually incurred and not listed in the exclusion catalogue, the company considered that they met the general criteria for tax-deductible costs. Additionally, with respect to interest, Article 16(1)(11) of the CIT Act applies, meaning that only interest actually paid may be treated as a tax cost.
However, the Director of the National Tax Information (KIS) found this position incorrect. He adopted a very broad interpretation of “defective performance of works and services” under CIT, stating that it includes any improper performance, including delays in carrying out warranty inspections. Under this approach, penalties for delays would fall within Article 16(1)(22) of the CIT Act and would therefore be excluded from tax-deductible costs, along with related interest and litigation expenses. The company challenged this interpretation, relying on established case law of the Supreme Administrative Court (NSA), which holds that the catalogue in Article 16(1)(22) is exhaustive and cannot be extended to other situations—particularly penalties for delays that do not relate to defective performance.
Following the complaint, the Head of the National Revenue Administration changed the interpretation issued by the Director of KIS. In a letter dated 13 March 2026 (ref. 0114-KDIP2-2.4010.599.2025.3.RK), it was explicitly stated that the company’s position was correct. This confirmed that the following may be treated as tax-deductible costs: contractual penalties for delays in performing warranty obligations, statutory interest on such penalties (deductible only upon payment), and litigation costs together with interest. Although the authority did not provide a detailed justification, the decision aligns with the line of case law established by the Supreme Administrative Court (e.g., II FSK 700/20, II FSK 2961/20, II FSK 2277/20, II FSK 409/22). These rulings clearly indicate that Article 16(1)(22) of the CIT Act, as an exception, must be interpreted strictly, and that penalties for delays not related to defective performance should not be automatically excluded. Instead, they should be assessed under Article 15(1) of the CIT Act, taking into account their connection to business activity and contractual risk.
This change in interpretation is significant not only for the energy and technical sector but also for all entities executing large contracts with extensive penalty clauses. The ruling confirms that not every penalty for delay constitutes a penalty for defective performance within the meaning of Article 16(1)(22) of the CIT Act. The nature of the breach is crucial—delays in the performance of otherwise properly executed obligations should not be treated the same as defects in goods or services. Expenses arising from typical business risk may be tax-deductible, provided they meet the general criteria under Article 15(1) of the CIT Act. Additionally, court-awarded litigation costs directly related to business activity may also qualify as tax-deductible expenses.
In conclusion, this latest change in interpretation demonstrates that the tax authorities are increasingly aligning with established case law, under which contractual penalties for delays—if not explicitly listed in Article 16(1)(22) of the CIT Act—may be treated as tax-deductible costs, provided they arise from rational business risk. This development improves the predictability of CIT settlements and facilitates the classification of such expenses for taxpayers.