Businesses with international operations often have to settle exchange rate differences. The choice of settlement method has a significant impact on the amount of tax due and on how the books are kept. A key question for many taxpayers is whether a method already chosen can be changed retroactively.
This issue becomes particularly important in the context of changing economic conditions and evolving tax law. Taxpayers often realise the consequences of their choice only after applying a method for some time, which naturally raises the question of whether earlier decisions can be corrected.
Legal basis for choosing the method of settling exchange rate differences
The tax system provides two basic methods of settling exchange rate differences, which taxpayers can choose according to their business needs and organisational capabilities. The choice is fundamental to how tax liabilities are calculated and requires a conscious approach to the consequences of each option.
Available settlement methods
Taxpayers can choose between the following methods:
- The tax method under Article 15a of the CIT Act (corporate income tax; the standard method)
- The accounting method based on the accounting rules
- The same two methods in PIT (personal income tax) — for taxpayers keeping accounting books (Article 14b of the PIT Act; tax method — Article 24c). We settle exchange differences in full accounting books as part of our accounting services.
Under Article 9b(1) of the CIT Act, taxpayers can choose between the tax method under Article 15a and the accounting method based on the accounting rules. Choosing the accounting method also requires that the financial statements prepared throughout the period of its mandatory application be audited by audit firms
The tax method, set out in Article 15a of the CIT Act, is the standard solution provided by tax law. It has detailed rules on when exchange rate differences are recognised and how they are calculated. Taxpayers using this method must follow strict tax rules, regardless of the solutions adopted in their accounts.
The accounting method offers more flexibility, allowing taxpayers to use the solutions provided by the accounting rules. Adopting this method means that exchange rate differences arising under the Accounting Act are included in tax revenue and costs. The accounting classification and the way items are recorded in the accounting books are key here. An unusual case of exchange differences is paying an invoice in cryptocurrency.
Taxpayers who choose the accounting method must apply it for at least three tax years, counting from the beginning of the tax year in which it was adopted. The choice is reported in the CIT-8 return filed for the year in which the taxpayer started applying the method (Article 9b(3))
The procedure for reporting the choice of method has been significantly simplified compared with earlier rules. Since 1 January 2019, there has been no separate deadline for filing a statement of intent to apply a given method. The taxpayer reports the choice only in the annual CIT-8 return, but applies the accounting method from the first day of the tax year in which it was chosen (Article 9b(3) and (5)). The annual return plays a different role under Estonian CIT, where, among other things, income from undisclosed operations is taxed separately.
How giving up the accounting method works
Giving up the accounting method requires following specific procedures and has specific tax consequences. The process is regulated in detail to ensure transparency and continuity of tax settlements.
Procedure for giving up the method
Giving up the accounting method involves the following steps:
- Checking whether the mandatory period of at least three years of applying the method has passed (Article 9b(4))
- Determining exchange rate differences on the last day of the tax year
- Including the differences in revenue or costs in line with the accounting rules
- Switching to the tax method from the first day of the following year
- Reporting the change in the CIT-8 return for the last year in which the accounting method was applied (Article 9b(4))
Under Article 9b(6) of the CIT Act, taxpayers giving up the accounting method must carry out a number of settlement steps. The basic obligation is to include accrued exchange rate differences determined under the accounting rules in revenue or tax-deductible costs, as appropriate, on the last day of the tax year in which they applied the accounting method.
From the first day of the tax year following the year in which they gave up the accounting method, taxpayers automatically apply the rules of Article 15a, determining exchange rate differences from the day of the final settlement (Article 9b(6)). The change is reported by ticking the relevant box in the CIT-8 return for the last year in which the accounting method was applied
This mechanism ensures continuity of settlements and limits the risk of exchange rate differences being counted twice or omitted when the method changes. Determining exchange rate differences correctly on the transition date is particularly important and requires precise calculations and documentation.
Applying these rules in practice requires detailed preparation of documentation and calculations. Remember that errors in the transitional settlement can have long-term tax consequences, so it is advisable to get help from tax advisers or accountants.
Correcting the CIT-8 return in relation to exchange rate differences
Whether a tax return can be corrected as regards the choice of the method of settling exchange rate differences has been the subject of intense debate between taxpayers and the tax authorities. The interpretation of the Tax Ordinance Act (Ordynacja podatkowa) provisions on correcting returns is fundamental here.
Article 81 § 1 of the Tax Ordinance Act provides that taxpayers may correct a previously filed return unless separate provisions state otherwise. A correction is made by filing a correcting return (Article 81 § 2). In theory, this provision does not restrict the type of items that can be corrected.
Comparison of the positions of the authorities and taxpayers
| Aspect | Position of the tax authorities | Position of taxpayers |
|---|---|---|
| Nature of the choice of method | A declaration of will — irreversible | An element of the return that can be corrected |
| Scope of correction | Only factual errors | All elements of the return |
| Legal basis | No express provision | Article 81 § 1 of the Tax Ordinance Act |
| Consequences | Ban on retroactive change | Ability to change the decision on the method |
A correction of a return is most often used to fix an error made when the return was first prepared, but as a rule it can cover any item on the form, unless a separate provision prohibits this. Correcting means filling in the form again, correctly, and marking it as a correction
The tax authorities, however, take a restrictive position. They argue that a correction concerns only factual errors, not the taxpayer’s declarations of will. In their view, the choice of the method of settling exchange rate differences is a conscious declaration of will that cannot be changed retroactively.
An example of this position is the individual tax ruling (KIS) of 8 August 2022 (0111-KDWB.4010.48.2022.1.HK), in which the authority stated that ticking “Yes” in the box on giving up the accounting method (in the CIT-8 return for 2019 — box 30) means ending the accounting method and an obligation to apply the tax method. In the authority’s view, changing the decision after the end of the tax years in which a given method was applied is unjustified.
The position of the administrative courts: a breakthrough in case law
Administrative court case law has brought a significant change in the approach to correcting returns as regards the choice of the method of settling exchange rate differences. Particularly significant is the judgment of the WSA (Voivodeship Administrative Court) in Warsaw of 31 January 2023 (III SA/Wa 2221/22), which set aside that ruling. The case concerned a leasing company that had applied the accounting method for more than three years, ticked the box giving it up in its return for 2019, and then wanted to correct the return and continue with the accounting method. An NSA judgment on workplace accident compensation as a tax cost proved similarly important for businesses.
Key arguments of the court
The court presented the following arguments in favour of allowing the correction:
- No express ban on correction in the CIT Act
- A broad understanding of the institution of correcting a return
- The possibility of correcting declarations of will, not only factual errors
- No deadlines for filing a statement on giving up the method
The court pointed out that Article 9b of the CIT Act does not expressly prohibit correcting a tax return because of a retroactive change in the decision on the choice of method. Nor is there a direct ban on changing the choice for earlier years. If the legislator had wanted to introduce such a ban, it should have done so in a way that leaves no doubt.
The WSA stressed that, in its current wording, the provision does not set any deadline for filing a statement on giving up the method of determining exchange rate differences. Neither the taxpayer nor the tax authority may presume restrictions of this kind
The court also disagreed with the view that a correction can concern only errors and not declarations of will. It argued that a tax return is not only a form of the taxpayer’s declaration of knowledge, but also an expression of the will to pay the liability. Filing a return or a correction is an act of applying tax law, and its effect is to specify the tax liability.
A correction of a return is not a new legal event, but a change to a previously filed settlement for a given period. The principle under Article 81 § 1 of the Tax Ordinance Act is the taxpayer’s right to correct the return, unless separate provisions state otherwise. And there are no provisions prohibiting a correction of the statement on giving up the accounting method.
Legal arguments for allowing the correction
A detailed analysis of the court’s reasoning gives a better understanding of the legal basis for allowing a correction of the return as regards the choice of the method of settling exchange rate differences. The correct interpretation of the legal nature of a tax return and of the scope of the right to correct it is key.
Basic legal arguments
The arguments in favour of allowing the correction include:
- No express ban in the CIT Act
- The broad wording of Article 81 § 1 of the Tax Ordinance Act
- The possibility of correcting all elements of the return
- No time limits for choosing the method
- The purpose of correction — ensuring correct settlements
The court pointed out that the right to file a corrected return is not restricted in a way suggesting that only selected elements of the return can be corrected. This means that any element of the return can be corrected, including declarations of will. Correcting a return concerns its entire content, so not only declarations of knowledge, but also declarations of will.
In the courts’ view, the current rules do not limit corrections of returns to cases where the original settlement was prepared incorrectly. A taxpayer can file a correction of the CIT-8 return as regards the statement on the method of determining exchange rate differences, provided they meet the conditions of Article 9b of the CIT Act
Another important element of the reasoning is the lack of specific time rules for choosing the method. Since 2019, the law has not set a strict deadline for a statement choosing the accounting method or giving it up; the limit on the right to correct is the limitation period for the tax liability. The statutory conditions still apply, however: applying the method from the start of the year, for at least three years, and having the financial statements audited by an audit firm.
In addition, the court drew attention to the meaning of the concept of correction itself. Correcting means not only removing errors, but also making changes to bring what is into line with what, in the view of the person correcting, should be — which is why limiting correction to factual errors only, excluding declarations of will, has no basis in the law.
Practical consequences of being able to change the method retroactively
Being able to change the method of settling exchange rate differences retroactively by correcting the CIT-8 return has significant practical consequences for taxpayers. Above all, in certain situations it allows taxpayers to change an earlier decision on the method and adapt their settlements to changing economic conditions.
Main practical consequences
The ability to change the method retroactively affects the following areas:
- Recalculating tax liabilities for previous years
- Adapting settlements to changing economic conditions
- Correcting wrong decisions made in the past
- Using favourable changes in case law
- Improving cash flow by recovering overpayments
Taxpayers who chose a method that turned out to be less favourable in their particular situation can now consider correcting their returns. This applies in particular where changes in exchange rates or in the structure of foreign operations have affected the effectiveness of the method originally chosen. The case decided by the courts concerned withdrawing a decision to give up the accounting method; adopting that method retroactively also requires that the financial statements for the whole period of its application be audited by an audit firm (Article 9b(1)(2)).
Before correcting a return, carry out a detailed analysis of the financial and tax consequences of changing the method. A correction may affect the settlements for several tax years, which requires precise calculations
Using this option in practice requires caution and a professional approach. A correction of a return can have a number of consequences, including:
- The need to recalculate exchange rate differences for previous years
- An effect on the amount of tax liabilities and any overpayments
- The need to update accounting records
- The possibility of a tax audit in connection with the correction
Also remember that despite favourable case law, the tax authorities may still challenge such corrections, which may lead to disputes and the need to assert your rights in court.
Procedure for correcting the return
Correcting the CIT-8 return as regards the method of settling exchange rate differences requires following specific procedures and preparing the right documentation. The process should be preceded by a thorough legal and financial analysis.
Stages of the correction procedure
- Legal analysis - assessing whether the correction is allowed in the specific situation
- Financial calculation - calculating the consequences of changing the method
- Preparing documentation - collecting materials justifying the correction
- Filing corrections - submitting corrected CIT-8 returns
- Monitoring - following the reaction of the tax authorities
The first step is a detailed analysis of the consequences of changing the method for all tax periods the correction is to cover. Prepare calculations showing the effect of the change on the amount of tax liabilities and any overpayments or additional payments.
A correction of a return should be preceded by professional legal and tax advice. Procedural errors can lead to unfavourable tax and legal consequences
Pay particular attention to properly justifying the correction. Although case law confirms that such a correction is allowed, the tax authorities may ask for explanations of the reasons for and the legal basis of the changes.
Required documentation
The documentation should include:
- A legal analysis of the basis for the correction
- Financial calculations showing the effect of the change
- A business justification for changing the method
- Documents confirming that the conditions for the chosen method are met
- Legal or tax opinions supporting the correction
The NSA judgment: final confirmation of the position
In its judgment of 18 February 2025 (II FSK 878/23), the NSA (Supreme Administrative Court) dismissed the cassation appeal of the Director of KIS and confirmed that a CIT-8 return can be corrected as regards the statement on giving up the accounting method for completed tax years. The judgment is of great importance for tax practice in this interpretive dispute.
The NSA shared the WSA’s position and its key arguments in favour of allowing the correction. The judgment was given in an individual case and is formally binding only in that case, but it is an important argument in similar cases.
The NSA judgment of 18 February 2025 (II FSK 878/23) confirms that taxpayers can correct the CIT-8 return as regards the statement on the method of settling exchange rate differences, also for completed years, until the limitation period expires. The judgment was given in an individual case, but it will be an important argument in future tax practice
The significance of this judgment goes beyond the specific case of exchange rate differences. It confirms a broad understanding of correcting returns and the possibility of correcting not only factual errors, but also the taxpayer’s declarations of will. This matters for other areas of tax law where similar problems may arise.
The NSA judgment strengthens the position of taxpayers who want to make such corrections. The tax authorities may, however, still challenge specific corrections and examine whether the conditions of Article 9b of the CIT Act are met.
Recommendations for taxpayers
In light of current case law, taxpayers have gained the ability to change an earlier decision on the method of settling exchange rate differences. However, using these options requires a well-considered and professional approach.
Key recommendations
Before deciding to correct a return, you should:
- Carry out a comprehensive analysis of benefits and risks
- Prepare solid legal and financial documentation
- Consult tax advisers
- Analyse the effect on your entire tax structure
- Prepare for a possible tax audit
Before deciding to correct a return, carry out a comprehensive analysis covering:
- An assessment of the financial benefits of changing the method
- An analysis of the risk of a possible tax audit
- Preparing solid documentation justifying the correction
- Calculating all tax and accounting consequences
A decision to correct a return should be preceded by a thorough legal and financial analysis. It is advisable to get help from tax advisers or lawyers specialising in tax law
Properly preparing the justification for the correction is particularly important. Although the right to correct has itself been confirmed by the NSA, the tax authorities may still challenge specific cases if they consider that the correction lacks substantive justification or was made incorrectly.
Taxpayers should also remember the limitation periods for tax liabilities. A correction can be filed only until the limitation period for the liability concerned expires — as a rule 5 years from the end of the year in which the tax payment deadline passed (Article 70 § 1 of the Tax Ordinance Act).
Practical example: A leasing company settling contracts in euro applied the accounting method for more than three years and ticked the box giving it up in its return for 2019. After switching to the tax method, it turned out that it required much more work with several thousand contracts. In light of the judgments of the WSA in Warsaw (III SA/Wa 2221/22) and the NSA (II FSK 878/23), the company could correct its return for 2019 and continue with the accounting method — provided it continued to meet the conditions of Article 9b, including the audit of its financial statements.
