For years, compensation for harm (zadośćuczynienie) paid to employees after workplace accidents raised serious tax doubts among businesses. The tax authorities often refused to treat such payments as tax-deductible costs, citing their personal nature, the lack of a direct link with the business and the employer's fault-based liability. This created an additional financial burden for employers, who not only had to pay the compensation but also paid higher taxes as a result.
A landmark 2025 judgment of the NSA (Supreme Administrative Court) changed this perspective, allowing compensation to be treated as a tax-deductible cost in certain specific circumstances. The ruling is particularly important for businesses in high-risk sectors, where workplace accidents are a natural element of operational risk despite the highest safety standards. Case law and rulings also shape other business tax issues, such as changing the exchange rate difference method.
The tax authorities' position before the judgment - why compensation was not a cost
Before the NSA's landmark judgment, compensation for workplace accidents paid by employers to employees was treated by the tax authorities in some rulings as a personal payment with no direct link to revenue. This approach was based on the assumption that such payments serve only to redress harm done to a specific person, not to pursue the business's economic objectives.
In negative rulings, the tax authorities stressed that compensation payments are expenses resulting from breaches of labour law or occupational health and safety rules. It was argued that they arose from culpable acts or omissions of the employer, which in their view ruled out treating them as tax-deductible costs. This line was not uniform, however — for example, in an individual tax ruling of 21 May 2019 (0114-KDIP2-2.4010.147.2019.1.RK), the Director of KIS (National Tax Information) accepted compensation and annuities paid after workplace accidents as indirect tax-deductible costs.
In negative rulings, the tax authorities did not allow compensation to be treated as a tax-deductible cost, stressing its reparatory nature. It was argued that it serves only to redress harm, not to earn or secure revenue. It was also pointed out that accepting such costs would reward businesses that failed to meet health and safety standards
In such rulings, the tax authorities refused to treat this type of expense as a tax-deductible cost, stressing its reparatory nature. This meant that it served only to redress harm, not to earn or secure revenue. It was also pointed out that accepting such costs would in a way reward businesses that had failed to meet health and safety standards.
In practice, this approach of the tax authorities raised many doubts, especially where the employer had acted properly, with due diligence and in compliance with the rules, and an accident still happened. These cases were particularly significant in high-risk sectors, where the risk of accidents is inherent in the nature of the business.
Before the NSA judgment, negative rulings treated compensation as a personal payment with no link to revenue. This applied in particular where the authority assumed the employer's liability was based solely on fault. This position created an additional tax burden for employers in a difficult financial situation
The tax authorities' restrictive position put businesses in a particularly unfavourable financial situation. They not only had to bear the cost of paying compensation, but also paid higher taxes because these expenses could not be treated as tax-deductible costs. This was especially painful for small and medium-sized businesses, which often did not have sufficient financial reserves to cover such significant expenses.
Key points of the landmark NSA judgment - a change of approach to costs
In its judgment of 18 March 2025, case No. II FSK 806/22, the NSA dismissed the cassation appeal of the Director of KIS against the judgment of the WSA (Voivodeship Administrative Court) in Białystok of 18 May 2022 (I SA/Bk 111/22), which had set aside a negative individual tax ruling of 4 March 2022 (0111-KDIB2-1.4010.571.2021.1.BKD). The case concerned a company that paid a former employee compensation of PLN 327 thousand under a court settlement concluded after a workplace accident (the employee had claimed PLN 365 thousand in the lawsuit). The company wanted to treat this significant expense as a tax-deductible cost, arguing that the settlement ended the dispute and limited the expense, and that the payment was linked to its business.
The tax ruling authority challenged this position, assuming that the company was liable for the accident solely on the basis of fault and that the compensation did not serve to earn revenue. However, the WSA in Białystok and the NSA took a different view, siding with the taxpayer on this important tax issue.
In the NSA's view, the compensation payment was a result of running a business, which entails liability usually based on risk (Article 435 of the Civil Code). A workplace accident remains in normal connection with the employment relationship. The court stressed that since the injured person's conduct was not the only cause of the accident, and the settlement ended the dispute and limited the expense, the expenses are linked to revenue
In the NSA's view, the compensation payment was a result of running a business and employing staff, which is inseparably linked with liability for damage even if the business owner is not at fault (Article 435 KC). The court stressed the key point that where the injured person's conduct was not the only cause of the accident, the compensation paid secures the source of revenue, and paying the settlement amount ends the dispute and minimises the expense, which would have been higher had the claim been upheld — so the expenses incurred are linked to revenue, even if indirectly. The NSA also noted that the common court before which the settlement was concluded confirmed the nature of the amount paid.
The NSA also emphasised that the exclusion in Article 16 section 1 point 16 of the CIT Act (corporate income tax) (one-off compensation for workplace accidents in the amount set by the competent minister) concerns a different type of benefit, so such compensation is not covered by the list of exclusions; the PIT equivalent is Article 23 section 1 point 13. The judgment breaks with the restrictive line of some rulings of the tax authorities and opens the way to a more flexible approach to costs incurred by businesses in connection with their activities. On the employee's side, the tax exemption of compensation is a separate issue.
The significance of this ruling goes beyond the specific case and may affect tax practice regarding costs related to employer liability. Formally, the judgment is binding only in that case (Polish law does not recognise binding precedent), but it can be used as an argument in similar cases by other businesses in a comparable situation.
Conditions for treating compensation as a tax-deductible cost
For compensation paid to an employee for a workplace accident to be treated as a tax-deductible cost, the basic conditions set out in the tax rules must be met. Above all, the expense must be linked to the business, be incurred to earn revenue or to maintain or secure a source of revenue, and not be excluded from costs under the applicable rules. For employees, deductible costs work differently, for example with 50% tax-deductible costs for employee creators.
The basis of the employer's liability is also crucial. In the case decided by the NSA, the causes of the accident were both improper work organisation and lack of supervision on the company's side and gross negligence of the injured person — yet the court held that the company was liable on the basis of risk (Article 435 KC), because the injured person's conduct was not the only cause of the damage. The authorities refuse when they assume the employer's liability is based solely on fault. In practice, this means that the business should demonstrate the circumstances of the accident, the basis of its liability and the preventive measures taken.
The basic conditions for treating compensation as a cost include a link with the business and the purpose of earning revenue or maintaining or securing its source. The risk of a dispute increases if the authority finds that the employer is liable solely on the basis of fault (e.g. for a gross breach of health and safety rules). It helps to show that the payment resulted from the risk of running a business, not solely from the employer's negligence
It is worth stressing, however, that the favourable NSA judgment does not mean that the tax authorities will automatically accept all such expenses in every case. Businesses should act carefully, particularly with large payments, and consider obtaining an individual tax ruling to secure their position against possible disputes with the tax authorities.
Treating compensation as a cost requires careful preparation of documentation and a justification that convincingly shows that all the required conditions are met. It is particularly important to document the circumstances of the accident and the preventive measures taken by the employer.
| Condition | Requirements | Documentation | Consequences of not meeting it |
|---|---|---|---|
| Link with the business | Accident during work | Accident report, witness statements | Cost cannot be deducted |
| Purpose of securing the source of revenue | Ending the dispute and limiting the expense | Settlement (in the NSA case — a court settlement), lawsuit, legal correspondence | Challenge by the tax authorities |
| Basis of liability | Risk-based liability (Article 435 KC), not solely fault | Post-accident report, health and safety training and inspection records | Risk of the cost being challenged |
| Due diligence | Preventive measures | Procedures, instructions, internal checks | Weaker position in a dispute with the authority |
The judgment's significance in practice - who it affects
The landmark NSA judgment is important for a wide range of employers, particularly those in higher-risk sectors such as industry, construction, transport and manufacturing. In these sectors, workplace accidents are not rare even with the highest safety standards, and the related claims can involve serious financial costs.
Thanks to the NSA's position, businesses have gained an argument that paying compensation, provided it results from the risk of running a business and not solely from the employer's fault, can be treated as a natural cost of doing business. In practice, this may mean a real reduction in the income tax burden, which can significantly reduce the negative impact of the compensation payment on the business's financial health.
The judgment is particularly important for high-risk sectors such as industry, construction, transport and manufacturing. In these sectors, workplace accidents are a natural element of operational risk. Businesses have gained a strong argument for treating compensation as a tax-deductible cost, which may reduce the negative impact on the company's financial health
Remember, however, that the position taken in the judgment can be relied on only where the accident occurred directly in connection with the business and where the employer is liable on the basis of risk and the injured person's conduct was not the only cause of the damage. In the case decided by the NSA, the payment resulted from a court settlement limiting the costs of the dispute — the court held that this confirmed the nature of the amount; with an out-of-court settlement or a voluntary payment, the risk of a dispute with the authority is higher.
The judgment does not clearly establish that from now on every compensation payment will automatically be treated as a tax-deductible cost, but it opens up certain new possibilities and provides a solid basis for argument in any dispute with the tax authorities. Businesses should nevertheless remain cautious and carefully prepare documentation supporting their position.
The practical application of the judgment will depend on the specific circumstances of each case and on how the tax authorities interpret and apply the new court position in future cases. It can be expected, however, that the judgment will have a positive effect on businesses' position in tax disputes on similar issues.
How to secure your position before a dispute with the authorities
Despite the favourable NSA judgment, the decision to treat compensation as a tax-deductible cost still carries the risk of being challenged by the tax authorities. It is therefore worth considering applying for an individual tax ruling (KIS) before including such an expense in your tax settlements. An individual tax ruling issued by the Director of KIS protects the taxpayer if they follow the position set out in it (Articles 14k–14m of the Tax Ordinance Act (Ordynacja podatkowa)). Business costs, including unusual ones, are booked for clients as part of our accounting services.
In practice, this means that even if the ruling is later changed, following it cannot harm the business (Article 14k § 1 of the Tax Ordinance Act) — provided the facts match those described in the application. The protection does not, however, cover changes in the law after the ruling is issued. This is particularly important for large compensation amounts, where any additional tax burden can be very painful financially.
An individual tax ruling protects the taxpayer against the negative effects of changes in the authorities' position. If the ruling is changed, a business that followed it does not pay late-payment interest and is not liable under the fiscal penal rules, and where the tax consequences arose after the ruling was delivered, it is as a rule exempt from paying the tax (Article 14k § 3 and Article 14m of the Tax Ordinance Act). A ruling applies only to a specific set of facts and a specific taxpayer
The application for an individual tax ruling should contain a detailed description of the facts, the circumstances of the accident and the conclusion of the settlement, and facts showing the link between the accident and the business. It is also worth citing arguments based on the NSA judgment and showing that the business acted in compliance with the rules and with due diligence.
Obtaining an individual tax ruling requires careful preparation and can take up to 3 months. The benefits of such legal protection often outweigh the cost and time spent on the procedure, especially for significant compensation amounts.
- Preparing a detailed description of the facts of the case
- Collecting documentation on the accident and its circumstances
- Documenting the preventive measures taken by the employer
- Preparing legal arguments based on the NSA judgment
- Filing the application for an individual tax ruling with the Director of KIS
- Waiting for the ruling to be issued (up to 3 months, Article 14d § 1 of the Tax Ordinance Act)
- Applying the ruling in your tax settlements
Documentation needed to support your position
To successfully justify treating compensation as a tax-deductible cost, the business must collect appropriate documentation confirming that all the required conditions are met. It is crucial to document the circumstances of the accident, the preventive measures taken by the employer and the process of reaching a settlement with the injured employee.
The basic document is the post-accident report prepared in accordance with the applicable rules, which describes in detail the circumstances of the event, its causes and the measures taken. This document shows whether the accident occurred while performing work duties and describes all its causes — in the case decided by the NSA, it was the content of the report (causes on the side of both the company and the injured person) that contradicted the authority's assumption that the employer was liable solely on the basis of fault.
Documentation on the health and safety management system in the business is equally important. It should include safety procedures, employee training schedules, workstation inspection reports and any other documents confirming that the employer exercised due diligence in ensuring safe working conditions.
Documentation must include the post-accident report, safety procedures and employee training schedules. It is crucial to show that the employer exercised due diligence in ensuring safe working conditions. The settlement with the injured person should contain an economic justification for the compensation payment
The settlement concluded with the injured employee should contain a clear economic justification for the compensation payment, indicating the aim of avoiding further court, reputational or organisational costs. It should also precisely state the amount of compensation and the basis for setting it.
An additional element of documentation may be a legal opinion on the basis of the employer's liability (risk-based liability under Article 435 KC) or a technical expert report describing the causes of the accident and the risk associated with the nature of the work. Such an opinion can significantly strengthen the business's position in any dispute with the tax authorities.
Impact on different industries and sectors of the economy
The NSA judgment is particularly important for industries with a higher risk of workplace accidents. Heavy industry, construction, transport, mining and energy are sectors in which, even with the highest safety standards, the risk of accidents remains relatively high due to the nature of the work.
In construction, where workers are exposed to various hazards related to working at height, operating heavy equipment or contact with hazardous substances, workplace accidents are unfortunately common. The possibility of treating compensation as a tax-deductible cost can significantly affect the profitability of construction projects and the competitiveness of companies in this sector.
The transport sector, particularly road and rail transport, has a high risk of accidents related to vehicle traffic and cargo handling. Transport companies often have to pay significant amounts in compensation, and the possibility of treating them as tax-deductible costs can significantly affect their financial results.
High-risk industries such as heavy industry, construction, transport and mining will particularly benefit from the new approach to compensation. In these sectors, workplace accidents are common despite safety standards being observed. The possibility of treating compensation as a cost may affect companies' competitiveness
Manufacturing, in which workers operate complex machinery and equipment, will also be able to benefit from the new approach to compensation. This applies in particular to plants producing chemicals, pharmaceuticals or food, where the risk of accidents is inherent in the production technologies.
Remember, however, that the NSA judgment does not mean automatic acceptance of all compensation expenses in every industry. The key remains to show that the employer is liable on the basis of risk, not solely on the basis of fault, and that the compensation payment served to maintain or secure the business's source of revenue.
- Heavy industry and manufacturing - high risk of accidents when operating machinery
- Construction - hazards related to working at height and heavy equipment
- Transport - risk of road and rail accidents during carriage
- Mining - natural geological and technological hazards
- Energy - work with high voltage and in difficult conditions
- Agriculture - operating farm machinery and working with animals
Practical aspects of implementing the new approach
Implementing the new approach to compensation for workplace accidents requires businesses to have a well-thought-out strategy and appropriate organisational preparation. The key is to develop procedures for documenting accidents and processes for paying compensation that take into account the tax requirements arising from the NSA judgment.
Businesses should above all strengthen their health and safety management systems so that they can show they exercised due diligence in preventing accidents. This means regularly updating safety procedures, providing systematic employee training and documenting all preventive measures.
It is equally important to work with qualified tax advisers and lawyers specialising in labour law who can properly assess whether a specific compensation payment can be treated as a tax-deductible cost. Such cooperation is particularly important for large compensation amounts, where the risk of a dispute with the tax authorities is greatest.
Implementing the new approach requires strengthening health and safety management systems. The key is regularly updating procedures, providing training and documenting preventive measures. Working with tax advisers and lawyers specialising in labour law can help properly assess whether compensation can be treated as a cost
Companies should also consider introducing internal procedures for assessing the tax risk associated with paying compensation. These procedures should include analysing the circumstances of the accident, assessing the preventive measures taken by the employer and preparing arguments justifying treating the expense as a tax-deductible cost.
Another important element of practical implementation is educating management and HR departments about the new tax possibilities. The staff responsible for tax settlements should be aware of the conditions that must be met for compensation to be treated as a tax-deductible cost.
Example: a manufacturing company employing 200 people introduces, after the NSA judgment, a comprehensive system for documenting workplace accidents. Each accident is analysed in detail to see whether any compensation could be treated as a tax-deductible cost. If the company treats as a cost compensation of PLN 150 thousand paid to an employee after an accident while operating a hydraulic press, at the 19% CIT rate it will reduce its tax by PLN 28,500 (at the 9% rate — by PLN 13,500).
