Poland has adopted a three-tiered transfer pricing documentation structure in line with OECD guidelines. This includes:
The master file, which contains standardised information relevant for all members of the multinational enterprise (MNE) group;
The local file, which refers to material transactions of the local taxpayer; and
The country-by-country report, containing information on the global allocation of income, taxes paid, and economic activity indicators within the MNE.
The master file must be finalised within 12 months following the end of the tax year.
While the master file has traditionally been prepared by the central company and then provided to the local entities, it is becoming increasingly critical to ensure that the master file is also aligned with Polish regulations.
Some companies may have treated the master file as supplementary to local transfer pricing documentation, as it was rarely scrutinised by tax authorities in Poland in the past. However, its role is becoming more critical in Poland, especially regarding withholding tax (WHT) compliance. Polish tax authorities are increasingly requesting both local and group transfer pricing documentation, including the master file, during WHT audits to obtain useful information such as:
Ownership and organisational structure;
Key intangible assets;
Centralised financing models;
Main intercompany transactions; and
Consolidated financial and tax data.
Potential risks of master file errors
As the Polish tax authorities increasingly rely on the master file in WHT audits, inaccuracies or oversimplifications in the document may lead to significant tax risks:
WHT risks – one common risk arises from overly simplified information about the group’s ownership and functional structure. If the master file fails to adequately reflect the beneficial ownership of received payments, tax authorities may challenge the application of WHT exemptions or reduced rates under double tax treaties (DTTs). This could lead to higher WHT liabilities.
Transfer pricing risks – misidentifying roles and functions within the group can lead to errors in transfer pricing calculations and method selection, resulting in incorrect intercompany pricing and potential tax liabilities.
Inaccurate reflection of reality – the master file may not accurately delineate the actual substance of the transaction (e.g., loan or on-lending), which could become an issue during a tax audit and generate the risk of recharacterisation of the transactions.
Why local consultation is key
Given the risks mentioned, it is crucial for parent companies to ensure that the master file that they prepare accurately reflects both the group’s structure and the true substance of intercompany transactions. In particular, when a Polish subsidiary is a WHT remitter, careful attention must be paid to the information in the master file regarding the decision-making autonomy of the recipient of payments, allocation of income and ownership within the group, and, especially, allocation of risks and functions.
It is strongly recommended that the master file be reviewed in consultation with local entities, especially in Poland. Local tax nuances – including those related to WHT exemptions/reduced DTT rates, with a special focus on beneficial ownership and substance criteria – should be considered to ensure full compliance. Failure to do so could lead to significant delays, penalties, and additional tax liabilities during WHT audits.
Key takeaways
In the current regulatory environment, it is vital that master file documentation is prepared with care and regularly reviewed in light of the local tax landscape. For multinational groups with subsidiaries in Poland, this process should include close consultation with local entities to proactively identify and address any potential WHT liabilities. Ignoring these issues could result in significant tax exposure and compliance challenges.
By working closely with local teams and aligning the master file with both global and local tax realities, groups can reduce the likelihood of facing ‘delayed time bomb’ issues during WHT audits taking place many years later and ensure that their documentation serves its intended purpose across all tax authorities involved.
