In the request, which was submitted to the tax authorities on 8 July 2008, a Polish company (the Company) explained that it buys the rights to movies, which are intended for sale to TV stations. The contract that is signed with a foreign company from which Polish Company buys rights for movies concerns several titles, each of which is determined, by a unique unit price and a 3-year period in which the movie can be broadcast on a television. The start date for broadcasting begins with one month to twenty months from the date of signing the agreement and ends after 3 years. Records of the dates are assigned to the emission of the purchase agreement signed with the television station. The whole contract is payable in seven installments. Before the date of payment of each installment the Company issues a VAT invoice to the buyer. A foreign company from which these right are bough also issues to the Company the invoices, according to the payment schedule. Percentage payment schedule in the contract of purchase and sale are identical.
The Company inquired the tax authorities i) whether the rights should be treated as commodities, or as intangible and legal assets that are subject to depreciation over two years, ii) and at which time/moment the company creates the revenue that is subject to income tax of legal persons, iii) and in which time the company creates tax deductible.
According the Company those TV rights are bought for resale and should be deemed as goods/commodities and are not subject of depreciation under the terms of the Legal Persons’ Income Tax Act. While presenting the view on the creation of the income the Company stated that in this situation, transfer of property rights takes place not earlier than in the date of the exercise thereof by the purchaser. Revenue in the amount of license fee for each film is formed/created on the date of fulfillment of all contractual terms, i.e. delivery of materials and the beginning of the license period. The starting materials can be supplied before the date of license period, and after that date. The invoice installments issued by the Company are accounted in proportion to the prices on all movie titles that are subject to a given contract/agreement, and therefore the amount concerning movies which have not entered the license period, or starting materials have not been supplied, are deemed as received advances and are not taxable income. The deductible is the total price for the given movie, resulting from the purchase agreement signed with a foreign company and is created in the month of sale. The installment purchase invoices received by the Company are accounted in proportion to the prices on all movies being subject to a given contract/agreement, and therefore the amount concerning movies which have not entered a period of license, or starting materials have not been supplied, are not deductible costs for tax purposes.
The Minister of Finance in the individual interpretation issued of September 2008, held that the position of the Company on a legal assessment of the facts with respect to qualifications of tax on turnover of rights for movies was correct, but it also held that the position on the time/moment of creation of the revenue and recognition of income tax deductible cost was incorrect.
The Ministry of Finance ruled that, pursuant to the provisions of of the Polish Act on Authors Rights and Neighbouring Rights – ARNR – (in Polish: ustawa o prawie autorskim i prawach pokrewnych) of 4 February 1994, published in Journal of Laws (Dziennik Ustaw) No. 24, item 83, consolidated text of 16 May 2006, Journal of Laws (Dziennik Ustaw) No. 90, item 631, by license agreement, the licensor grants the licensee the authorization (license) to use his right of intellectual property, and the licensee agrees to pay the license fee. The right to use the audiovisual work is the property right. If subject of business activity of the Company (licensee) is marketing (distribution) of such rights, in this case, those rights are the goods.
While referring to the issue of the time/moment of creation of the revenue, the Tax Office found that expenditure on the acquisition of rights to the use of audiovisual works are direct costs associated with the disposal of such property/economic rights. Therefore, the applicant’s position that the amount concerning titles of movies which have not entered the period of a license or for which the starting materials has not been provided, are not deductible for tax purposes, was found invalid. The Company filed a request to case the infringement of law by changing the interpretation of the time/moment of creation of the revenue (second question). In response to that request, the Minister of Finance said that there are no grounds to change it.
The company filed a complaint against this interpretation. The Voivodeship Administrative Court in Warsaw in its judgment of 1 April 2009 case file III SA/Wa 3472/08 agreed with the Ministry of Finance and dismissed it. The cassation complaint was dismissed by the Supreme Administrative Court in its judgment of 2 November 2010 case file II FSK 1140/09.