Keep your arm’s-length distance – how to meet Polish TP obligations
Magdalena Dymkowska of MDDP provides a guide to the vagaries of the Polish transfer pricing regulations and explains why the applicability of the arm’s-length rule may leave multinational companies somewhat surprised.
Multinational companies that are familiar with transfer pricing (TP) issues in their countries might raise their eyebrows over the kinds of transactions that are subject to the arm’s-length rule in Poland. Usually, TP regulations apply to service, goods, and financial transactions made between related entities. Let’s go through the most controversial Polish regulations.
Exemptions for domestic transactions in Poland
According to Polish law, transactions between Polish related entities must also comply with the arm's-length principle.
Admittedly, the lawmaker provided for an exemption from the local file obligation for domestic entities. The exemption is available only if Polish taxpayers achieved a tax profit for the documented year and do not benefit from other simplifications specified in the CIT Act. These transactions must be reported in a TPR form (a type of tax statement).
Unclear meaning of a ‘transaction’
In Poland, only ‘controlled transactions’ are under the TP regime. However, the TP regulations do not define what a controlled transaction is. This causes many uncertainties and problems for taxpayers, who are unable to identify obligations in the field of TP. Variable case law and interpretation offer no help.
According to the tax authorities, the concept of a transaction cannot be understood only as an operation of purchase or sale of goods and services. A transaction should be understood broadly: as an economic activity performed by related parties.
The General Interpretation issued by the Minister of Finance in 2021 confirmed that a controlled transaction means activities of an economic nature identified on the basis of the behaviour of the parties (including attribution of income to a foreign establishment), the conditions of which have been established or imposed as a result of relationships.
The phrase "established or imposed as a result of relationships" does not mean that the transactions must be directly performed by related parties. The idea is that the relationships influenced the determination of the content of the activities. Therefore, it is perfectly possible that the terms of a transaction may be set or imposed by a related entity that is not directly a transacting party.
A common example is a purchasing centre that negotiates the prices of services and products purchased from independent entities by companies belonging to the group. Such a transaction can also be treated as a controlled one subject to TP regulations. This is surprising because the transaction is made between unrelated parties, while the purchasing centre cares about reducing the costs of the entire group by leveraging on the economies of scale.
Other transactions covered by Polish TP regulations
These transactions should also be analysed in terms of the documentation obligation:
Free-of-charge services such as granting free guarantees;
Services performed or received without remuneration for related entities; or
Making available a trademark without remuneration.
Taxpayers must also define TP obligations for capital transactions such as mergers, acquisitions, exchange of shares, redemption of shares, increase of share capital, and joint venture agreements. All of them are subject to the arm’s-length principle and should be documented to prove the business nature of the transaction and to justify that third parties would make such a transaction on comparable terms.
If the company was the subject of restructuring of the group's operations (transfer of significant functions, assets, risks between related parties), then adequate remuneration for the transfer of profit potential may be required.
On top of the need to prepare a local file along with the TP analysis, such a transaction is reported in detail using the TPR form.
Crème de la crème – transactions with tax havens
TP regulations usually apply to transactions between related entities. However, there is a very specific exemption in Poland: transactions with third parties from tax havens. Once a specific materiality threshold for such a transaction is exceeded, a respective local file must be compiled to prove the business justification of the transaction. Currently, the materiality threshold for direct tax havens transactions amounts to PLN 100,000 annually.
According to the changes planned by the Ministry of Finance, this threshold will be increased up to PLN 2.5 million in the case of financial transactions and up to PLN 500,000 for non-financial transactions. This is perceived as a change in a good direction but still not sufficient for medium and large-size enterprises buying goods from companies located in tax havens; for example, in Hong Kong. Transactions concluded with tax havens also have to be reported in the TPR form to the tax office.
There is also good news – the controversial regulations regarding transactions made indirectly with entities based in tax havens (see an ITR article by Marta Klepacz, the MDDP senior manager, on August 4 2022, “The absurdity of Polish TP obligations covering transactions with third parties”) will be soon repealed.