Taxpayers, in relation with support provided in connection with the armed conflict in Ukraine, have the opportunity to settle for tax purposes the assistance provided. In particular, they can benefit from tax preferences under current legislation and temporary regulations introduced in connection with the situation in Ukraine, in particular under corporate income tax (CIT) and value added tax (VAT).
Donation – the way it is accounted for in corporate income tax
Under the current provisions of the CIT Act, taxpayers are able to deduct from their income donations made for charitable and pro-social purposes related to, among others, helping victims of armed conflicts and wars domestic and abroad. This deduction can be made in an amount not exceeding 10% of income. However, it must be remembered that this limit applies to all deductions made for public benefit purposes and for religious cult purposes – the deduction from income for all these purposes cannot exceed 10%. Donations can be both in kind and in cash.
Taxpayers benefiting from the deduction of a donation from income are required to show in their annual CIT return:
- the amount of the donation made,
- the amount of the deduction made,
- data allowing for identification of the beneficiary (in particular, name, address, and tax identification number or number obtained in another EU or EEA member state than Poland in which the beneficiary is established, used for tax identification purposes).
Donation to NGOs or to an individual?
Making a donation to a specific individual is not a basis for deducting the donation from income under the Polish CIT Act.
The rules of deducting donations from income apply to donations made to domestic as well as foreign non-governmental organisations providing aid to Ukraine. Such activities are conducted by non-governmental organisations (NGOs), which are both public benefit organisations and foundations and associations without such status. The tax preference applies to donations made to such organisations operating within the European Union (EU) and the European Economic Area (EEA) (a donation to, for example, an organisation in Switzerland would not be deductible).
The right to deduct from income a donation made to NOGs from another EU or EEA Member State is granted provided that:
- the donor has a statement from the organisation to which the donation was made confirming that on the date of the donation it was an non-governmental organisations carrying out public benefit activities in the country of its registered office, and
- there is a legal basis for the exchange of tax information with the country where the organisation has its registered office (on the basis of ratified international agreements to which Poland is a party).
It is also important that such a donation should be properly documented. A donation made in cash should be documented by a proof of payment into the account of the organisation, whereas a donation made in another form, e.g. a donation in kind, should be confirmed by a document showing its value and a statement of acceptance of the donation by the organisation.
New solutions in CIT concerning aid to Ukraine
On 12 March 2022, the Act on Assistance to Citizens of Ukraine in Connection with the Armed Conflict on the Territory of Ukraine entered into force. The new regulations apply retroactively from 24 February 2022.
The Act introduced a favourable solution for companies that will donate aid for the purposes of counteracting the effects of armed actions in Ukraine to:
- national and foreign non-governmental organisations, including those from Ukraine,
- local self-government units,
- the Government Strategic Reserve Agency,
- entities performing medical and emergency activities in Poland and Ukraine.
This solution gives the possibility to recognise in tax deductible costs the expenses incurred for this assistance. The cost of production or purchase price of items or rights that are the subject of donations (including costs for e.g. free medical assistance) donated between 24 February 2022 and 31 December 2022 may be included in tax deductible costs.
As a rule, donations are not tax-deductible costs, so the new regulations may be important for all entities, in particular for entities that incur a tax loss and cannot make a deduction from income, but would like to help Ukraine.
In the light of CIT settlements, taxpayers are able to benefit from favourable tax solutions. However, it is important to remember, first of all, to properly document donations and to check the status of the organisation. It is also more advantageous from the tax point of view to make a donation through an NGO rather than directly to a specific individual.
Donation – VAT treatment
Donations are in principle a supply of goods within the meaning of the VAT Act. Donations of money are not subject to VAT, because money is not a good for VAT purposes.
Therefore, a donation in kind should be taxed at the appropriate rate as a supply of goods. The right to deduct VAT is granted provided that the purchased goods, transferred as a donation, were related to a taxable activity. This means that the right to deduct input VAT applies to the extent to which the entity uses the purchased goods and services to carry out activities that give rise to output tax. Therefore, to the extent that a taxpayer uses the purchased goods or services to carry out activities that are not subject to taxation or that are subject to taxation, but exempt from tax, he is not entitled to deduct input tax.
Aid to Ukraine without VAT only to a limited extent
In support of relief efforts for victims of the conflict in Ukraine, a special arrangement has been made to apply a 0% VAT rate. However, this preference is significantly limited. The possibility to apply this rate was introduced by the Regulation of the Minister of Finance of 3 March 2022, which reduces the VAT rate for the supply of goods and services to:
- the Government Strategic Reserve Agency;
- medical entities;
- local self-government units.
Such transfers in kind should be documented by a donation agreement indicating the purpose of the transfer. Use of this rate is possible for donations made up to 30 June 2022. The reduced rate may also be applied by entities that made donations before 4 March, however, if they have not collected the appropriate documentation, this may be difficult.
In the context of the application of the reduced VAT rate for donations, it is necessary to expand the catalogue of entities also to include domestic as well as foreign non-governmental organisations, also operating in Ukraine, which provide assistance to Ukraine on a large scale, but were omitted by the Regulation.