Some time ago, we informed you about the planned expansion of the National Labor Inspectorate's powers ( New Powers of the National Labor Inspectorate ) and the tax and contribution consequences of reclassifying a B2B contract into an employment contract ( Tax Consequences of Reclassifying a B2B Contract ). But can such a situation have a positive impact on an employer's tax settlements? It turns out that in certain situations, it can. This situation is illustrated by the judgment of the Supreme Administrative Court of March 12, 2024, file reference II FSK 759/21.
The case concerned an individual interpretation. It was requested by a company that employs both employees under employment contracts and subcontractors – individuals performing work under business-to-business agreements. While the collaborators run their own businesses, they are a permanent part of the complainant's entire team, participating in its projects in a similar way to employees. The company organizes team-building events for employees and collaborators, aimed at strengthening positive relationships, increasing identification with the company, motivating teams to work efficiently and building team loyalty to the company (thus ensuring/maintaining collaboration with top employees/collaborators). The company inquired whether it could deduct expenses incurred for team-building events involving collaborators as tax-deductible costs.
The Director of the National Revenue Administration ruled that it was not. The expenses presented are not causally related to generating revenue or maintaining or securing a source of revenue. Instead, they constitute representation expenses, as their primary purpose is to create or improve the entrepreneur's image in the eyes of third parties who are not its employees.
Disagreeing with the interpretation, the company filed a complaint with the administrative court. The Provincial Administrative Court upheld the case. It pointed out that the fact that, within the work organization model, co-workers are a permanent part of the entire team, participating in projects implemented by the complainant on a similar basis to employees, is crucial to the resolution of the case. In light of these circumstances, the position that expenses for team-building events for co-workers cannot be considered tax-deductible is unfounded, as they are not causally linked to generating revenue or maintaining or securing its source. In this situation, the form of the contract concluded with the individual is irrelevant; however, the common purpose of the expenses is significant: establishing and maintaining collaboration with top industry specialists and increasing the team's efficiency, and consequently, generating higher revenues for the company. The co-workers are not clients of the company, which excludes the possibility of attributing a representative nature to the expenses under review.
This time, the Director of the National Tax Information Office filed a cassation appeal. The Supreme Administrative Court ruled that the expenses incurred for co-workers' participation in the team-building event cannot be considered tax-deductible. It justified this decision by, among other things, citing the different status of employees and individuals providing services as part of their business activities.
An employee of a company performs their work under the terms and conditions specified in the Labor Code, meaning under the employer's direction and at the time and place specified by the employer. The employer is subject to legally defined obligations, including meeting the social, living, and even cultural needs of employees. Among other things, the employer is also obligated to respect employee rights, counteract mobbing, provide vacation leave, and cover a range of costs (pension and disability contributions, contributions to employee capital programs, and the creation of social benefit funds). Therefore, expenses incurred on employee integration and meeting their entertainment needs are, firstly, within the employer's scope of responsibility, and secondly, they lead to increased work efficiency and are therefore also in the employer's best interest.
The legal situation for business entities collaborating with a company, however, is different. Collaborators, conducting business activities on their own behalf, as entrepreneurs, organize their own operating conditions, guided by the principles of increasing profits. Acting independently and at their own expense, they undertake all necessary actions to ensure their activities generate the greatest possible profits, and they also determine the terms of their services. The nature of business activity implies that no one motivates them to do so, and the choice of contractors is left to their discretion – although this choice can undoubtedly be influenced by the contractor's perceived image as a trustworthy entity offering hope for beneficial cooperation. Therefore, organizing team-building events for collaborators cannot be justified by the need to motivate them to improve their business operations and generate greater profits. Benefits between entities linked by a B2B agreement and their implementation arise from the previously concluded cooperation agreement. A collaborator performs tasks for the contractor based on the contractual obligations, not on the necessity of participating in the team-building event and getting to know the contractor's employees.
Therefore, if a B2B contract is reclassified as an employment contract, the employer will be entitled to recognize the costs incurred for organizing a team-building event for the former employees as well. The same applies to other costs, such as language training, participation in trade fairs, conferences, and meals.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of October 7, 2024
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