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Tax-deductibility of an advance towards a connection fee in doubt

Tax-deductibility of an advance payment towards a connection fee in RES business

Connection conditions are usually obtained to carry out a project that will generate revenues from production and sale of electricity.

Pursuant to Article 15 of the CIT Act, tax-deductible expenses include expenses incurred in order to earn revenue from a revenue source or to maintain or secure a source of revenue.

There are no major doubts that energy producers may deduct the connection fee from tax. There are, however, doubts over when they can do so.

Ways to recognise tax-deductible expenses

As a rule, tax-deductible expenses may be recognised in two ways – in the current period according to the relevant rules, or through regular deduction of a certain portion of the asset's initial value by means of depreciation charges.

An advance payment towards a connection to the power grid is often the first step in the investment project development. Having a legal interest in land secured, business owners apply for environmental permits, administrative decisions, and connection to the grid. No production will ever happen without such a connection.

Once all the permits are secured, construction work begins.

The question is whether an advance towards the connection fee should increase the initial value of future tangible assets or be deducted in the current period.

Manufacturing cost of a tangible asset

Pursuant to Article 16g(4) of the CIT Act, the manufacturing cost of a tangible asset (i.e. a cost that increases the asset’s initial value) is the value of the following items used in the manufacturing of tangible assets (at their acquisition cost): property, plant and equipment as well as external services, labour costs, including non-wage components, and other costs which may be included in the value of the manufactured tangible assets. The manufacturing cost does not include: management overheads, cost of sale and other operating expenses and costs of financial operations, in particular, interest on (bank) loans and commission fees, except for interest and commission fees accrued until the date the tangible asset is brought into service.

This means that there must be a direct relation between a cost and the production of the asset in order for the cost to be treated as a manufacturing cost. There is no closed-ended list of costs that increase the initial value of tangible assets, as evident from e.g. the phrase “and other costs which may be included in the value of the manufactured tangible assets.”

When it comes to energy producers, the grid connection seems to be directly related to the construction of farms or energy storage facilities. It is not only indispensable to start the project (construction) but is also related to the scope of use of future tangible assets and the scale of production. Therefore, when it comes to energy producers, the connection fee is not just a secondary operating expense (it is not required e.g. to light up a warehouse), but it defines the scale of business of the tangible assets to be built.

Importantly, revenue authorities have recently taken a divergent approach claiming that a connection fee cannot increase the initial value of tangible assets and should be deducted in the current period. The authorities explain that an advance towards a connection fee is not related to the asset manufacturing process itself and does not increase its value.

The revenue rulings are issued also to energy producers, e.g.:

advance tax ruling of 17 July 2025, no. 0111-KDWB.4010.63.2025.1.APA, concerning a wind farm
advance tax ruling of 22 August 2022, no. 0111-KDIB2-1.4010.338.2022.1.PB, concerning a PV farm

Courts take a similar stance, e.g.:

judgment of the Supreme Administrative Court (SAC) of 23/04/2025, file no. II FSK 959/22 concerning construction of a building.

This approach is often very unfriendly to energy producers because they incur losses in the first years of their business (no way to generate revenue) and, therefore, they sometime cannot effectively deduct those expenses from tax at all. Moreover, with this exclusion of such costs from the initial value of assets some business owners may be unable to deduct them from tax in a later period due to the statute of limitations.

It is worth following the development of the revenue authorities’ future approach to this matter.

You are welcome to contact us to discuss and review the available options to secure the tax affairs of your business.

FAQ

Can you deduct an advance payment towards a connection fee from tax?

As a rule, revenue authorities say that energy producers may recognise an advance towards a connection fee as a tax-deductible expense because it meets the criteria of Article 15 of the CIT. The controversy centres on the recognition date.

Does an advance payment towards a connection fee increase the initial value of the tangible assets?

This is disputed. In practice, many business owners treat the advance as a part of the project cost citing the direct relationship between the connection fee and the investment project. However, revenue authorities are claiming more and more often that the fee does not affect the tangible asset value and should be deducted in the current period.

Why do revenue authorities question the adding of the connection fee to the initial value of an asset?

The revenue authorities argue that the connection fee is not directly related to the manufacturing of a tangible asset. They believe that an advance on account of the connection fee does not increase the value of the facilities under construction, even though it is often a pre-requisite to start off the project.

What do the administrative courts say?

Courts sometimes share the revenue authorities’ view and hold that an advance payment towards a connection fee should be treated as an indirect cost. However, most judgments deal with the treatment of a connection fee in non-RES industries. In our opinion, energy producers may have more arguments in favour of adding their expenses to the initial value of assets (as they determine the scale of operation of the tangible assets to be manufactured).

Why does the recognition in the current period may not be good for RES companies?

Energy producers often generate no revenue in the first years of business, or even incur losses. Tax-deduction may be difficult in that period. Moreover, if a taxpayer includes such costs in the initial value of tangible assets and later has them challenged by the revenue authorities, he may be unable to deduct them in the current period due to the statute of limitations.

Are there any options to secure the tax treatment of an advance payment towards a connection fee?

Yes. You can apply e.g. for an advance tax ruling and review the connection agreement. The right steps should be taken at the beginning of the project development. Circumstances must be assessed on a case-by-case basis.

May the revenue authorities change their approach?

The revenue authorities’ stance is evolving dynamically. Moreover, there is no firmly-established case law at the moment on the treatment of the advance towards a connection fee in the RES industry.

If you have any questions, please feel free to contact our experts »

Author: Agata Asenhajmer

18 December 2025

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Agata Asenhajmer

Tax adviser (Poland)

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