Polish tax authorities’ approach to TP adjustments: hope for change?

The application of transfer pricing adjustments in intragroup transactions is a common practice globally among multinational groups. These adjustments aim to ensure that settlements between related parties adhere to the arm’s-length principle. The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the OECD Guidelines) primarily address the application of these adjustments, emphasising that their main purpose is to appropriately remunerate individual entities based on the activities they undertake and the risks they incur, and to allocate costs to the entities that bear those risks.

Polish companies, which are becoming increasingly active internationally, also seek to benefit from the common practice of applying transfer pricing adjustments and recognising them as tax-deductible costs. Unfortunately, over the past few years, Polish tax courts have opposed this international practice and have taken their own stance, disallowing the tax treatment of transfer pricing adjustments.

In 2019, new tax regulations were implemented in Poland, intended – according to the accompanying explanations – to clearly indicate that transfer pricing adjustments could be treated as tax revenue or tax-deductible costs, provided certain conditions are met. Despite this, Polish tax authorities and courts began questioning the application of transfer pricing adjustments and their recognition for tax purposes for fiscal years before 2019.

Polish tax courts argued that transfer pricing adjustments made before 2019 were not allowed due to the absence of specific provisions in the Polish Corporate Income Tax Act (the CIT Act) that allowed these adjustments to be recognised as tax-deductible costs. Additionally, the courts claimed that taxpayers had failed to demonstrate a cause-and-effect relationship between the transfer pricing adjustments and their revenues. The courts stated that since these adjustments are not, for example, direct fees for the sale of goods or services, they do not meet the criteria for recognition as tax-deductible costs. Furthermore, the courts concluded that transfer pricing adjustments are, by nature, adjustments to companies’ financial results, reflecting post-tax year-end reductions in the margins achieved on transactions adjusted to market levels set by those companies, and therefore cannot be treated as tax deductible.

So why did Polish tax authorities and courts consider the transfer pricing adjustment mechanism inapplicable in Poland until 2019, even though the new regulations were only intended to clarify the existing general provisions regarding the tax treatment of costs connected with these adjustments?

At the beginning of 2024, two new rulings were issued by the provincial administrative courts in Białystok and Poznań (I SA/Bk 13/24 and I SA/Po 721/23) that broke the negative line of interpretation that had persisted since 2019. The courts have finally indicated that transfer pricing adjustments made before 2019 may be recognised as tax-deductible costs. The courts consistently emphasised that the application of transfer pricing adjustments is directly related to the functioning of entities within capital groups and that such adjustments are crucial to ensuring the arm's-length nature of settlements between related parties.

The courts found that, despite the absence of specific transfer pricing adjustment provisions before January 1 2019, it was possible to recognise costs related to these adjustments as tax-deductible costs. They noted that the application of transfer pricing adjustments is often a key condition for generating revenue, thereby fulfilling the cause-and-effect requirement for deductibility as indicated in Article 15(1) of the Polish CIT Act, which was in force before 2019. Additionally, the courts determined that the provisions effective from 2019 should be treated as lex specialis in relation to Article 15(1) of the Polish CIT Act, establishing special conditions for including transfer pricing adjustments as tax-deductible costs.

Furthermore, the courts emphasised that without the application of transfer pricing adjustments, the companies concerned would not have been able to operate within capital groups or participate in internal settlements on an arm’s-length basis. They also stated that without applying these adjustments at the end of the settlement periods, the transactions between related parties would not have met the arm's-length standard. The courts concluded that companies incurring expenses related to transfer pricing adjustments are acting to implement the primary transfer pricing principle; i.e., the arm's-length principle, as outlined in the OECD Guidelines prior to 2019.

Transfer pricing adjustments are undoubtedly a common mechanism applied by multinational groups. It is hoped that companies from Poland, as a member of the OECD and the EU, will have equal opportunities to apply the transfer pricing adjustment mechanism in their intragroup settlements. Therefore, the authors hope that these two recent rulings will lead to the development of a new, positive, and secure approach for Polish taxpayers in the jurisprudence on transfer pricing adjustments.