Transactions between related parties at a value above statutory thresholds must be identified in local transfer pricing documentation, but the regulations provide for a number of exceptions.
Transactions not covered by the obligation to prepare local transfer pricing documentation under the Polish Corporate Income Tax Act are indicated in Art. 11n of the act. Probably the most common exemption from the documentation obligation is the one concerning controlled transactions concluded only by related entities with their place of residence, registered office or management in Poland (domestic controlled transactions) in a tax year in which all of the related entities meet the following conditions:
- The entity does not benefit from a subjective CIT exemption under Art. 6 of the CIT Act.
- The entity does not benefit from the CIT exemption for income from activity in a special economic zone based on a permit (Art. 17(1)(34a)) or income from activities specified in a decision awarding support (Art. 17(1)(34a)).
- The entity did not suffer a tax loss.
Doubts regarding condition 2
Taxpayers have doubts whether they can benefit from the privilege described above in a situation where they conduct business based on a decision awarding support (they incur costs and generate income from such an activity) but do not earn income that would benefit from the tax exemption.
Under the position taken by the director of the National Revenue Administration in an individual interpretation of 19 November 2020 (ref. 0111-KDIB1-2.4010.414.2020.1.MS), the condition of not benefitting from the CIT exemption for income from activity specified in support decision should be interpreted literally.
This means that the exemption from the obligation to prepare documentation will also apply if, for example, one of the related entities conducts business on the basis of a decision awarding support but fails to show income subject to the CIT exemption in the tax year in which the controlled transaction is carried out.
Only the generation of income benefiting from this exemption will prevent this condition from being fulfilled. Then it is necessary to prepare transfer pricing documentation.
Doubts regarding condition 3
The privilege of not preparing transfer pricing documentation for a domestic transaction is conditional upon not incurring a loss. There is no doubt that the condition of not incurring a loss refers to a tax loss, not a balance-sheet loss. Therefore, it relates to the excess of tax-deductible costs over revenue generated from a given source of revenue.
In the tax year in which the controlled transaction is executed, none of the related parties may incur a tax loss from the source of revenue to which each related party allocates the controlled transaction.
Such a situation occurs, for example, when related parties bear a tax loss from a source of capital gains without incurring a loss from a source of operating income, and the controlled transaction affects the related parties’ income from a source of operating income.
These circumstances no longer raise any doubts. Recently this position was confirmed by the director of the National Revenue System in an individual interpretation of 15 May 2020 (ref. 0111-KDIB2-1.4010.405.2020.1.AR).
Transfer pricing report
Even if a controlled transaction is exempt from the documentation obligation under Art. 11n(1), pursuant to Art. 11t(1)(1) such a controlled transaction should be included in the taxpayers’ transfer pricing report (form TPR). In that case, a simplified form of the transfer pricing report should be filed, omitting the general financial information on the related party for which the information is submitted, information on transfer methods and pricing, and additional information or explanations.
Mateusz Rowiński, Wojciech Marszałkowski, adwokat, Tax practice, Wardyński & Partners