Although the definition of a “controlled transaction” has been introduced into the PIT Act and the CIT Act, taxpayers (and lawmakers) still have doubts which events require preparation of transfer pricing documentation. Today, we write about transfer pricing documentation in the case of contributions to share capital, share redemptions, and dividends.
The concept of a controlled transaction includes activities of an economic nature, the substance of which is determined by the actual behaviour of the parties to the transaction. This definition covers the contribution of money to a company as well as the company’s voluntary or compulsory acquisition of its own shares for the purpose of redemption, and the situation when shares are redeemed without remuneration. But a dividend payment is not a “controlled transaction” as it is not economic in nature.
Acquisition of shares in exchange for a cash contribution constitutes a controlled transaction subject to documentation requirements if the contribution exceeds a transaction value threshold of PLN 2 million.
This position was confirmed by the director of the National Revenue Administration Information System (KIS) in an individual interpretation of 15 May 2020 (no. 0111-KDIB1-2.4010.81.2020.2.MS). Under the facts presented there, an affiliate with its registered office in Slovakia, the 100% shareholder of a company with its registered office in Poland, planned to make a cash contribution to increase the share capital of the Polish company, but the contribution was to be made partly to share capital and partly to reserve capital. The contribution was EUR 5 million, exceeding the documentation threshold of PLN 2 million applicable to capital transactions.
Therefore, the applicant took the position that the cash contribution constituted a controlled transaction and, due to its value, was subject to the obligation to prepare transfer pricing documentation. The tax authority fully agreed with the applicant.
The redemption of shares, whether voluntary or compulsory, constitutes a controlled transaction, subject to the documentation requirement, if the value threshold for “other transactions” of PLN 2 million is exceeded. A voluntary transfer of shares for redemption without remuneration is also considered a controlled transaction.
This is based on the individual interpretation of the director of KIS of 10 June 2020 (no. 0112-KDIL2-2.4011.289.2020.2.KP). In the facts presented there, three out of five shareholders decided to withdraw from the company. Withdrawal from the company took a form of a voluntary redemption of shares without remuneration. The applicant claimed that the conditions for redemption of the shares were not established or imposed as a result of links and that the redemption of shares was not economic in nature, so the event could not be regarded as a controlled transaction.
The director of KIS disagreed with this position, pointing out that a controlled transaction should be understood as any type of legal transaction resulting in the transfer of ownership of property affecting the taxpayer’s income (or loss) within the meaning of the CIT Act or the PIT Act. Consequently, in the director’s opinion, the redemption of shares, irrespective of its voluntary or compulsory nature, constitutes a controlled transaction subject to the documentation obligation if its value exceeds the statutory threshold.
A transaction involving the payment of a dividend between related parties does not constitute a controlled transaction due to its “non-economic” nature. Consequently, it is not subject to the documentation obligation.
This position was indirectly confirmed in the individual interpretation of the director of KIS of 18 December 2019 (no. 0111-KDIB2-3.4010.308.2019.2.KK). That interpretation applied to an association which, as part of its statutory activity, made transactions with related parties consisting in awarding and receiving grants.
The applicant referred to the report on public consultation of the amending act, where in the context of clarifying the exemption from the documentation obligation for transactions involving a donation, grant or dividend, the Ministry of Finance stated, “These activities are in principle not subject to the documentation obligation under other regulations.”
The applicant also stated that the transactions indicated, including the grants received and awarded by the applicant, were not subject to the documentation requirement as they did not constitute a controlled transaction because they were not “economic” in nature. The director of KIS upheld the correctness of this position.
A similar position was taken by the Minister of Finance in response to parliamentary inquiry no. 9368 of 22 August 2020. The explanation stated that dividend payments cannot be regarded as an “economic” action. A dividend constitutes remuneration for entrusted capital, but the profit generated, and its distribution, is only a consequence of business activity. Therefore, payment of a dividend is not “economic” in nature, does not fall within the definition of a controlled transaction, and does not create an obligation to prepare local transfer pricing documentation.
Mateusz Rowiński, Wojciech Marszałkowski, attorney-at-law, Tax practice, Wardyński & Partners