Organizing contests and PIT/ZUS consequences

What is a contest for PIT purposes

The PIT Act does not contain a definition of a contest. Therefore, we should refer to the linguistic interpretation, which is indicated for example by the judgment of the Voivodeship Administrative Court in Warsaw of 15 December 2022 (ref. no. III SA/Wa 957/22), according to which “A contest is understood as an undertaking of an artistic, entertainment, sporting nature having a specified program and making it possible to select, by elimination, the best performers (participants), authors of given works, etc., usually distinguished with prizes. (...)”

Thus, an event organized by a company can be regarded as a contest, if the following conditions are met:

• the winners will be selected through mutual competition;
• there are contest rules;
• the number of winners is limited;
• there are specified persons responsible for the course of the contest and for selecting the winners – the jury, contest committee;
• the winners receive prizes.

How to tax prizes, which are won in the contests – the importance of the group of participants

Open contests

The classification of prizes obtained in contests in which any interested person may participate without any additional restrictions does not raise controversies. Prizes in such contests are subject to taxation under the rules of Article 30 paragraph 1 point 2 of the PIT Act - to 10% flat-rate taxation.

Contest addressed exclusively to employees

The situation is different if the contest is addressed exclusively to the employees of a given employer. The value of the prize is then treated as income from an employment relationship within the meaning of Article 12 paragraph 1 of the PIT Act. This means that it should be taxed in accordance with the tax scale (12% or 32%).

This position was reflected, among others, in the tax ruling of 1 August 2022, ref. no. 0113-KDIPT2-3.4011.391.2022.2.GG: “(...) in the case of a contest organized exclusively for your employees, employed under an employment contract, the win (the value of the win) will constitute income from an employment relationship as referred to in Article 12 paragraph 1 of the said Act and therefore will not be subject to flat-rate tax under Article 30 paragraph 1 point 2 of the said Act. (...).”

Contests addressed to a broader, closed group

However, contests are often addressed to a broader group, e.g. employees, but also to contractors, people engaged by an employment agency and assigned to perform work for the organization conducting the contest or members of employees’ families.

In such a situation, regardless of whether the winner is an employee or a person from a group other than employees, income in the form of winning a contest constitutes income from other sources (article 20 paragraph 1 of the PIT Act). In that case the prize is subject to 10% flat-rate taxation. The entity that awards the prize must calculate and remit tax advance payments to the proper tax office. The entity must also prepare and file the form PIT-8AR by the end of January of the following year (after the tax year in which the prize was awarded).

Organization of a contest outsourced to an external entity

Additional doubts arise when a company outsources the comprehensive organization of a contest to an external entity, e.g. a marketing agency that purchases and distributes the prizes. The provisions of the PIT Act impose the obligations of a remitter on the entity awarding the prize, whereas the tax authorities indicate that the remitter continues to be the entity financing the contest and the prizes. Such an approach is impractical, especially if the organization of contests is outsourced to external agencies on a comprehensive basis, including the purchase and distribution of prizes. In the case law of administrative courts nevertheless appears judgments presenting a position different from that in the interpretations (e.g. judgment of the Provincial Administrative Court in Gliwice, ref. no. I SA/GL 577/23).

In the case of contests organized exclusively for employees, there are tax rulings indicating that in a situation, where such a contest is not directly related to the scope of the employee’s duties, the value of the prize in such a contest may be recognized as income from other sources, and not as income from an employment relationship. This is not, however, an approach that can be regarded as established (and it requires obtaining an appropriate tax ruling).

When can a prize from a contest be exempt from tax?

According to Article 21 paragraph 1 point 68 of the PIT Act, income from winning a contest may be exempt from taxation if it represents:

• the value of winnings in contests and games organized and broadcast (announced) by mass media (press, radio and television) – for the exemption to apply, the mass media must be not only the broadcaster but also the organizer of the given contest;
• the value of winnings in contests in the fields of science, culture, art, journalism and sport;
• the one-off value of these winnings or prizes does not exceed the amount of 2 000 Polish zlotys.

If the above exemption cannot be applied because the value of the prize exceeds 2 000 Polish zlotys, then a flat-rate income tax in the amount of 10% is collected on the total value of the prize.

Does winning in a contest constitute a basis for calculating social insurance contributions?

If a prize in a contest constitutes income from an employment relationship, then in such a case this winning also constitutes a basis for calculating social insurance contributions.

If a contest has the character of an open contest, that is, it is also addressed to people other than the company’s employees, and the winning is not linked to the work performed and official duties, then the income from the prize is classified as income from other sources. In such a situation it does not constitute a basis for calculating social insurance contributions.