Accounting and Tax Vademecum of Accounting Offices 3/2015

The Company entered into a contract for the construction of a building The Company issues advance invoices for the services performed. It follows from the provisions of the contract that the Parties excluded the possibility of partial acceptance. In connection with the above, the question arose as to when income arises in the Company?

Pursuant to Article 12(1)(1) of the Law on Corporate Income Tax of February 15, 1992 (consolidated text, Journal of Laws of 2014, item 851, as amended) - hereinafter referred to as the "CIT Law", income, subject to paragraphs 3 and 4 and Article 14, is, in particular, money received, monetary values, including exchange rate differences.

The Corporate Income Tax Law does not provide a definition of income. However, as a general rule, any property gain of a taxpayer of a permanent nature can be considered tax revenue. The inclusion of a given property gain in the income of a legal entity is determined by the definitive nature of the gain in the sense that it actually increases the assets of the legal entity in a definitive manner. The above means that, as a general rule, a material gain is considered tax income on the date it is actually obtained, and therefore on a cash basis.

An exception to this rule is revenue related to business activities, which for CIT purposes is recognized on an accrual basis, i.e. it is tax revenue on the date it became due, regardless of whether the taxpayer actually received it. Pursuant to Article 12(3) of the CIT Act, revenue related to business activities and special divisions of agricultural production, earned in a tax year, is also considered to be revenue due, even if not yet actually received, after excluding the value of returned goods, granted discounts and rebates.

The date on which income arises is governed by Article 12.3a of the CIT Act, which is considered to be the date on which an item is delivered, a property right is disposed of, or a service is performed or partially performed, no later than the date:

1) issue an invoice or 

2) payment of dues.

When determining the moment of performance, the provisions of the general contract law of the Civil Code and the provisions of the contract between the parties should be taken into account. The tax analysis should aim to answer the question of whether the payment in question is an advance payment or the result of the performance of a specific and closed part of the performance.

Discrepancies in determining the date on which income arises result from the wording of Article 12, paragraph 4, point 1) of the CIT Law, according to which income does not include payments collected or accrued on account of deliveries of goods and services to be performed in subsequent reporting periods, as well as loans (credits) received or returned, except for capitalized interest on such loans (credits).

Does the Company make advance payments or is there a payment for partial completion of the work?

The situation should also be analyzed based on the provisions on construction contracts contained in Title XVI, Articles 647-658 of the Act of April 23, 1964. - Civil Code (Journal of Laws No. 16, item 93, as amended). According to the content of Article 647 of the Civil Code, through a construction contract, the contractor undertakes to hand over the object provided for in the contract, performed in accordance with the design and principles of technical knowledge, and the investor undertakes to perform the activities required by the relevant regulations related to the preparation of the work, in particular, to hand over the construction site and deliver the design, and to accept the object and pay the agreed remuneration. It follows from the wording of this provision that the contractor's obligation under a construction contract includes not only the execution of the object itself, but also its handover to the investor. Thus, prior to such handing over of the object, there is no performance of the contractor's obligation, and thus there is no performance.

In turn, the provision of Article 654 of the Civil Code, stipulates that the contractor may also request that the investor accept the completed work in part, as it is completed, against payment of an appropriate part of the remuneration. However, the parties may exclude this right in the contract.

It follows from the contract concluded by the Company that acceptance and settlement of the completed work takes place only after complete completion of the construction, and during the course of the investment the individual stages of the project are not subject to acceptance and settlement.

The tax authorities confirm that, in such a case, income arises at the time of final performance of the contract. The Second Tax Office in Rzeszow, in a letter dated 03.02.2006, No. II.US. PB-I-415/10/06 stated: "In light of the applicable tax laws and the provisions contained in the contract, income from the business of construction services will arise only at the time of final performance of the contract, on the date of the final invoice for the sale of services. As of that date, you should recognize the revenue resulting from the final invoice and from the previously issued invoices confirming receipt of the advance payment."

This position is confirmed by the Undersecretary of State at the Ministry of Finance. The response of the Undersecretary of State at the Ministry of Finance - under the authority of the Prime Minister - to Interrogatory No. 3834 on accounting for corporate income tax purposes of revenues and their deductible costs in companies building public roads, dated June 13, 2003, reads: "The application of these norms to the accounting of revenues resulting from contracts for the construction of roads, bypasses, etc., depends on the provisions contained in the specific contracts concluded by construction companies with the General Directorate of National Roads and Highways. If it follows from the provisions contained in these contracts regarding the method of implementation of the investment, the schedule of works, the conditions for acceptance of the completed stages of the investment, that settlement of a given investment takes place in stages, i.e., for example, after completion of a given road section (bypass), it is accepted on the basis of a take-over protocol, then it should be considered that the moment of issuing an invoice for completion of this stage of construction will be the moment of obtaining revenue for the construction company. In such a case, it cannot be said that an invoice covering the amount due for construction work already performed, which constitutes a certain closed and completed whole, is an "advance" invoice, i.e. covering the amount due on account of supplies of goods and services that will only be performed in subsequent reporting periods.

On the other hand, in cases where it is clear from the contracts that the acceptance and settlement of the completed work takes place only after the complete completion of construction, and during the course of the project the individual stages of the project are not subject to acceptance and settlement between the parties, it is possible to report revenue only at the time of the final completion of the project and complete settlement of the contract."

Accordingly, business income from construction services will only arise upon final performance of the contract, on the date of the final invoice for the sale of services.

Revenue resulting from the final invoice and from previously issued invoices confirming the receipt of an advance payment should be shown on the date of the final invoice for the sale of services. To ensure that the contract does not raise doubts with the tax authorities, the contract should contain clearly worded provisions:

- In the course of the work performed, the ordering party undertakes to make advance payments for the service performed,

- is charged to the costs incurred by the contractor in connection with the service,

- Settlement between the purchaser and the contractor will be made on the date of completion of the work under the contract.