Contractual penalties are a common feature of commercial agreements – applied, for instance, for delays in performance, breaches of exclusivity clauses, or early termination of cooperation. From a tax perspective, however, they may lead to unexpected consequences – particularly in the area of VAT.

Although generally considered punitive in nature, an increasing number of cases show that the tax authorities – as well as the courts – are beginning to view them as... services subject to VAT.

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The classic model vs the authorities’ approach – a growing interpretative gap

Under article 483 of the Polish Civil Code, a contractual penalty serves a compensatory function. It constitutes a lump-sum compensation for failure to perform or improper performance of a non-monetary obligation. In business practice, this instrument is widely used – both as a disciplinary measure for the counterparty and as a means to safeguard the creditor’s interests.

For many years under VAT law, it was assumed that such payments – since they are not reciprocal – are not subject to taxation. However, over time, and due to increasing discrepancies in the application of the rules, the tax authorities' approach has evolved. More often now, the focus is not on the form of the payment but on its actual function. And this element is increasingly decisive in assessing whether a payment is a "penalty" or a reciprocal service.

A penalty in name, a service in essence

In the interpretation issued by the director of the National Tax Information Office (KIS) on 17 January 2025 (ref. 0114-KDIP1-1.4012.798.2024.2.AKA), the case of a telecom operator was considered. The operator charged clients a contractual penalty for early termination of a fixed-term agreement. The clients were required to pay an amount equal to the value of services the operator would have received had the agreement continued to its original end date.

The authority had no doubts – it concluded that this type of fee constitutes remuneration for a specific service: the client terminates early but, in doing so, essentially “purchases” the right to end the agreement. There is, therefore, a direct link between the service and the payment, which results in a VAT obligation.

A similar conclusion can be drawn from the interpretation issued by the head of the National Revenue Administration (KAS) on 30 May 2023 (ref. DOP7.8101.27.2023.FMLM), regarding additional charges for parking without a valid ticket. Even though these charges were labelled as “penalties” in the parking regulations, the tax authority deemed them part of the consideration for the parking service – and thus subject to VAT. A key argument cited by the authority was the CJEU judgment in case C-90/20, which underlined that even fees charged for improper use of a service may form part of the service’s price if there is a clear link between the customer’s conduct and the service.

When a penalty truly remains a penalty – a taxpayer-friendly approach

A different outcome arose in an individual tax ruling dated 14 February 2025 (ref. 0111-KDIB3-1.4012.747.2024.2.KO), concerning the construction sector. A contractor withdrew from an agreement due to the investor’s failure to provide a payment guarantee and demanded the payment stipulated in the contract – despite not performing the construction work.

In this case, the authority sided with the taxpayer, stating that the amount has a compensatory nature, not a service-related one. It was explained that the contractor does not provide any service to the investor – does not grant usage rights, does not make resources available, does not engage in any actual activity. A unilateral termination of the contract does not result in reciprocal performance, and therefore the payment is not subject to VAT.

This case serves as a reminder that not every situation gives rise to a tax obligation. What is key is always the content of the agreement and the actual intent behind the clause.

The national e-invoicing system (KSeF) as a new catalyst for risk assessment

As of 1 February 2026, the mandatory national e-invoicing system (KSeF) also changes the practice surrounding the documentation of contractual penalties. Until now, debit notes were commonly used, which were not recorded in the structured invoice system. However, if a penalty is classified as a service – the taxpayer is required to document it with a KSeF invoice.

This implies not only the need for proper recognition of the VAT obligation, but also the adjustment of accounting systems and processes to the new reporting framework. Incorrect classification may result not only in tax arrears but also in improper reporting in KSeF – which may lead to penalties.

Substance over form

Recent interpretations show that the tax qualification of a payment is determined not by how the parties label it, but by its actual economic function. A fee labelled a “penalty” may in fact be a reciprocal service, while a discount may serve as a penalty for non-performance. What matters most is the analysis of the agreement, the relationship between the parties, and the purpose of the payment.

As a result, even seemingly similar factual circumstances – due to differing party intentions and the way the circumstances are documented – may be assessed differently for tax purposes.

This applies both to relatively minor events (e.g. fees for early termination of telecom contracts or unauthorised parking), as well as to cases involving significant financial risks – such as compensation for undelivered goods, changes to infrastructure contract terms, or expropriation matters. Therefore, special attention should be paid to the quality of documentation and the economic analysis performed, as even low-value, high-frequency transactions may give rise to significant tax risks.

In the era of mandatory national e-invoicing (KSeF) and a growing number of disputes regarding the taxation of “sanctions”, it is worth devoting more attention to how contract provisions are drafted. This will not only help avoid misunderstandings with business partners, but also ensure compliance with tax authority practices – and protect against unpleasant surprises during audits.

If you need support in analysing contract clauses or are preparing for the implementation of KSeF, feel free to contact us. We can help identify risk areas, correctly classify transactions, and implement solutions in line with current tax authority practice and e-invoicing requirements.