Foreign exchange options and VAT

We would like to draw you attention to the recently issued verdict of the Polish Supreme Administration Court (I FSK 1217/14) concerning VAT on foreign currency options. The court has ruled, contrary to one of its previous verdicts, that a company which enters into option transaction with a bank should be regarded as VAT payer in relation to such transaction. The court has concluded that both parties of such transaction – the company and the bank – benefit from it and therefore both of them are service providers to each other.

In consequence, according to the court, the bank’s client has to report VAT turnover from such transaction (exempt services). What is more, such services are not incidental in the meaning of VAT regulations beacuse they are aimed at securing foreign exchange risk which is related to the core business (in this case these were related to purchase of commodities and bank loans). Therefore, as the court ruled, the exempt turnover from such transactions affects the pro rata deduction of input VAT.

If this view is shared by tax authorities, it can force the taxpayers to use pro rata system even if they so far have not been obliged to do it. There is also a risk that a similar approach is applied to other foreign currency transactions.