In a judgment dated 6 May 2025 (ref. II FSK 1012/22), the Supreme Administrative Court (NSA) agreed with the position that contractual penalties may be recognized as tax-deductible costs if the failure to deliver was not due to the company’s fault.
Uncertainty in this matter stemmed from the interpretation of Article 16(1)(22) of the CIT Act, which lists the types of contractual penalties and damages that cannot be recognized as tax-deductible costs. In the case law, this provision is interpreted literally, meaning that other types of compensatory payments not listed in the provision may be considered tax-deductible.
The case involved a company engaged in the delivery of products and technology for the military, police, and border guard, as well as specialized equipment for airports. These deliveries were made based on contracts that included provisions for contractual penalties—for example, for late deliveries or failure to deliver. Due to the COVID-19 pandemic, delays occurred both in production and in the delivery of goods to the company by its suppliers—circumstances beyond the company’s control. As a result, the delivery deadlines were not met, and the company was charged contractual penalties. The company applied for a tax ruling, arguing that the payment of contractual penalties should be considered a tax-deductible cost.
The Director of the National Tax Information (KIS) disagreed, stating that Article 16(1)(22) of the CIT Act should be interpreted broadly. According to the authority, it does not matter what caused the delay—if a company is liable for the delay under the terms of the contract, the related penalties cannot be tax-deductible.
The Provincial Administrative Court (WSA) in Łódź, in a judgment dated 6 July 2022 (ref. I SA/Łd 263/22), found the authority’s position to be incorrect. The court held that the tax authority misinterpreted the provision by equating the facts of the case with defects in delivered goods, completed work, or services. The court emphasized that such an expansive interpretation is impermissible, and the terms in the statute should be understood according to their meaning in civil law. The company’s failure to meet the delivery deadline due to reasons beyond its control cannot be considered a delay attributable to the company, as a delay implies fault.
The Supreme Administrative Court upheld the lower court’s ruling, noting that the contractual penalties were related to exceeding the delivery deadline and partial non-performance. A defect, by contrast, occurs only when a contract is performed improperly. In this case, the incomplete delivery did not constitute a defect, which excluded the application of the provision barring tax deductibility.