Tax challenges, opportunities and prospects for the construction industry in the context of ESG

The rapidly evolving economic landscape, growing expectations towards businesses, and emerging regulatory frameworks present undeniable challenges and obligations for entities in the construction industry. At the same time, however, the proper management and implementation of new ESG-related obligations may offer tangible tax benefits for businesses taking proactive steps in this area.

A few words about ESG – what is it and why does it matter for the construction industry?

Today, ESG has become a key consideration for the construction sector. It is important to recall that ESG is an acronym for three pillars that comprehensively define its scope:

• E – Environmental,
• S – Social Responsibility,
• G – Corporate Governance.

ESG should be approached from multiple perspectives, taking into account environmental aspects, corporate social responsibility, and the implementation of appropriate internal structures. These factors serve to define a company’s identity, in particular its development strategy, business goals, and core values in the ESG domain.

However, implementing actions in each of these areas involves the incurrence of related expenditures – and this, in turn, has significant implications from a corporate income tax (CIT) perspective.

ESG expenditure under standard CIT

Under the standard CIT regime, the key question is whether ESG-related expenditures can be classified as tax-deductible costs. Each expense must, of course, be assessed individually against the statutory criteria under Article 15(1) of the CIT Act.

Tax authorities have gradually begun to establish a consistent approach to the tax treatment of broadly understood ESG costs. For example, in one tax ruling, it was confirmed that a taxpayer who:

• engages in environmental protection efforts,
• collaborates with local authorities,
• supports occupational health and safety initiatives,
• organises community-oriented contests,
• cooperates with research institutions,
• supports education and academic development,
• provides aid for the elderly,

– may recognise these ESG-related expenses as tax-deductible (Ruling of 16 April 2025, Director of the National Tax Information [“DKIS”], ref. 0111-KDIB1-3.4010.76.2025.2.MBD).

This interpretation is consistent with the general direction taken by the tax authorities in recent years (e.g. DKIS ruling of 1 September 2023, ref. 0111-KDIB2-1.4010.216.2023.3.DD).

Thus, it can be stated that, in principle, ESG-related expenditures may be classified as deductible for CIT purposes.

Estonian CIT and ESG-related expenses

The qualification of ESG costs under the Estonian CIT regime warrants separate attention. This tax model, introduced in 2021, still raises many doubts. Under Estonian CIT, tax is levied on:

• hidden profit distributions (Article 28m(1)(2) of the CIT Act);
• non-business-related expenses (Article 28m(1)(3) of the CIT Act).

The key uncertainty is whether ESG expenditures could be categorised as hidden profit distributions or non-business expenses. The lack of clear definitions and guidance complicates the classification of individual outlays.

However, tax practice is gradually providing answers. For example, in one ruling, DKIS agreed with a taxpayer’s position that ESG-related costs incurred for:

• organising business meetings with clients and partners,
• organising internal team or integration events,
• attending conferences and industry events,
• purchasing office supplies,
• occasional gifts and tokens of appreciation,
• minor donations to NGOs as part of CSR activities,

– do not qualify as non-business expenses or hidden profit distributions (Ruling of 18 October 2024, DKIS, ref. 0111-KDIB2-1.4010.362.2024.2.AS).

This interpretation aligns with earlier favourable rulings, such as the one from 21 February 2024 (DKIS, ref. 0111-KDIB2-1.4010.534.2023.1.MK).

The evolving approach of tax authorities to ESG-related expenses

From a corporate tax perspective, a prevailing and increasingly consistent approach by tax authorities can be observed, confirming the possibility to treat ESG-related spending as tax-deductible.

For companies in the construction industry, this creates opportunities to derive real tax benefits – under both standard CIT and Estonian CIT regimes – provided each expense is subject to individual assessment.

While the approach to ESG-related costs is stabilising, other ESG-related issues are also seeing a trend toward favourable interpretation, further encouraging investment by enhancing their economic attractiveness.

Construction of photovoltaic farms and wind power plants – debt financing costs

One positive development is the evolving stance of DKIS toward “green energy” investments involving the construction of photovoltaic farms and wind power plants, especially regarding debt financing costs.

Previously, DKIS had held that such investments could not be treated as long-term public investment projects, meaning that debt financing costs had to be included when calculating the surplus (e.g. Ruling of 22 November 2023, DKIS, ref. 0111-KDIB1-2.4010.491.2023.2.MC – now repealed).

Taxpayers challenged these decisions and received favourable court rulings (e.g. WSA in Gdańsk, judgment of 27 March 2024, ref. I SA/Gd 38/24), confirming that these investments qualify as long-term public investment projects.

Although initially opposed, tax authorities eventually revised their approach, withdrew cassation appeals (e.g. Supreme Administrative Court order of 27 June 2024, ref. II FSK 819/24), and began issuing favourable interpretations, such as the one dated 2 April 2025 (DKIS, ref. 0114-KDIP2-2.4010.61.2025.1.PK).

This shift provides significant encouragement for construction companies – both from a microeconomic perspective (project profitability) and a macroeconomic one (alignment with ESG-driven tax policy trends).

Nonetheless, as ESG remains a relatively new area for Polish tax authorities, taxpayers should continue to act with caution.

ESG and transfer pricing – how to allocate costs and benefits within the corporate groups?

Although ESG and transfer pricing may seem unrelated at first glance, in practice, they increasingly overlap. Implementing an ESG strategy entails real costs – from carbon footprint calculations to investments in reporting systems and automation.

In corporate groups, key questions arise: Who should carry out ESG activities? Who benefits from them? And how should these be allocated in line with the arm’s length principle?

Holding companies developing ESG strategies must ensure their alignment with transfer pricing rules. Tax authorities may assess whether ESG costs – e.g. from group-wide sustainability campaigns funded centrally – are allocated based on actual benefit to each entity and whether the allocation method and cost level reflect market conditions. This requires taxpayers to:

• carefully document the rationale for ESG cost allocations,
• conduct a benefit test, and
• ensure that intercompany settlements reflect arm’s length pricing.

Authorities may also check whether ESG-related expenses are duplicated in the cost base of multiple entities – for instance, if subsidiaries pursue ESG goals independently, they should not also be charged for costs incurred by the parent company.

Moreover, centralisation or reallocation of ESG responsibilities may significantly affect the value chain and be treated as a business restructuring under transfer pricing rules. This could trigger documentation requirements such as an exit fee analysis, preparation of a defense file, and reporting in the TPR-C form.

The impact of the CSRD Directive on transfer pricing documentation

From a regulatory standpoint, one cannot overlook the reporting obligations under the CSRD Directive (2022/2464/EU). Despite the EU’s efforts to simplify rules for SMEs, large corporations must still comply. Notably, CSRD reporting covers consolidated entities, meaning ESG data must be collected and presented for the entire value chain – including related parties.

This should prompt groups to integrate ESG strategy with transfer pricing compliance – including cost/benefit identification, allocation, and documentation. Crucially, consistency between financial and non-financial disclosures is key – discrepancies between ESG reports and TP documentation may be flagged by tax authorities, investors, auditors, and regulators.

Recommendations for finance and tax departments in the context of ESG and transfer pricing

1. Identify ESG activities within the group – map out which entities perform which ESG tasks, what costs are incurred, and who ultimately benefits.
2. Review your transfer pricing policy – assess whether it adequately covers ESG-related cost allocations and whether allocation keys are economically justified.
3. Evaluate restructuring risks – determine whether ESG-driven organisational changes may qualify as a transfer pricing restructuring, and if so, prepare supporting documentation.
4. Include ESG in TP documentation – if ESG activities affect intragroup pricing, reflect them in the Local File and, if required, in the Master File.
5. Ensure data consistency – ESG disclosures (e.g. CSRD reports) should align with transfer pricing documentation and TPR filings.

Comprehensive support form MDDP in the field of ESG

MDDP experts provide end-to-end support for the construction industry in managing tax aspects related to ESG. We offer advisory services on assessing the tax deductibility of specific ESG expenditures, identifying tax risks and opportunities, and advising on “green” investments.

We also support construction companies engaging in related-party transactions by helping to select appropriate pricing methods, determine or verify arm’s length compensation for services, supplies, and equipment leasing, and fulfil reporting obligations under transfer pricing regulations (Local File, benchmarks, TPR forms, Master File).

We look forward to working with you!