Who benefits from benefits?, American Investor, Fall 2015

The Constitutional Tribunal straightens up a messy area of employee taxation

Corporate bonding outings, company parties and other non-cash benefits for employees—do they constitute taxable income for the employee? Until recently, the answer to this question was not easy or clear. Often there were conflicting tax interpretations concerning similar facts. Finally the issue of in-kind employee benefits was taken up by Poland’s Constitutional Tribunal. As a result, the answer to this question became easier—to the “benefit,” as it were, of many employees.

Recent dilemmas

In contemporary employment relationships, employers provide employees with a whole range of benefits not mentioned in the employment contract and not making up part of the employee’s salary: corporate outings, parties, sports events and so on. This common practice raised the question whether benefits of this kind represent “other gratuitous benefits” for employees for tax purposes and in consequence constitute a form of taxable income for the employee deriving from the employment relationship.

Until recently, it was hard to answer this question. Both the tax authorities and the administrative courts presented varying and often contradictory positions. On one hand, it was held that for benefits from the employer to constitute employment income for receipt of “other gratuitous benefits,” it was necessary to show that the employee actually received the benefit and that it was possible to determine exactly what the amount was (e.g. tax interpretations IBPBII/1/415-487/11/BD, IBPBII/1/415-561/13/HK, IBPBII/ 1/1415-271/14/MK and IPPB2/415-174/11-4/MG). On the other hand, some of the rulings turned on the mere fact of making free benefits available to the employee, which in itself was deemed sufficient to impute income to the employee for receiving “other gratuitous benefits,” the value of which could then be determined by applying tax regulations and simple calculations (e.g. tax interpretations IPPB2/415-1159/08-5/AK and ILPB1/415-1301/13-2/AG and judgments of the Supreme Administrative Court of January 17, 2012, Case II FSK 2740/11, and March 12, 2013, Case II FSK 1428/11).

Three-pronged test

After years of inconsistent rulings and interpretations on employee income from receiving gratuitous benefits, the Constitutional Tribunal finally took up the issue, conducting an interpretation of the concept of “other gratuitous benefits” in a judgment issued on July 8, 2014 (Case K 7/13). The Tribunal held that not every benefit provided to the employee by the employer without fixing a payment for the benefit constitutes taxable income for the employee.

The Tribunal ruled that in order to find that a gratuitous benefit received by the employee is income for the employee, the following three conditions must all be met:

  • The first condition is that taking advantage of the benefit offered is voluntary.
  • The second condition is that the benefit was provided in the interest of the person receiving the benefit (and not in the interest of the person providing the benefit) and brought an advantage to the recipient in the form of an increase in his or her assets or avoidance of an expenditure which the person would have had to incur.
  • The third condition is that the benefit constituted a measurable advantage that can be attributed to a specific person in an individualized way (i.e. the advantage is not available to everyone generally).

In the judgment, the Constitutional Tribunal applied these conditions to the case of bonding outings, conferences and training. The Tribunal took the view that even if the employee participates in the event voluntarily (i.e. the first condition is met), there is no advantage on the employee’s side, at least not in the form of avoiding an expense, because it cannot be assumed that if not for the conference or training organized by the employer the employee would have spent his or her own money to participate in such an event (i.e. the second condition is not met). It is the employer who benefits from organizing such events. By integrating the team and raising their qualifications, the employer gets better work from its staff in return. The Tribunal also pointed out that in the case of bonding outings it would not be possible to determine the amount of the taxable income of specific individual taxpayers involved in the event. There is no basis for attributing a measurable advantage to individual participants in an event addressed to all of them (i.e. the third condition is not met).

Using this example, it is apparent that with some benefits received free of charge by employees, only one or perhaps two of the three required conditions for imputing income to the employee are met. These are primarily the types of benefits which previously raised lots of doubts, and now it can easily be verified whether a given benefit has tax consequences for the employee. Tax authorities can conduct this verification as well, and also reconsider their previous positions on this issue.

Consequences of constitutional interpretation

This judgment by the Constitutional Tribunal is interpretive in nature, which means that the administrative courts and tax authorities are bound by the interpretation adopted by the Tribunal. A year later, it can be observed that the three-pronged test established by the Constitutional Tribunal is being widely applied in practice. Applying this test, the tax authorities have had to update their existing position on receipt by employees of “other gratuitous benefits”—not only with respect to bonding outings, conferences and training events, but also with respect to financing by the employer of such items as:

  • Lodging during business trips
  • Leasing of housing for mobile employees to stay in
  • Sports activities, such as free tickets to the swimming pool or funding for the company football team
  • Events on special occasions, such as staff Christmas parties and weekend festivals
  • Insurance.

The previous and often conflicting positions of the tax authorities concerning these examples have been unified, and by application of the interpretive guidelines from the Tribunal are now highly predictable. After applying the three-pronged test, it turned out that in the great majority of instances these benefits cannot be regarded as “other gratuitous benefits.” The authorities are in apparent agreement that lodging during business trips, events for special occasions, and sports activities organized for staff are not done in the interest of the employee but primarily in the interest of the employer, which means that the second and third conditions are not met. And often it is difficult to assign an advantage to a specific person in an exact amount, for example in the case of services universally available to all employees; then the benefit cannot be deemed “another gratuitous benefit” because the third condition is not met.

Thanks to the three-pronged test from the Constitutional Tribunal, clear interpretive guidelines have dispelled previous doubts surrounding taxation of gratuitous benefits and ensured uniform, consistent rulings by the tax authorities and administrative courts in this area. Moreover, it seems that because of the general nature of the conditions, a similar test could also be applied in other relationships where one party provides a benefit and the other party receives it free of charge.


Published in: American Investor, Fall 2015