Polish taxpayers will be able to apply new criteria to determine whether parties are related or not for tax purposes from 2019. The new definition of "related parties" has been extended to include "significant influence".
The outcome may influence not only the scope of transfer pricing (TP) documentation, but also the tax deductible cost of group charges.
Transfer pricing regulations in Poland have been much stricter than elsewhere in Europe for many years. In most cases in Europe, only capital relations are reviewed while analysing arm's-length prices.
Until the end of 2018, Polish taxpayers were obliged to identify related parties not only based on capital relations (level of direct or indirect shares at 25%, and 5% until the end of 2016), but also in respect to control, management and family relations.
The new, wider definition seeks to include situations where structures are established in capital groups involving an investment fund, for instance, or a foundation or ownership structure specifically modeled on relations.
The idea of exerting "significant influence" is recognised if an individual has the actual ability to influence key business decisions of an entity.
In this respect, relations can also be identified in cases where a person has no formal authority or control in the government of an entity (e.g. at the board of directors or supervisory board level, for instance), and may significantly influence the strategic economic decisions made by the entity.
Examples stated by the legislator include making a decision to abandon a part of a business activity, implementing a new product in the market, taking over a part of a business from a related entity, and influencing the pricing strategy.
Therefore, "significant influence" can be identified in the case of an individual who could have a significant impact on the TP of an entity. The significant impact also exists in the case of family relations (being married, kinship, affinity, or second-degree affinity).
In practice, identifying a relation triggered by "significant influence" could be very challenging, cost-intensive and time-consuming for each organisation, particularly regarding cases featuring many departments.
For example, a number of entities that dispose of employees engaged in making business decisions, or cooperation with subcontractors, or those engaged in negotiations in business agreements, can face a dilemma regarding whether such employees could trigger relations with a subcontractor, for instance.
The new approach employed by tax administrations in new contexts remains to be seen.
In this respect, taxpayers in Poland should pay close attention to fulfilling all TP reporting obligations, and when making tax deductions on a related party's charges.
Transactions exceeding circa €690,000 ($790,000) per year are tax deductible only up to €690,000 + 5% earnings before interest, tax, depreciation and amoritisation (EBITDA).