Compensation awarded by a court for a breach of the principle of equal treatment in employment, relating to differences in pay for work of equal value, is not exempt from personal income tax – according to an individual interpretation issued by the Director of the National Tax Information on 30 June 2025 (ref. 0114-KDIP3-1.4011.123.2025.2.MK).

Contrary to common belief, not all compensation awarded by court judgment is tax-exempt. Exemptions apply only to compensation where the amount or method of calculation comes directly from legal provisions or collective bargaining agreements and which compensates for actual losses suffered, rather than lost profits.

In this case, the compensation from the employer constitutes reimbursement for lost profits, not for actual damage suffered by the employee. In practice, this means that the payer (the employer) is obliged to deduct advance payments for income tax from the amount of compensation paid, and to include this amount in the basis for calculating social security and health insurance contributions.

The employee, on the other hand, should declare the compensation received as taxable income in their annual tax return.

Find more articles in PRO HR July 2025.