How long will it be necessary to store tax records?

If a taxpayer has generated a loss and plans to carry it forward to apply against income earned in subsequent tax years, the taxpayer may have to retain its tax records and related documents for up to 11 years.

In 2003 a limited-liability company closed out the year with a loss, and then carried forward the loss to offset profit earned in 2007–2008, deducting 50% of the loss in each of those tax years. In 2011 it was notified that it would be audited for corporate income tax in 2007–2008. The auditors demanded tax records for 2003 so that they could verify the amount of the loss.

This raised the issue of whether the auditors had a right to demand the taxpayer’s records from 8 years before.

Pursuant to a judgment issued by the Polish Supreme Administrative Court on 27 August 2010 (Case No. II FSK 583/09), a loss incurred by a taxpayer in a given tax year is not a constitutive element of any tax obligation for that year, because a tax obligation arises only if there is a profit. However, the loss may affect the amount of tax during the next five tax years, during which time the taxpayer has the right to carry forward the loss. Thus Art. 24(1) of the Tax Ordinance authorises the tax authorities to issue a decision estimating the loss by the taxpayer if the amount of the loss differs from the amount reported on the tax return and the taxpayer is entitled to tax relief because of the loss.

There is no express time limitation in the Tax Ordinance or the Corporate Income Tax Act on issuance of such an assessment. Thus, it should be accepted that Tax Ordinance Art. 70 §1, which sets the limitations period when a tax obligation expires, does not apply to a loss. Moreover, in this ruling, the Supreme Administrative Court held that the tax authorities may issue a finding on the amount of the loss for a given year (in this example, 2003) up until the time that the tax obligation for the year in which the loss was applied expires (in this example, 2007 or 2008).

Meanwhile, under Tax Ordinance Art. 86 §1, taxpayers are required to maintain tax records and related documents until the end of the limitations period for a tax obligation.

Therefore, if a taxpayer incurs a loss and plans to carry it forward to deduct from profit earned in future tax years, it should maintain the tax records and related documentation until the limitations period ends for the tax obligations arising for the years in which it applies the loss carryforward. For example, a loss incurred in 2003 may be applied against profit earned in 2008, but the tax obligation for 2008 does not expire until 2014. Until then, the taxpayer should maintain the tax records and related documents enabling the tax authorities to verify the amount of the loss that was generated in 2003.

Radosław Teresiak, Tax Advisory team, Wardyński & Partners