In an individual interpretation dated on 8 May 2019, No. 0111-KDIB2-1.4010.62.2019.1.MJ, the Director of the National Fiscal Information (KIS) confirms the possibility of deducting withholding tax from income. In the interpretation, the Director of KIS indicated that “(…..) The applicant may include as tax deductible costs the expenditure including the payment of withholding tax as a foreign contracting party in a situation where the obligation to be covered by the payer results from the provisions of the agreement between the parties. In the opinion of the local authority, the lack of a gross-up clause resulting from a relevant agreement between the parties also does not exclude the possibility that the amount of withholding tax (i.e. the gross-up amount) may be treated as tax deductible costs, however, in such cases it is necessary to prove that the conditions of Article 15(1) of the CIT Act are met?.
Pursuant to Article 15 of the CIT Act, tax deductible costs are costs incurred in order to generate revenue from a source of revenue or in order to maintain or secure a source of revenue, except for the costs listed in Article 16(1).
On the other hand, Article 16 paragraph 1 point 15 of the CIT Act states that CIT is not regarded as tax deductible costs of income tax and profit distributions specified in separate regulations. In the interpretation, KIS Director of KIS, referring to the exclusion of income tax from tax deductible costs, explained that “The scope of this provision refers only to the income tax that is paid by the taxpayer, and not as it is the case in the factual state of affairs and the future event – by the remitter”.
To sum up, if the taxpayer paid the tax from his own resources and incurred the economic burden of the tax, he may classify the withholding tax as tax deductible costs – also in the absence of a gross-up/net of tax clause in the contract with the contracting party – if he meets the conditions under Art. 15 par. 1 of the CIT Act.