Tax challenges in the construction sector

The construction industry in Poland is struggling with a range of challenges – from labour shortages and rising material costs to increasingly stringent energy efficiency requirements. And beyond these operational hurdles, there are also tax implications that companies must navigate.

Tax implications of late payments
Delayed payments remain a major issue in the construction sector, with over 700 companies having declared insolvency in 2024. These delays have tax consequences for both creditors and debtors under the so-called bad-debt relief mechanism.

For VAT purposes, VAT taxpayers (creditors) have generally the right to adjust the output VAT on receivables deemed likely to be uncollectible – that is those that have not been settled or assigned within 90 days from the due date specified in the contract or on the invoice. The bad-debt relief can be applied even in cases where the debtor is in financial distress, including restructuring or liquidation proceedings.

On the other hand, debtors are required to adjust the input VAT resulting from an unpaid invoice if it remains unsettled for 90 days past its due date. However, if the debtor eventually pays the invoice, they are entitled to include the input VAT from that invoice in the settlement for the period in which the payment was made.

Similar rules on bad-debt relief apply for CIT taxpayers. Creditors can reduce their tax base by the value of unpaid receivables after 90 days, provided certain conditions are met. As with VAT, such ‘relief’ is optional for creditors but mandatory for debtors. Debtors are required to increase their tax base by the amount of the unpaid liabilities that were previously recognised as a tax-deductible expense, for the period in which 90 days have passed since the payment due date. In contrary to VAT Act, CIT Act provisions on bad debt relief, are not applicable – for example, if the debtor is undergoing liquidation or restructuring or the transaction is concluded between related entities.  

The correction resulting from bad-debt relief will, however, not influence a company’s obligation to pay minimum CIT. For the purpose of minimum CIT, taxpayers have to take into account their tax income-to-tax revenue ratio, while the correction resulting from bad-debt relief affects the tax base.

Cost exclusions under payment restrictions
Construction companies often issue or receive invoices subject to the mandatory split-payment mechanism, particularly for the provision of construction services or sale of building materials. As a reminder, the split-payment mechanism consists in settling the net amount to the supplier’s current account while the input VAT goes to a dedicated VAT account. If input VAT resulting from invoice marked with obligatory split payment is not paid via such mechanism, in line with the CIT Act, the taxpayer is not entitled to treat such an expense as tax-deductible cost. Similar consequences apply when an invoice is paid without using a bank account or to an account not listed on the so-called ‘white list’ – a database of VAT taxpayers that includes bank accounts registered with the tax authorities.

However, a favourable trend in tax authority ruling practice has recently emerged. According to this approach, if the creditor returns the received amount to the debtor and the debtor repays it again – this time using the split-payment mechanism (or to an account of the supplier listed on the white list)  – the taxpayer can correct the error and treat the expense as tax-deductible. Tax authorities also confirm that the right to adjust tax-deductible costs applies even if only the sole VAT amount is repaid using the split payment mechanism.

Tax audits: fewer but more precise
While it’s difficult to say whether tax authorities have become more permissive overall, their approach to audits has certainly evolved. Thanks to digital reporting tools like JPK VAT, TPR, and MDR, the authorities now have access to detailed data, allowing them to target audits more precisely. According to the latest statistics, 97% of tax audits in 2024 resulted in additional tax assessments totalling over 10 billion złotys.

When it comes to the issues that tax authorities verify the most during tax audits, VAT compliance remains a top priority. Errors in VAT settlement can lead to severe penalties in form of an additional tax liability. Such additional tax liability is generally imposed up to 15%, 20% and 30% of the underpaid tax, or even 100% in cases of deliberate fraud. Taxpayers are able to protect themselves from such penalties in most cases by using the split-payment mechanism. This however does not apply to the taxpayers who deliberately participated in fraud.

Another area under scrutiny is withholding tax (WHT). In particular, tax authorities verify the eligibility for WHT exemptions, especially in terms of recognising the payment recipient as the beneficial owner (BO). WHT cases are handled by the specialised Lublin Tax Office, which is known for its rather pro-fiscal approach. The situation may however change with the release of long-awaited Tax Explanations of the Ministry of Finance.

However, difficulties with WHT on dividends do not affect permanent establishments (PE) of foreign companies, which are often established due to conducting construction or installation projects in Poland. Distributions from PEs to  headquarters are as a rule not subject to WHT, since they are treated as transfers within the same enterprise.

Although the taxpayer and its PE are not formally separate entities, they are related entities within the meaning of transfer pricing regulations. Therefore, headquarter profits should be allocated to a headquarters and the PE on an arm’s-length basis – that is as if they were operating as  independent enterprises.

When it comes to related entities, tax authorities have recently been increasingly verifying debt-financing transactions in capital groups. Taxpayers should therefore assess whether intra-group loans are priced at arm’s length, repaid on time, and whether the debt-to-equity ratio is not excessively high. Otherwise, they may face the risk of tax reassessment.

Given that taxpayers will soon be required to report JPK CIT, the number of income-tax audits concerning CIT may also increase.

Conclusions
Besides having to deal with economic pressure, entities operating in the construction industry are also encountering new tax challenges. They have to navigate through complex and constantly changing tax regulations, and face increasing scrutiny from tax authorities. As digital reporting expands, audits are becoming more targeted and specialised. Businesses need to proactively manage their tax risks in order to mitigate them.