The Supreme Administrative Court, in a judgment dated October 9, 2024 (ref. I FSK 89/21), resolved an important issue concerning the VAT taxation of reimbursement of costs related to share-based incentive programs. While the ruling is groundbreaking, it also raises a number of controversies and could have far-reaching implications for many industries.

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Background of the case

The case involved an insurance company that participated in an international incentive program organized by its U.S. parent company. Under the program, selected employees of the company received free of charge restricted stock units (RSU) of the parent company. The company agreed to reimburse the organizer in an amount equal to the value of the awarded shares.

The company took the position that reimbursement of costs related to the acquisition of shares by participants in the incentive program should not be subject to VAT. This is because it argued that there is no provision of a service, but only reimbursement of expenses incurred, while emphasizing that it does not derive a direct and clearly individualized benefit from the actions of the program organizer.

In the company's view, even if this activity were considered a service, it should enjoy VAT exemption under Article 43(1)(41) of the VAT Act, as a service relating to financial instruments. The company also pointed out that it was charged only for the cost of taking up the shares, with no additional margin, which in its view precluded the possibility of treating the transaction as a paid service.

Tax authority's position

The Director of the National Tax Information Authority took the position that reimbursement of costs related to the acquisition of shares by participants in the incentive program constitutes a VAT-taxable activity.

He stated that the company acquires services for consideration from the organizer (the U.S. parent company) within the meaning of Article 8(1) of the VAT Act. The authority argued that the organizer's activities constitute services for organizing and managing a long-term incentive program.

It stressed that the company benefits from the program in the form of increased employee motivation and improved financial performance. At the same time, the authority considered it irrelevant whether the reimbursement amount includes only the value of the shares or also other program costs.

In the opinion of the Director of the National Tax Information Authority, these services do not qualify for VAT exemption under Article 43(1)(41) of the VAT Act, as their essence is the management of an incentive program, not the trading of financial instruments.

Consequently, the Director of the National Tax Information Authority took the position that the company should recognize the import of services taxed at the basic VAT rate of 23%.

Regional Administrative Court dismisses the company's complaint

The Regional Administrative Court in Warsaw agreed with the tax authority's position and dismissed the company's complaint.

The Court confirmed that all the elements characterizing the provision of services subject to VAT are met in the case. At the same time, it ruled that the organizer performs activities that constitute services for the organization and management of a long-term incentive program.

The Court stressed that the company achieves measurable benefits from the program, which justifies the existence of a supply of services for consideration. In addition, it disagreed with the company's argument that the absence of additional costs beyond the value of the shares means there is no provision of a service. According to the Court, it is irrelevant that the company does not make decisions regarding the disposition of financial instruments transferred to participants.

Ultimately, the Court confirmed that the service does not enjoy the exemption for financial services, since its essence is the management of an incentive program. Thus, the Court held that by paying a remuneration equivalent to shares, the company does not trade in financial instruments, it does not acquire them either for itself or for its employees.

Supreme Administrative Court settlement

The Supreme Administrative Court agreed with the position of the tax authority and the Regional Administrative Court in Warsaw, holding that:

  • The reimbursement constitutes remuneration for the service of organizing and managing the incentive program provided by the parent company.
  • This service is subject to VAT as a supply of services for consideration.
  • It is irrelevant that the reimbursement amount corresponds only to the cost of the shares, with no additional margin.
  • The service does not enjoy the exemption for financial services, since its essence is the management of an incentive program, not the trading of financial instruments.

Justification of the Supreme Administrative Court’s judgment

The Supreme Administrative Court stressed that the company derives tangible benefits from the program in the form of increased employee motivation and loyalty. Thus, there is a direct connection between the provision of services and the remuneration received.

The Supreme Administrative Court referred to the jurisprudence of the CJEU (ref. C-94/19 in the case of San Domenico Vetraria SpA), pointing out that the amount of the consideration is irrelevant to the assessment of whether there is a provision of services for consideration. The fact that the company only reimburses the cost of the shares does not exclude the recognition of this activity as a service subject to VAT.

In the end, the Court disagreed with the company's argument that the absence of additional costs beyond the value of the shares means there is no provision of a service. The Court considered that the organizer calculates the remuneration according to its own criteria, and the fact that it includes only the value of the shares does not change the nature of the transaction.

Controversy and potential consequences of the judgment

The judgment of the Supreme Administrative Court in question may have a particularly significant and adverse impact on the financial sector. This is especially true for institutions that are regulated by the Polish Financial Supervisory Authority or other regulatory bodies, which require linking the remuneration of key personnel to the company's financial performance, often expressed through indicators such as share price. The situation may prove even more problematic for those financial institutions that do not have the full right to deduct VAT. For such entities, the additional burden of VAT on the cost of incentive programs can significantly increase the total expenses associated with such programs.

It should also be noted that the Supreme Administrative Court’s judgment may lead to competitive inequality between companies using different types of incentive programs. Groups using shares of the parent company may be in a worse tax position than companies offering their own shares, where there is no reimbursement subject to VAT. This may prompt companies to change the structure of their incentive programs, which will not necessarily be in line with their original goals. As a result, companies may face a dilemma between tax optimization and maintaining the most effective form of employee motivation.

Although the Supreme Administrative Court’s judgment opens the field for a broader discussion on the VAT taxation of incentive programs, the single ruling does not yet establish a clear line of jurisprudence. Companies should therefore approach its interpretation with caution and follow further developments on this issue. It may be necessary to develop a more unified approach, taking into account the specifics of different industries and forms of incentive programs, which requires further analysis and potentially further court decisions.

Does your company have incentive programs in place? Check out how we can help:

  • In-depth tax analysis: we will conduct a detailed analysis of your organization's incentive program in terms of VAT implications in light of recent case law.
  • Settlement adjustment: we will help you adjust your VAT settlements, including proper recognition of imports of services, and check for past VAT irregularities related to incentive programs.
  • Tax planning: we will help develop a tax strategy that takes into account potential VAT risks in incentive programs.
  • Support for the financial industry: we offer specialized advice to entities in the financial sector, taking into account specific regulations and limitations on VAT deduction.

Feel free to contact us to discuss how we can help your company account for incentive programs and avoid potential risks.