Transfer Pricing in Poland

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Adrian Branny
Partner, Warsaw
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Transfer Pricing in Poland

The transfer pricing regulations in Poland generally follow the OECD Guidelines and are applied to transactions between domestic entities (where both parties are Polish tax residents), as well as to transactions between a Polish tax resident and a foreign entity. Regardless of whether the parties to the transactions are related entities, all transactions with entities based in tax haven countries are subject to TP documentation requirements if a certain value threshold is exceed. The scope of application of the rules with regard to related party transactions is wide and covers goods, services and financing transactions, as well as the licensing and sale of intellectual property. Excluded however, are transactions where both parties are domestic residents / entities operating within a special vehicle – capital tax group.

Since 2014 the tax authorities conducted an increasing number of TP audits. Both the taxpayer’s transfer pricing documentation and the actual terms of the intercompany transaction, including the calculation of prices and the profitability of the related parties, were subject of the tax authorities’ investigations. Furthermore, several court rulings issued recently specify that the analysis justifying the arm’s length character of prices applied is an essential part of the transfer pricing documentation.

Since January 1, 2015, transfer pricing regulations were also extended to transactions with partnerships which were outside of transfer pricing restrictions before that date.
Since January 1, 2017, amendments of the Personal Income Tax and Corporate Income Tax acts are introduced in Poland, making significant changes to the Polish TP regulations and affecting transactions and events occurring from this date. The key changes concern i.a. the TP documentation content, reporting, benchmarking analyses and group documentation (master file). A further change regards the related parties definition: two entities will be deemed related if one of them holds (directly or indirectly) 25% of the share capital in the other entity (in contrast to 5% in the current regulations applicable until the end of 2016).

Recent changes

On January 1, 2015, significant amendments on some provisions of the CIT and PIT Acts related to TP regulations came into force. These amendments include:

  • Organization units who do not possess a legal personality (like partnerships) are now subject to arm’s length requirements;
  • An extension of documentation requirements which now makes partnerships and joint ventures between related parties subject to documentation requirements;
  • An implementation of income adjustments which requires dealings between a Polish taxpayer and its permanent establishment (PE) abroad to be at arm’s length;
  • An implementation of documentation requirements with regard to dealings between a Polish taxpayer and its foreign PE;
  • An introduction of an exemption to income adjustments and documentation requirements with regard to agricultural producers groups as well as fruit and vegetable producers groups;
  • An introduction of procedures for double taxation elimination in domestic transactions.

Main Provisions and Definitions of the Transfer Pricing Law

Related parties
In order to determine how companies might be affected by TP regulations, it is necessary to first determine if they are regarded as “related parties” in the context of TP rules. The TP legislation provides a large list of criteria to determine if two parties are deemed to be related. In practice, the most important ones are the following:

  • Two parties of a transaction are deemed to be related if they are under common control or management. The control can be exercised directly or indirectly by individuals, partnerships as well as companies. A share in capital of 5% or more is enough to lead to a capital relation (since 2017 this threshold shall be 25%).
  • Two parties are deemed to be related if both parties to the transactions are Polish resident entities and one of the following conditions is met:
    • Family relationships (i.e., marriage, consanguinity or affinity up to the second degree);
    • Relationships resulting from employment or property between Polish residents or between persons performing managerial, inspection or supervisory responsibilities in Polish residents.

From the year of the tax payment, the tax settlements are open five years from the end of the calendar year for TP audits. TP rules apply to permanent establishments in Poland as well as foreign permanent establishments of Polish taxpayers.

Transactions subject to control

Polish TP rules apply to Polish and foreign parties as well as to domestic and cross-border transactions.

Transfer Pricing Methods and Information Sources

Under the Polish tax regulations, the following methods are stipulated for determining the conformity of prices applied to controlled transactions having “arm’s length”:

  • Comparable uncontrolled price (CUP) method
  • Resale price method
  • Cost plus method
  • Profit split method
  • Transactional net margin method (TNMM)

Please note: In Poland, the tax authorities determine which method to use based on several factors, such as the course of the transaction, the availability of reliable information, etc. Transaction-based methods (CUP method, cost plus method and resale price method) are preferred over the transactional methods.

Please refer for the more detailed description of the methods here.

For the determination of prices with the arm’s length principle, comparable data from commercial databases are available and usually accepted in practice.

Commercial databases are available and usually accepted as a valid way to compare prices and, therefore, determine their compliance with arm’s length principles. The Amadeus database, for instance, is used by tax authorities in the APA process. Besides that, other sources of data, such as the Polish Central Statistical Office, are also used. If multiple data sources are available, local databases are preferred over pan-European or global ones.

Transfer Pricing Documentation

Minimum documentation requirements
According to Article 9a of the Corporate Income Tax Act and Article 25a of the Personal Income Tax Act, the minimum required TP documentation should currently contain:

  • Identification of the functions to be performed by the parties participating in the transactions (including assets used and risks undertaken by the parties);
  • Specification of all anticipated costs associated with the transaction including form and date of payment;
  • Method and manner of profits calculation and specification of the transaction price;
  • Determination of the economic strategy in case the strategy adopted by the party to the transaction has influenced the value of the transaction object;
  • Indication of other factors, when the parties to the transaction took such factors into account to regulate the value of the transaction object; and
  • Indication of the expected benefits by the parties to the transaction in case of contracts relating to intangible performances (including services).

Please note: The prices agreed between related parties should be determined on the market level. In case of performing transactions with related parties, taxpayers are obliged to note this fact to the tax authorities in an annual tax declaration and prepare a detailed TP documentation when transactions between related parties or transactions connected to tax heavens exceed the following threshold:

  • 50 000 EUR in general cases;
  • 100 000 EUR if the transaction value does not exceed 20% of the share capital recalculated for the purposes of the thin capitalization regulations;
  • 30 000 EUR if services were performed or intangible assets were sold / made available; and
  • 20 000 EUR if tax haven transactions are affected.

TP documentation should be prepared annually for partnerships in which the total value of partners’ contributions to the partnership exceeds 50 000 EUR. With regard to joint ventures, only those with a value determined in an agreement (or, if not determined, the predicted value of the undertaking) over 50 000 EUR are subject to prepare the TP documentations annually.

Additional documentation requirements

The documentation should be prepared in Polish and the records must be preserved for five years from the end of the year in which tax payment for the period concerned was due.

TP documentation has to be filed only if requested by the tax authorities but in such a situation the documentation shall be presented within 7 days (if this deadline is not met, tax authorities charge a penalty 50% tax rate on the income understated due to violation of the TP rules).

Advance Pricing Agreements

Currently taxpayers may also apply for the advance pricing agreement (APA) in order to confirm with the Minister of Finance that the material terms and conditions agreed between related parties are comparable with data for unrelated party. In addition APA confirms that the taxpayer has chosen correct method of setting the prices and contains in particular functional profile description of the related parties participating in an analyzed transactions and algorithm for the transfer price calculation.

The agreement could be made for the period of up to 5 years and later it could be renewed for period not longer than 5 years. The decision confirming APA should be issued within 6 months since the procedure started.

In the process of procuring APA also tax authorities from other countries may be formally involved, however, such proceedings can take longer (statutory deadlines are respectively 12 and 18 months depending if one or more countries participate in the process).

Transfer Pricing Audit

TP audits in Poland could be performed as part of Corporate Income Tax (CIT) audit. A TP audit may also be initiated as a result of an audit carried out in the related entity.
In practice, in the course of CIT audits, intercompany service fees usually attract the most attention of the Polish tax authorities, whereas the documentation of the results of the intercompany services purchased by Polish entities is of special interest to the authorities. The audits focus also on cross-border business restructurings resulting in the transfer of business functions from Poland.

With respect to the procedure, the tax authorities begin a TP enquiry with a request for TP documentation as well as other information which relate to intercompany transactions. This documentation does not include an economic analysis. In case the tax authorities conclude that a transaction was not concluded at market value, they issue a tax decision declaring the correct amount of assessed tax. It is crucial to provide tax authorities with formal TP documentation within 7 days since receiving the request (see also Penalties section below).

Penalties

  • 19% of the outstanding tax liabilities for transactions below the threshold for mandatory documentation
  • 19% of the outstanding tax liabilities for transactions above the threshold when the documentation is presented and accepted
  • 50% of the outstanding tax liabilities for transactions above the threshold when documentation is not presented to the tax authorities within 7 days since receiving the request (or it is presented to the tax auditors but they disregard it since it does not satisfy the formal requirements).

Overview of Amendments from 2017

With regard to the recent changes mentioned previously, which shall come into force as of January 1, 2017, Polish taxpayers are supposed to review their related party transactions, consider their arm’s length character and make any adjustments necessary prior to the introduction of the new documentation requirements. In detail the key changes will affect i.a.:

TP documentation content

The information required to be included in Polish TP documentation will be changed and extended. In the future it will cover – beside the description of a transaction itself – “other events included in the accounting books” between related parties, provided that they influence the Polish taxpayer’s taxable income or loss. Taxpayers will not only have to indicate the applied TP method but also to justify the selection of that method, including presenting the algorithm for settlements of the transactions. Hitherto it was enough for a taxpayer to indicate the TP method applied without an obligation to prove that the TP method complies with the arm’s length principle.

Reporting

Within the deadline to submit the annual tax declaration taxpayers shall prepare TP documentation and file with the tax authorities a statement confirming that it has been prepared. TP documentation itself is not submitted to the tax authorities.

Since 2017 the introduction of the amendments will terminate a long-lasting debate between taxpayers, tax authorities and the Courts with respect to the timeframe for the preparation of TP documentation. This should be done within the deadline to submit the annual tax return, i.e. by the end of third month following the tax year-end date.

Benchmarking analyses

TP documentation requirements will increase for Polish taxpayers whose revenue or expenses exceed 10m EUR. Such taxpayers in the future will be obliged to present a benchmarking study to verify the arm’s length nature of their related party transactions. The benchmarking study will consider Polish companies conducting comparable activities.

Limitation of entities obliged to prepare TP documentation

The amendments entering into force since 2017 do not require the preparation of TP documentation for:

  • taxpayers whose revenues or expenses are lower than 2m EUR in a given year;
  • transactions that are covered by an agreed Polish Advance Pricing Arrangement (APA). These transactions are subject to simplified documentation, containing only limited information; and
  • transactions where a price is dictated or required by another acts or legal provisions.

Group documentation (master file)

A more extensive documentation (master file) presenting the overall nature of a groups’ activities and transactions will be required since 2017 from taxpayers whose annual revenues or expenses exceed 20m EUR.

What does this mean for you?

We consider that with the enforcement of the (new) TP regulations in Russia, Ukraine, Poland, Kazakhstan and Belarus, the matter of TP in the different countries will attract the increased attention of the relevant tax authorities. Therefore, the management of the
company’s pricing policy and documentation of transactions will require additional consideration by taxpayers.

The following steps should be undertaken in order to be prepared for a TP audit:

1. Examine intercompany transactions in order to prepare a list of transactions which are subject to TP control and verify whether or not you are above the relevant thresholds and need to prepare TP notifications and TP documentation.

2. Select the appropriate TP method under the local law.

3. Analyze the performed functions, involved risks and used assets in order to prepare a functional analysis.

4. Carry-out a benchmark analysis.

5. Prepare the TP notification / report and TP documentation.

It should be taken into consideration that the preparation of the TP documentation is a time-consuming procedure. Therefore, it is important to calculate what additional personnel should be hired or to outsource the process to external consultants. However, preparation for the TP policies implementation should start as soon as possible in order to meet legislative requirements.

Please note: Due to country-specific differences in TP law, the TP methods used in the above mentioned countries might differ significantly.

How we can help you

SCHNEIDER GROUP has a team of accountants and tax experts with extensive experience in accounting and taxation in our offices in Russia, Ukraine, Poland, Kazakhstan and Belarus, who will be pleased to provide you with:

  • An analysis of your transactions which may be subject to TP control;
  • A benchmark study to check if your intercompany prices comply with the “arm’s length” principle
  • Preparation of the TP documentation for your controlled transactions;
  • Preparation of the notifications/reports to the tax authorities about controlled transactions;
  • Support to your in-house team in preparing TP documentation and notifications.
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