The International Journal
of Not-for-Profit Law
Volume 3, Issue 2, December 2000
Interpretation of Article 17 of Corporate Income Tax Act
By Kuba Wygnanski
Forum of Polish NGOs (FIP)
The lack of clarity of tax regulations has generated interpretative doubts leading to the questioning of lawmaker’s intentions as expressed in Article 17, section 1, point 4 of the Corporate Income Tax Act. Pursuant to the above referenced Article 17 tax exempt status applies to “income of taxpayers […] the statute of which defines its objectives as operating in the areas of science, science and technology, education, including university education, culture, physical culture and sports, environmental protection, support for social initiatives for construction of roads, telecommunication network in rural areas and water supply for rural areas, charity, health protection and social welfare, professional and social rehabilitation of the handicapped, and religious cult, with respect to the part of the income designated for such purposes”.
By decision of the Tax Control Inspector, later confirmed by the Tax Chamber in Warsaw, the Foundation for Polish Science (Fundacja na Rzecz Nauki Polskiej) was charged with overdue corporate income tax for 1995, 1996 and 1997, increased by respective interest, with respect to expenditure related to purchase of securities. The Foundation appealed against the decision of the Tax Chamber to the Supreme Administrative Court. The three judges tribunal addressed a legal question to a seven judges committee. On 20 November 2000 the seven Supreme Administrative Court judges committee adopted a resolution whereby they stated that by purchasing securities for investment purposes the foundations forfeited their tax exempt status. It is expected that the ruling tribunal will soon take a similar position.
The Foundation for Polish Science invested funds designated for its core operations in financial instruments, including treasury bonds and treasury bills which are considered to be among the safest investments available. The foundation made the investments, because it believed that Article 17, section 4 of the Corporate Income Tax, which provides that funds designated for its core operations, regardless of the time they are spent therefor, are tax exempt, permits such action. The Foundation’s belief was supported by, i.a. the official position of the Government Legislative Centre. The opinion was also shared by reputable professionals.
The inaccuracy of the regulation resulting in interpretation contrary to the intentions of the law makers may hinder not only the development of civil society in Poland but also the contributions supporting the development thereof. This issue applies not only to the Foundation for Polish Science but many other organisations, foundations and associations which try to use and manage the funds available to them as economically as possible to provide the best support for and carry on operations in the area of education, science, culture or charitable aid.
Therefore, there is no doubt that in the event of an unfavourable ruling by the Supreme Administrative Court the respective bodies must appeal against such ruling to the Supreme Court. There is a justified threat that unfavourable interpretation of the tax regulations may have the following consequences:
- question the historically shaped notion and logic of operation of foundations and other social organisations which through economical management of their resources support worthy, socially beneficial causes;
- greatly limit the ability of stable operation for many NGOs which attempt to rationally manage their resources to ensure long-term support for their core activities (e.g. the foundations, if they are deprived of the ability to get income from their capital, will soon use their resources and will face either discontinuance or material limitation of their grant giving activities for research, educational, cultural, social welfare purposes);
- large foreign foundations will be discouraged from giving grants to Polish NGOs in fear of the unfavourable tax regulations (including the threat of payment of high taxes or decreasing the value of grants, because of the inability of effective management thereof);
- blocking the creation of new charitable organisations which raise financing for long-term support of socially viable local initiatives in small towns and in rural areas (e.g. local funds or scholarship funds).
A decision has been taken to appeal this case to the Supreme Court of Poland – the procedure requires certification by the Ombudsman, and that is being sought. It is expected that many briefs amicus curiae will be filed.
Moreover, an amendment of tax regulations seems to be unavoidable to ensure that in the future foundations and social organisations would have a clear view on the investment options they have with respect to their resources for the core and socially beneficial operations. The following is the draft that has been presented to the Sejm Finance Committee, where it is presently under discussion.
Draft of 1 December 2000
The following section 1e shall be added to Article 17 of the Corporate Income Tax Act of 15 November 1992 (Dz.U. 2000, No. 54, item 654 and No. 60, item 700):
“1e. The exemption referred to in section 1, point 4-8 shall also apply to the spending of the income designated for purposes as defined in those regulations, in relation to the taxpayer purchasing the following:
- State Treasury bonds issued after 1 January 1989, treasury bills, bonds issued by local government bodies after 1 January 1997;
- bonds issued in compliance with the Bonds Act of 29 June 1995 (Dz.U. 1995, No. 83, item 420 and No. 118, item 574, Dz.U. 1997, No. 88, item 554 and No. 118, item 754; Dz.U. 1998, No. 106, item 668; and Dz.U. 2000, No. 60, item 702 and No. 94, item 1037);
- pledge instruments (listy zastawne) issued by mortgage banks on the terms and conditions as defined in the Pledge Instruments and Mortgage Banks Act;
- debt securities other than bonds, guaranteed by the State Treasury, the National Bank of Poland , local government bodies, domestic or foreign banks having their registered seat in OECD countries;
- bank securities issued in accordance with the Banking Law of 29 August 1997 (Dz.U. 1997, No. 140, item 939);
- shares admitted to public trading, purchased through a public offering or at a stock exchange or in regulated secondary public market outside any stock exchange or on the basis of a foreign exchange permit granted in compliance with Article 92 or 93 of the Law on Public Trading in Securities of 21 August 1997 (Dz.U. No. 118, item 754, No. 141, item 945; 1998, No. 107, item 669, No. 113, item 715; and 2000, No. 22, item 270 and No. 60, item 207 and item 703), provided that the shares purchased by the taxpayer do not entitle it to more than 5% of votes at the general meeting of shareholder of the company issuing the shares or to more than 5% of such company’s share capital.