Paying for the contractor’s accommodation costs, airline tickets, and insurance is considered taxable income

The Supreme Administrative Court, in its judgment of May 29, 2023, case no. II FSK 1093/22, ruled that costs incurred by the contractor for accommodation, airline tickets, and insurance, financed by the contracting party, are considered income for the contractor and are inseparably connected to the services provided within the scope of business activities. Gratuitous benefits are provided with the taxpayer’s consent and in their interest, constituting measurable advantages. Therefore, they are subject to taxation, just like regular remuneration.

Payment of additional benefits to the contractor

The case involved a contractor who provided services related to broad project supervision of a foreign investor’s expansion of a seaport. The contractor conducted these services within their individual business activities. Due to the necessity of physically performing the services within the project country, the contracting party undertook the obligation to provide accommodation in that country. The obligation was regulated by the payment of a monetary sum corresponding to the agreed daily flat-rate for covering accommodation costs and the number of days spent in the project country. Additionally, based on the provisions of the agreement, the contracting party provided the contractor with airline tickets, travel insurance, accident insurance, medical insurance, and necessary medical services for the preparation and stay in the project country, such as vaccinations or essential medications.

According to the contractor’s interpretation, their income referred to in Article 10(1)(3) of the Personal Income Tax Act, stemming from services covered by the agreement, only includes the net amount of remuneration without taking into account the value of benefits provided by the contracting party for the purpose of performing services in the project country.

Neither the tax authorities nor the Supreme Administrative Court agreed with the contractor’s statement. In the appealed interpretation submitted to the court, the authority stated that all benefits received by the contractor from the contracting party, apart from the regular remuneration, meet the conditions qualifying them as gratuitous benefits, as specified in the judgment of the Constitutional Tribunal of July 8, 2014, case no. K 7/13.

It is beyond doubt in this case that, according to the provisions of the agreement concluded between the contractor and the contracting party, the contractor is entitled to remuneration for the services they provide to the contracting party, which is essentially equivalent to the activities performed by them. In addition to the remuneration, the contractor receives other benefits from the contracting party that undoubtedly facilitate or contribute to the easier provision of services. While the nature of these benefits is not specified in the agreement, the authority is correct in stating that they are provided with the contractor’s consent, as they accepted their receipt by signing the agreement with the contracting party. These benefits have a measurable value, directly related to the purchase of specific services or the payment of their equivalent, and the contractor is undoubtedly the beneficiary. In this regard, there is no doubt that if the contractor did not receive these benefits, they would have to bear the costs themselves. The contractor’s claims that they would have to increase the price of their services without these benefits are irrelevant, as the necessity to increase their remuneration is a hypothetical circumstance and would not result in a limitation of the tax obligation that arose in this respect. Therefore, the value of the benefits received will constitute income from non-agricultural business activities.