Can a forfeited deposit be tax-deductible?

The rulings were applied for by producers and sellers of electricity, which wanted to know if they could claim such a forfeited deposit as tax-deductible and at what point they could do so. 

Entities that produce electricity using renewable energy sources (RES) can participate in auctions. The auctions provide state aid to enterprises to support the development of renewable energy in Poland. In the auction, operators submit a bid in which they guarantee a price (bid price) that is the price of selling energy for a maximum of 15 years – thus securing the operator's source of revenue for the coming years. With the submission of a bid, operators are required to pay a deposit, which is refundable provided that the operator fulfils the obligations imposed on them by the RES Act. The auction winners are those who have offered the most favourable price for the sale of electricity.

As a result, the winner becomes entitled to have the so-called negative balance covered by the renewable energy clearing operator.

The balance itself is made up of two components:

The difference between the two values gives the balance. A negative result (negative balance) – i.e. a situation where the bid price is higher than the average market price – means that the clearing operator is obliged to pay the corresponding amount to the energy producer. A negative balance therefore occurs when energy market prices are low. The opposite situation – i.e. a positive balance – means that the energy producer is obliged to pay the difference to the clearing operator. This also means that energy market prices are high.

Initially, the auction system seemed attractive to renewable energy producers who wanted to have a stable source of revenue. However, in the face of soaring electricity market prices which were significantly higher than the bid price, the auction system was no longer beneficial or economically viable for many operators.

In addition, financial instruments used in the commercial market, above all physical or virtual Power Purchase Agreements (PPAs, vPPAs), which also hedge electricity supply prices, have meanwhile become major competitors. The first agreement is for the physical supply of renewable energy for a pre-agreed price. The latter provides neither for the transfer of ownership of electricity nor for its physical supply, it only secures the price of energy at a certain level. In both cases, energy prices are generally better hedged than in the auction system, which consequently helps energy companies achieve higher profitability and is therefore better for them.

Driven by these factors, more and more energy producers decide to opt out of the auction system, which saves them significant amounts of money and thus makes more economic sense. However, opting out of the auction system costs the producers the deposit they paid. It goes to the President of the ERO by operation of law. Another consequence of withdrawing from the auction system is that energy producers are prohibited from taking part in further auctions for three consecutive years after the date on which electricity under the auction system should have been sold for the first time. 

As a result, the question is whether energy companies can treat the forfeited deposit as tax-deductible and at what point they should do so. 

The Head of the National Revenue Information Service has confirmed that the forfeited deposit qualifies as tax-deductible. This is because it is a business-related expense that is incurred to secure higher revenues using instruments other than those offered by the State. This expense qualifies as an indirect cost that cannot be directly linked to future specific revenues. 

Also questionable is whether the expense is definitive, which affects the timing of its recognition as tax-deductible. As noted earlier, deposits in the auction system are refundable. Therefore, the expense becomes definitive as a consequence of two specific developments: either the deposit is forfeited by operation of law or the administrative proceedings initiated by the President of the ERO are concluded. The tax rulings [1] confirm that the expense becomes definitive when the entity receives an administrative decision confirming the forfeiture of the deposit and then either exhausts the appeal route or allows the decision to become final. 

Nevertheless, it is worth noting that there have also been tax rulings in the past suggesting that the deposit becomes an expense earlier – when it is forfeited by operation of law to the President of the ERO [2]. At the moment, it is therefore impossible to say clearly which approach will gain the upper hand in the future.

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