Retroactive reduction of depreciation rates

by Jakub Wajs, Agata Asenhajmer

18 March 2022

The Supreme Administrative Court (SAC) issued on 3 February 2022 a judgment (case file no. II FSK 1413/19) regarding the reduction of depreciation rates applied to tangible assets. The court’s position set the precedence for the interpretation of Article 16i(5) of the CIT Act, in that it confirmed that the straight-line depreciation rates of tangible assets could be reduced retroactively (taking account of the statute of limitations for tax liabilities). 

Point at issue

The case involved a company that applied for an advance tax ruling on a corporate income tax issue.  The company depreciated its assets using straight-line rates. As the company had a tax loss carried forward available for offsetting, it contemplated the reduction of depreciation rates also for previous years, taking into account the statute of limitations for tax liabilities.

The Head of the National Revenue Information Service (NRIS) stated in his ruling dated 8 December 2017 (case file no. 0114-KDIP2-2.4010.222.2017.1.SO) that the company’s viewpoint was incorrect and that depreciation rates may not be changed retroactively, but only in every tax year that follows a given current year.

According to the NRIS, depreciation rates may not be reduced during a year with the aim to reduce tax-deductible costs for previous periods.

The taxpayer did not agree with this conclusion, so the case was brought to the Provincial Administrative Court (PAC) in Warsaw, which challenged the NRIS’ standpoint and rejected the appealed ruling in its judgment of 11 December 2018 (case file no. III SA/Wa 566/18).

PAC’s judgment

According to the PAC, the provision applicable in this case does not stipulate that depreciation rates must be changed in the first month of a tax year; in particular, it does not prohibit changing depreciation rates with retroactive effect.

The provision in question only refers to a “point in time” from which depreciation rates may be changed, but it does not specify when the taxpayer must enter the reduced rates in its tax books.

The NRIS turned to the Supreme Administrative Court (SAC) with a cassation appeal against the judgment issued by the PAC in Warsaw.

SAC’s judgment

The SAC also supported the company’s standpoint and agreed with the PAC’s judgment, thus dismissing the NRIS’ cassation appeal.

According to the SAC, what is crucial is that rates should be changed from the first month of every tax year; at the same time, it is up to the taxpayer when it decides to change depreciation rates, and the change may be with retroactive effect.

What does the judgment mean for taxpayers?

Taxpayers may change depreciation rates at any time and such a change will also have retroactive effect. The condition is that the change must apply from the first month of a tax year even if the decision on the change is made in the course of that year.

No written statement of reasons has been issued as yet for the SAC’s judgment.

If you have any questions, please contact Rödl & Partner experts.