VAT deduction for CSR expenses not always obvious

By judgment of February 2^nd, 2023, ref. I FSK 1474/20, the Supreme Administrative Court (NSA) denied the taxpayer the right to deduct VAT on expenses for the use of an electric bus by its social partner (Caritas), even though they were essentially part of activities related to corporate social responsibility (CSR).

Corporate social responsibility (CSR)

The applicant in this case was the company involved in the coal mining sales. In order to build an image of a responsible, trustworthy, representing high ethical standards, caring for the environment and for relations with the local community, this company initiated a CSR project. The company incurred expenses (lease instalments) for the purchase of an electric bus intended for use by the Christian charity – Caritas. Slogans promoting ecological issues and Christian values, as well as the company’s logo, were placed on the bus.

Already at the stage of applying for an individual tax interpretation, the entrepreneur argued that the expenses incurred on CSR projects are basically a form of advertising, as they help build a positive image of the company as an ethical, trustworthy entrepreneur and employer.

Not every CSR entitles to VAT deduction

The position of the coal company was not shared either by the tax authority or the courts of both instances. In the judgment of July 6^th 2020, ref. I SA/Gl 1486/19, the Provincial Administrative Court (WSA) in Gliwice admitted that, although it is desirable for entrepreneurs to undertake CSR activities due to their positive impact on the social interest, this does not automatically mean that the entrepreneur is entitled to deduct VAT. According to the Provincial Administrative Court, the circumstances of a specific case should be assessed each time.

In the present case, the purchases made by the entrepreneur are not related to taxable activities and creation of turnover, or at least the applicant has not demonstrated such a connection. The company itself does not use the electric bus it has purchased, nor has it donated it for social purposes such as public transport. Instead, the bus will be used exclusively by the social partner for purposes such as the promotion of ecological activities of the Catholic Church and others. Therefore, according to the court, the predominant benefit of the CSR project organized in this way will accrue not to the company, but to its social partner, which actually uses the vehicle. The company’s line of business is the mining and sale of coal and the company has not demonstrated how the purchase of a bus for an organization related to the church and engaged in helping the needy and poor would affect its turnover from this activity or have a price-enhancing effect on the products it offers.

The court’s position on VAT deduction

The court held that the possible benefit for the company would be purely peripheral and would not generally consist in increasing sales, acquiring new customers or reducing the situation in which the applicant would be accused of polluting the environment. The slogans placed on the bus do not promote the company’s initiatives in any way, but are an advertisement for the activities of a Catholic charity. Simply placing the company’s logo on the bus is insufficient to consider that the expenses incurred on it have a marketing purpose.

The position of the tax authority and the Provincial Administrative Court was also confirmed by the Supreme Administrative Court (NSA) in the judgement of 2 February 2^nd, 2023, ref. I FSK 1474/20. In the verbal recitals of the decision, the Supreme Administrative Court stated that the company failed to demonstrate even an indirect link between the purchase of the electric bus and the company’s business activities. It is not the company, but its social partner that uses the leased bus to promote the pro-ecological activities of the Church and for its other purposes. In such a situation, it is possible neither to see any influence of the purchase made on the general functioning of the enterprise as a whole, nor its contribution to the generation of turnover. Consequently, the company is not entitled to deduct input tax on the expense incurred.

What is next for the CSR activity?

We do not yet know the written justification for the Supreme Administrative Court’s judgment, but the court’s position confirms that CSR activities do not always entitle a to deduct the VAT related. The key is to highlight the image and advertising purpose of the taxpayer itself, rather than other entities carrying out charitable activities.

CSR is a relatively new concept in the Polish economic reality, however – as the courts of both instances in this case also admitted – it is a commonly accepted method of promoting a positive image of a company in times of growing social sensitivity to ecology and sustainable development.

Thus, the Supreme Administrative Court ‘s ruling is a warning to taxpayers that promoting their activities as socially responsible entities does not automatically imply the right to deduct VAT, and each project of this type should be carefully analyzed in terms of meeting the requirement that the expenses are related to the business activities performed.