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Transactions with related entities - transfer prices
Taxpayers entering into transactions with related entities should remember about transfer pricing obligations. It is important that a given company does not have to be part of an international holding company or capital group. Transfer pricing obligations may also apply to transactions between the company and, for example, its partners or members of the management board.
Transactions between related entities
The first step in verifying a taxpayer's transfer pricing obligations is to determine:
- whether the taxpayer has related entities;
- whether the taxpayer made any transactions with these related entities in the tax year.
The definition of related entities is very broad and it results from Art. 11a paragraph. 1 point 4 of the CIT Act / 23m sec. 1 point 4 of the PIT Act. Related entities are:
- entities from which one entity exerts significant influence over at least one other entity,
- entities which are significantly influenced by the same other entity or a spouse, relative or related to the second degree of a natural person exerting significant influence over at least one entity.
The exercise of significant influence means having, directly or indirectly, 25% or more of:
- equity interests
- or voting rights in controlling, constituting or managing bodies,
- or shares or rights to participate in profits or assets or their benefits, including participation units and investment certificates.
Based on the above, the simplest example of a relationship are capital ties, i.e. one company in another company has at least 25% of shares.
Exerting significant influence is also the actual ability of a natural person to influence making key economic decisions in a given company - company. In practice, this provision means that a member of the management board and the company, and even a proxy and the company are also considered related entities.
Relationships between entities may also occur in connection with family ties - an example may be, for example, the management of company A by a husband and the ownership of shares in company B by a wife. Companies A and B are related entities.
Related entities are also:
- a partnership and its partner, including a limited partnership and its general partner,
- the taxpayer and his foreign establishment.
Once all related entities of a given taxpayer have been identified, it should be established whether there are any controlled transactions between them.
According to the regulations: "A controlled transaction is activities of an economic nature identified on the basis of the actual behavior of the parties, including attribution of income to a foreign establishment, the conditions of which have been established or imposed as a result of the relationship".
While there is no doubt that a controlled transaction is the sale or purchase of goods, finished products, services, or a loan, some events between entities may raise doubts as to whether they meet the definition of a controlled
transaction. This is, for example, a dividend payment or an increase in share capital.
Transfer prices
Related entities in concluded transactions are required to determine transfer prices in accordance with the so-called the arm's-length principle. According to Art. 11c paragraph. 1 of the CIT Act / art. 23o paragraph 1 of the PIT Act: "Related entities are obliged to set transfer prices on terms that would be agreed between unrelated entities".
Determining a transfer price in a transaction concluded between related entities that is lower or higher than the market price has consequences in the form of additional assessment of the taxpayer's income by the tax office and penal fiscal sanctions.
The regulations indicate that the transfer price means the financial result of the conditions established or imposed as a result of the existing relationships, including the price, remuneration, financial result or financial ratio.
The simplest example of a transfer pricing would be a price agreed between two related parties for the sale of certain goods (e.g. goods) or services.
Transfer pricing documentation
The transfer pricing documentation (TP) is to prove to the tax authorities that the transfer price has been agreed between related entities in accordance with the arm's length principle.
TP documentation includes local transfer pricing documentation (local file) and comparative analysis. Entities operating in large capital groups may additionally be required to prepare a group document - the so-called master file.
TP documentation is prepared when the transaction limits are exceeded, i.e. when the taxpayer performs transactions with related entities in the tax year for at least the following amounts:
- PLN 10 million - for commodity and financial transactions
- PLN 2 million - for service and other transactions
In addition to the preparation of TP documentation, the taxpayer is also required to submit to the tax office information on transfer pricing (TPR-C / TPR-P) and the management board's declaration on the preparation of TP documentation and the application of transfer pricing in accordance with the arm's length principle.
Dates in TP
Taxpayers should remember the following transfer pricing deadlines (applies to TP obligations for 2021):
- TPR and the management board's declaration should be sent to the office by the end of the 9th month after the end of the tax year (the Polish Law extends this period until the end of the 11th month);
- due to the deadlines for submitting TPR and the declaration, TP documentation (local file + comparative analysis) should be prepared by the end of the 9th month after the end of the tax year (Polski Ład - the Polish Order introduces the deadline by the end of the 10th month);
- The master file is prepared by the end of the 12th month after the end of the tax year.
With regard to TP's documentation for 2021, taxpayers whose tax year coincides with the calendar year should remember September as the final date for fulfilling TP's basic obligations. However, it is worth getting started with the preparation of documentation and TPR, because it is a tedious and long-lasting process.
The text was prepared by:
Aleksandra Trocińska-Tax advisor
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