Tax-deductibility of a deposit forfeited upon leaving the auction scheme

Commercial producers and distributors of renewable energy may submit bids referred to in Article 79(3) of the Renewable Energy Act of 20 February 2015 (RES Act) in auctions for sale of electricity from renewable energy sources organised as part of the auction scheme.

A company that wins an auction secures the sales price of its electricity as it obtains the right to have a negative balance covered. The balance is the difference between the value of the sold electricity calculated according to statutory rules and the electricity value calculated on the basis of the price bid submitted by the auction winner. If the balance is positive, the energy producer must refund the difference to the renewable energy clearing operator. If the balance is negative, the energy producer is entitled to demand that the balance be topped up.  

One of the pre-requisites to join the auction scheme is to pay a statutory amount of deposit. The auction bidders also undertake to sell for the first time the electricity under the auction scheme within a legally binding deadline. If a producer does not sell the electricity under the auction system within that deadline, the deposit is forfeited to the President of Energy Regulatory Office. 

The auction scheme has been designed to ensure a guaranteed level of revenues for energy producers. However, following the drastic changes to energy prices on the open market, the participation in auctions have become less attractive and many companies have started to explore other options. On some occasions, they have intentionally failed to sell electricity through the auction scheme and decided to opt out. Among other consequences, they lost their deposit. 

Then, many taxpayers have begun to wonder if the forfeited deposit may be treated as a tax-deductible expense.

In our opinion, tax-deductibility of forfeited deposits cannot be ruled out. Recent advance tax advance rulings substantiate such a view (e.g. advance tax rulings of 18 July 2023 and 20 July 2023, file no. 0114-KDIP2-2.4010.138.2023.2.AS and 0111-KDIB1-1.4010.202.2023.2.SG, issued by the Head of the National Revenue Information Service). 

In both rulings, the revenue authority has agreed that the deposit paid to join the auction scheme, which is subsequently forfeited upon departure from the scheme, meets the tax-deductibility criteria set in Article 15(1) of the CIT Act and may, therefore, be deducted from tax. In both cases, the authority has held that the forfeiture of the deposit is connected with earning revenue, and the expense for the deposit has been reasonably motivated.  

Due to the peculiarities of the forfeiture of a deposit and the related legislation as well as the frequent administrative proceedings in this area, the expense recognition date is unclear. Given the producer’s situation, the issue is worthy of an in-depth analysis.

The advance tax rulings deal with specific and concrete set of facts and circumstances and cannot be treated as an indisputable guarantee of tax-deductibility of a forfeited deposit. It makes sense to review the company’s situation on a case-by-case basis and consider applying for an advance tax ruling. 

If the situation described in this article applies to your company, contact us. Our experts provide comprehensive tax services and have vast experience in the energy area.