Contractual penalties and tax-deductible costs in Poland – a ruling by the Supreme Administrative Court of Poland (NSA)

Contractual penalties and tax-deductible costs in Poland are an important issue for businesses performing services, deliveries, construction projects and long-term contracts. The latest case law of the Supreme Administrative Court of Poland (NSA) confirms that not every contractual penalty is automatically excluded from tax-deductible costs. If a penalty is charged for delay rather than for defects in goods, works or services, it may be deductible, provided the expense meets the general requirements set out in Article 15(1) of the Polish Corporate Income Tax Act. This approach was confirmed by the Supreme Administrative Court of Poland in its judgment of October 9, 2025, case ref. II FSK 1655/24.

For businesses in Poland, this is not so much a complete shift in approach as another confirmation of a taxpayer-friendly judicial line. The dispute is usually not about the mere fact that a contractual penalty was paid, but about the legal basis for the charge, whether it is connected with business activity, and whether it falls within the closed list of exclusions set out in the Polish Corporate Income Tax (CIT) Act. The NSA has consistently stressed that provisions excluding specific penalties from tax-deductible costs must be interpreted strictly rather than broadly.

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What exactly did the Supreme Administrative Court of Poland (NSA) rule?

In the case decided on October 9, 2025, the NSA held that contractual penalties charged for delays in handing over buildings for acceptance and for delays in concluding agreements transferring ownership were not the same as penalties for defects in goods, works or services. This distinction is crucial from a Polish tax perspective because Article 16(1)(22) of the Polish CIT Act does not exclude all contractual penalties from tax-deductible costs, but only specific categories.

The Court pointed out that this provision refers only to contractual penalties and damages related to:

• defects in delivered goods,
• defects in completed works,
• defects in performed services,
• delay in delivering defect-free goods,
• delay in removing defects in goods or in completed works and services.

If, therefore, the penalty concerns delay itself, rather than defective performance or delay in remedying defects, it cannot automatically be treated as excluded from tax-deductible costs. The NSA also underlined that exceptions to the general rule allowing expenses to be recognised as tax-deductible must be interpreted narrowly.

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Why Article 16(1)(22) of the Polish CIT Act does not cover every contractual penalty

This provision remains at the centre of most disputes between taxpayers and the Polish tax authorities. Its literal wording shows that the exclusion applies only to penalties and damages connected with defects and with delay in delivering defect-free performance or removing defects. It does not automatically cover every penalty for late performance of an obligation.

In practice, this means businesses must distinguish between two situations

• penalties for defective performance or for delay in remedying defects,
• penalties for delay in performance that is not treated as a defect.

This is not merely a matter of terminology. The distinction determines whether the expense may be assessed under Article 15(1) of the Polish CIT Act, or whether it is automatically excluded from tax-deductible costs under Article 16(1)(22).

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When a contractual penalty for delay may be tax-deductible in Poland

The fact that a penalty does not fall within Article 16(1)(22) of the Polish CIT Act does not automatically mean it can be deducted. The taxpayer must still demonstrate that the general tax conditions are met. Under Article 15(1) of the Polish CIT Act, tax-deductible costs are expenses incurred in order to generate income, or to preserve or secure the source of income, except for those expressly listed in Article 16(1).

In practice, this means the expense should be:

• incurred by the taxpayer,
• final and non-refundable,
• properly documented,
• connected with the taxpayer’s business activity,
• commercially justified from the perspective of generating income or preserving or securing its source.

From a business perspective, the key issue is therefore not only the wording of the contract, but also the ability to show that payment of the penalty was a rational part of doing business, reduced greater losses, helped preserve a business relationship, or protected future revenue.

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Lack of fault matters, but it does not decide the tax treatment on its own

In Polish tax practice and case law, it is highly relevant whether the delay was attributable to the taxpayer. If a company missed a deadline for reasons beyond its control, its tax argument becomes considerably stronger. However, this should be approached carefully: in case II FSK 1655/24, the NSA itself noted that the detailed assessment of all conditions under Article 15(1) of the Polish CIT Act remained outside the direct scope of the ruling. In other words, lack of fault does not replace a full tax analysis; it is only one important factor in the overall assessment.

In practice, businesses should therefore collect documents confirming the real causes of the delay, such as:

• correspondence with the counterparty,
• schedules and contract amendments,
• documentation of supply chain disruptions,
• records relating to subcontractor performance,
• project notes,
• acceptance reports and agreed deadlines.

Very often, it is the documentation that determines whether the taxpayer’s position can be successfully defended during a tax audit or dispute with the Polish tax authorities.

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What this judgment means for developers and other companies performing contracts in Poland

Although the case concerned a property developer, the significance of the judgment is broader. Its conclusions may also matter for construction companies, manufacturers, logistics businesses, technology firms and service providers operating under project-based or contract-based models in Poland. If the penalty arises from delay in performance rather than from the defective nature of the performance itself, the taxpayer has a stronger basis to defend the position that the expense may be treated as tax-deductible.

At the same time, this does not mean full certainty. The Polish tax authorities may still adopt a more restrictive approach and attempt to interpret Article 16(1)(22) more broadly than its literal wording suggests. For that reason, each case requires an assessment of the specific facts, the wording of the contract and the way the connection between the expense and the business activity is documented.

In such situations, ongoing tax advisory in Poland may be particularly valuable, especially where a company wants to reduce the risk of a dispute with the tax authorities or prepare a defensible position for its CIT settlement in Poland.

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How a business should assess a contractual penalty before recognising it as a tax-deductible cost

Before posting a contractual penalty as a tax-deductible expense in Poland, it is worth carrying out a structured analysis.

1. Determine the legal basis for the penalty

First, verify whether the penalty was charged for:

• a defect in goods,
• defective works or services,
• delay in removing defects,

or rather for:

• delay in performing the obligation itself,
• delay in delivery,
• delay in transferring ownership,
• delay in completing a specific contract stage.

This distinction is fundamental because it determines whether it is even possible to move on to the broader analysis under Article 15(1) of the Polish CIT Act.

2. Assess the connection with income or the source of income

The next step is to determine whether payment of the penalty had a sound commercial rationale. In practice, this may include:

• completing the contract and preserving remuneration,
• maintaining a strategic relationship with the client,
• avoiding larger claims,
• reducing business or reputational losses.

3. Review the causes of the delay

It is worth checking whether the delay resulted from factors attributable to the company, or from objective, organisational or external circumstances. This issue does not decide the case on its own, but it may have significant evidential and argumentative value.

4. Secure the documentation

The more coherent the documentation, the better the chance of defending the taxpayer’s position during a tax audit in Poland.

5. Ensure consistency between accounting and tax treatment

In practice, it is also important to describe the business event correctly and maintain consistency between contractual, accounting and tax documentation. Where this type of event occurs more frequently, accounting services in Poland may also be helpful, especially for businesses handling multiple contracts or operating within an international group.

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The most common tax risks

Despite the favourable judicial line, businesses in Poland should still remain cautious. The most common risks include:

• overly general justification of the business purpose of the expense,
• lack of documents confirming the reasons for the delay,
• imprecise contract wording that mixes delay with defective performance,
• automatic assumptions that every delay-related penalty is tax-deductible,
• failure to take into account the current approach of the Polish tax authorities.

In practice, the wording of the contract itself may already be a problem. If the agreement does not clearly distinguish between a penalty for defects and a penalty for delay, a dispute with the tax authorities may be harder to win.

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Is this already an established judicial line in Poland?

Yes. The discussed judgment is not an isolated ruling. The Supreme Administrative Court of Poland (NSA) has previously indicated that Article 16(1)(22) of the Polish CIT Act must be interpreted narrowly and that the exclusion does not cover all contractual penalties related to non-performance or improper performance of obligations. This approach is reflected, among others, in the NSA judgments of November 23, 2022 (II FSK 700/20), October 24, 2023 (II FSK 335/21), December 19, 2024 (II FSK 409/22), and May 6, 2025 (II FSK 1012/22).

For taxpayers, this is good news, but it does not eliminate the risk of a dispute entirely. A safe CIT settlement in Poland still depends on the quality of the factual analysis, the wording of the contract and the supporting documentation.

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Key takeaways for businesses

The NSA judgment of October 9, 2025 strengthens a taxpayer-friendly approach in Poland: contractual penalties for delays are not automatically excluded from tax-deductible costs. The decisive issue is whether the penalty relates to defective performance or only to failure to meet a deadline, and whether the general conditions under Article 15(1) of the Polish CIT Act are met.

For businesses, this means a more careful review of contracts, the causes of delays and the documents proving the commercial rationale of the expense. In Polish tax practice, calling something a “contractual penalty” is not enough. What matters is the actual legal basis for the charge, the circumstances in which it was imposed and the ability to show a genuine connection with business activity.

If a company wants to reduce tax risk and properly assess whether such expenses can be recognised in its Polish CIT settlement, the analysis should be carried out before the end of the reporting period rather than only at the tax audit stage.

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Legal basis

• Judgment of the Supreme Administrative Court of Poland of October 9, 2025, case ref. II FSK 1655/24

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If you have any further questions or require additional information, please contact your business relationship person or use the enquiry form on the HLB Poland website.

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