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Taxpayers entering into transactions with related entities should remember their transfer pricing obligations. A company does not have to be part of an international holding company or corporate group. Transfer pricing obligations can also apply to transactions between a company and, for example, its shareholders or management board members.
Transactions between related entities
The first step in checking a taxpayer's transfer pricing obligations is to establish:
- whether the taxpayer has related entities;
- whether the taxpayer conducted any transactions with them in the tax year.
The definition of related entities is very broad and follows from Article 11a(1)(4) of the CIT Act / Article 23m(1)(4) of the PIT Act.Related entities are:
- entities of which one exercises significant influence over at least one other entity;
- entities over which the same other entity, or the spouse or a relative by blood or marriage up to the second degree of an individual exercising significant influence over at least one entity, exercises significant influence.
Exercising significant influence means holding, directly or indirectly, at least 25% of:
- shares in capital;
- or voting rights in supervisory, governing or management bodies;
- or shares or rights to participate in profits or assets or their expectancy, including participation units and investment certificates.
Based on this, the simplest example of a relationship is a capital relationship, such as one company holding at least 25% of another company's shares.Significant influence also means an individual's actual ability to influence key business decisions in a company. In practice, this means that a management board member and the company, and even an authorised representative and the company, are treated as related entities.Relationships can also result from family ties – for example, a husband manages company A and his wife owns shares in company B. Companies A and B are related entities.Related entities also include:
- a partnership and its partner, including a limited partnership and its general partner;
- a taxpayer and its foreign permanent establishment.
After identifying all of a taxpayer's related entities, it is necessary to establish whether they enter into any controlled transactions.Under the provisions: “A controlled transaction means activities of an economic nature identified on the basis of the parties' actual conduct, including the attribution of income to a foreign permanent establishment, whose terms were agreed or imposed as a result of a relationship”.There is no doubt that sales and purchases of goods, finished products or services and loans are controlled transactions, but some events between entities may raise doubts as to whether they meet the definition, for example a dividend payment or an increase in share capital.
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Transfer pricing
Related entities must set transfer prices in their transactions in accordance with the so-called arm's-length principle. Article 11c(1) of the CIT Act / Article 23o(1) of the PIT Act provides: “Related entities must set transfer prices on the terms that unrelated entities would agree between themselves”.Setting a transfer price in a related-party transaction below or above the market price can result in the tax office increasing the taxpayer's assessed income and imposing fiscal penal sanctions.The provisions say that a transfer price means the financial result of terms agreed or imposed as a result of existing relationships, including a price, remuneration, financial result or financial indicator.The simplest example is a price agreed between two related entities for the sale of particular goods or services.
Transfer pricing documentation
Transfer pricing (TP) documentation is intended to prove to tax authorities that the transfer price between related entities was set in line with the arm's-length principle.TP documentation comprises local transfer pricing documentation (local file) and a comparability analysis. Entities in large corporate groups may also have to prepare a group document known as a master file.TP documentation is prepared after transaction thresholds are exceeded, namely when a taxpayer conducts transactions with related entities during the tax year worth at least:
- PLN 10 million for goods and financial transactions;
- PLN 2 million for service and other transactions.
Besides TP documentation, a taxpayer must also submit transfer pricing information (TPR-C / TPR-P) and a management board statement that TP documentation was prepared and transfer prices comply with the arm's-length principle to the tax office.
TP deadlines
Taxpayers should remember the following transfer pricing deadlines (for TP obligations for 2021):
- TPR and the board statement must reach the office by the end of the ninth month after the tax year (the Polish Deal extends this to the end of the eleventh month);
- because of the TPR and statement deadlines, TP documentation (local file plus comparability analysis) must be prepared by the end of the ninth month after the tax year (the Polish Deal sets the end of the tenth month);
- the master file is prepared by the end of the twelfth month after the tax year.
For TP documentation for 2021, taxpayers whose tax year coincides with the calendar year should remember September as the final deadline for basic TP obligations. It is worth starting on the documentation and TPR earlier, however, because the process is laborious and lengthy.
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