Court Costs After Losing a Case – Can They Be Deducted as Tax-Deductible Expenses?

Losing a court dispute means not only an unfavorable judgment but often also significant costs. In the case of lengthy proceedings, these costs can reach substantial amounts. This raises a practical question – after losing a case, especially one related to business activities, can such expenses be classified as tax-deductible costs (TDC)?

According to Article 15(1) of the CIT Act, tax-deductible costs are expenses incurred to generate or secure a source of revenue, provided they are not listed in the exclusions catalogue under Article 16(1). The Act does not directly refer to court costs, which theoretically leaves the door open for their deduction. However, the practice of tax authorities shows that the matter is more complex.

In certain situations, court costs may qualify as TDC. In a tax interpretation dated 28 June 2023, the Director of the National Tax Information (KIS) sided with a bank, agreeing that litigation expenses were a natural element of its business activity. In this case, the bank incurred litigation costs inseparably linked to its banking services, which constituted its core business. The bank demonstrated a clear link between the litigation expenses and its business operations, even with a specific credit agreement that formed part of its core business activity. Therefore, the Director of KIS agreed that in this situation, the court costs could be treated as TDC despite the unfavorable outcome for the bank.

When court costs result from the taxpayer’s “fault”, tax authorities usually refuse the right to deduct them. This position was confirmed, for example, in an interpretation issued on 29 June 2023, where it was stated that attempting to classify such costs as TDC would amount to using one’s own mistake to reduce tax liabilities. Court costs resulting from the taxpayer’s culpable actions or lack of due diligence cannot be considered as incurred for the purpose of earning income.

Court costs can be deducted for tax purposes only if they are objectively connected with the business activity and do not result from the taxpayer’s culpable actions. The key issue is determining the taxpayer’s “fault” – which is still assessed on a case-by-case basis. In case of doubt, it is worth protecting yourself by applying for an individual tax ruling – this helps avoid disputes with tax authorities and the risk of having the deduction challenged.