Taxing authority and tax law

• Corporate Income Tax Act dated 15 February 1992 (CIT Act), Articles 9a, 11 and 19 §4 (Journal of Laws No. 21, item 86)
• Personal Income Tax Act dated 26 July 1991 (PIT Act) Articles 25, 25a and 30d (Journal of Laws No. 80, item 350)
• Tax Ordinance Act dated 29 August 1997, Articles 20a-20r (Journal of Laws No. 137, item 926)
• Ministry of Finance Decree of 16 May 2005, on the countries and territories applying harmful tax competition rules (Journal of Laws No. 94, item 791)
• Ministry of Finance Decree of 10 September 2009, on the method and procedure for assessing taxpayers’ income by estimating the prices in transactions conducted by these taxpayers, and on the method and procedure for eliminating double taxation of taxpayers in case of related-parties’ income adjustment ( Journal of Laws No. 160, item 1268)

Relevant regulations and rulings

Article 11 of CIT Act and Article 25 of PIT Act introduce the arm’s length principle, providing a definition of affiliation and criteria for the determination of the size of direct and indirect shares held in another entity. Documentation requirements can be found in Article 9a of the CIT Act and Article 25a of the PIT Act. Transfer pricing penalties are defined in Article 19 §4 of the CIT Act and Article 30d of the PIT Act.

Article 9a of the CIT Act and Article 25a of the PIT Act provide detailed information on transactions which are subject to documentation requirements, including value limits and categories of such transactions.

According to Articles 9a of the CIT Act and 25a of the PIT Act, the documentation requirements also encompass transactions in which payment is made directly or indirectly to an entity in a territory or country considered to be a tax haven. The list of these territories and countries is presented in the Ministry of Finance Decree of 16 May 2005, on the countries and territories applying harmful tax competition rules. The Decree was issued separately for personal and corporate taxation purposes.

As of 1 January 2007, documentation requirements apply also to permanent establishments (based in Poland) of foreign companies.

The pricing methods recognized by the tax authorities are described in the Ministry of Finance Decree of 10 September 2009. This Decree replaces the one dated October 1997 where the major changes concern redefinition of selected TP methods (more precise description) and introduction of the corresponding adjustment procedure (based on the OECD guidelines, Arbitration Convention and Code of Conduct for Arbitration Convention and the revised Polish corporate income tax act, i.e., as of 1 January 2009). Provisions of the Decree apply also to Polish permanent establishments of the foreign companies and foreign permanent establishments of the Polish taxpayers.

The APA regulations are specified in Articles 20a-20r of the Tax Ordinance Act. Introduction of APAs has brought with it special reporting requirements. According to the Ministry of Finance Decree of 31 May 2006, taxpayers who have agreed to an APA must submit together with their annual CIT return a progress report on the implementation of the method stipulated in the APA decision. APA may also be concluded by permanent establishments of foreign companies in Poland as well as permanent establishments of Polish taxpayers, based abroad.

OECD guidelines treatment

The Polish transfer pricing regulations do not refer to the OECD guidelines directly. Reference to the OECD guidelines is made with respect to the topic of tax havens. According to Article 9a §6 of the CIT Act (Article 25a §6 of the PIT Act), the list of countries recognized as tax havens is issued with regard to settlements made by the OECD. At the same time, the transfer pricing methods presented in the Polish rules are based on the OECD approach. There are no specific rules regarding the business restructuring issues in the Polish transfer pricing law. The OECD business restructuring report should, however, be an indication for the tax authorities when verifying the restructuring cases in Poland.

Priorities/pricing methods

Generally, the transfer pricing methods accepted by the tax authorities are based on the OECD guidelines. These methods are: CUP, Resale Price, Cost Plus, Profit Split and TNMM. The traditional methods are preferred. When the transfer price is determined by the tax authorities, the application of CUP method is verified in the first instance.

If a taxpayer has determined the arm’s length value of a transaction by applying one of the three accepted traditional methods (CUP, Resale Price and Profit Split), and there is no doubt about the objectivity in choosing the method, the method is also binding on the tax authorities.

Transfer pricing penalties

Taxpayers face a 50% penalty tax rate for income assessed by the tax authorities (instead of the standard tax rates).

Penalty relief

The penalty rate can be reduced to the normal tax rate only if the taxpayer provides the required documentation in due time as specified by the tax authorities (7 days on request).

Documentation requirements

Taxpayers carrying out transactions with related-parties and permanent establishments of foreign companies functioning in Poland, as defined in the Polish CIT and PIT Acts, are obliged to prepare tax documentation. Requirements for such transactions apply where the total transaction amount in a tax year exceeds the following limits:

• EUR 100,000 if the transaction value does not exceed 20% of the share capital
• EUR 30,000 if the transaction refers to services or intangibles
• EUR 50,000 for other types of transaction between related entities

Taxpayers carrying out transactions in which payments are made directly or indirectly to an entity in a territory or country recognized as a tax haven are obliged to prepare tax documentation for such transactions when the total transaction amounts in a tax year exceed EUR 20,000.

As there is no required specific form for transfer pricing documentation, the CIT and PIT regulations instead determine the extent of the documentation. The statutory transfer pricing documentation should cover at least the following elements:

• Functions performed by the parties to the transaction (with the consideration of assets employed and risks borne)
• Expected transactional costs and the method and payment due dates
• Method and manner of calculating profits and the transaction value
• Business strategy, if it influenced the transaction value
• Other factors influencing the transaction value
• Expected benefits from intangible performances or services -this element applies only to the purchase of intangibles or services

These elements are mandatory, so if the documentation prepared does not meet one of these requirements, such documentation may be disregarded by the tax authorities.

In addition, the statutory Polish transfer pricing documentation should be prepared and if requested, provided to the tax authorities in Polish.

Documentation deadlines

There is no deadline for preparing the transfer pricing documentation; however, taxpayers are obliged to submit the documentation within seven days of the tax authorities’ request.

Statute of limitations on transfer pricing assessments

There are no special time limit provisions applicable to intercompany transactions. The general regime of the statute of limitations applies in accordance with the Tax Ordinance Act. According to Article 70, §1 of the Tax Ordinance Act, the assessment period for tax is five years from assessment to the end of the calendar year in which the tax fell due.

Return disclosures/related-party disclosures

Information about related-party transactions is one of the elements of the annual income tax return. The taxpayer is required to indicate in the return whether it was obliged to prepare transfer pricing documentation or not.

Taxpayers who have concluded APAs must enclose, with their annual tax returns, a special report on the implementation of the transaction method chosen. The form of this report is given in the Ministry of Finance Decree of 31 May 2006.

Polish regulations recognize related entities in the following situations:

• The domestic entity participates directly or indirectly in managing or controlling the foreign entity or has a share in its capital
• The foreign entity participates directly or indirectly in managing or controlling a domestic entity or has a share in its capital
• The same legal and natural persons participate directly or indirectly at the same time in managing or controlling a domestic entity and foreign entity or have shares in their capital
• The domestic entity participates directly or indirectly in the managing or controlling of another domestic entity or has a share in its capital
• The same legal and natural persons participate at the same time directly or indirectly in managing or controlling domestic entities or have shares in their capital

Capital relations exist if one of the entities or contracting parties holds in the capital of the other entity, directly or indirectly, at least a 5% share. Domestic entities are also considered related for tax purposes by virtue of family, property or employment relations between them or between their management, supervision or control personnel, or if the same person carries out management, supervision or control functions in both these entities.

If the parties to a transaction, due to their relationship, agree or impose terms and conditions which differ from those that would be agreed to by unrelated parties, and as a result of these terms and conditions a domestic entity does not report income from the transaction or reports income that is lower than would be expected if the connection did not exist, the tax authorities may assess additional income and determine the tax due on such income for the domestic entity.

The above rules also apply to the allocation of taxable profit to the permanent establishment of a foreign entity in Poland and to Polish taxpayers carrying out transactions with their permanent establishments abroad.

Domestic entities transacting with foreign related-parties are allowed to adjust their income if the foreign tax authorities question the transactional prices as not meeting the arm’s length principle and, consequently, additional income for the foreign entity is assessed and the tax due on such income is determined (the so-called “corresponding adjustment”). Prerequisites of making the adjustment must however be justified and accepted by the tax authorities.

Adjustments to the domestic entities’ income will be allowed as long as the agreement on the avoidance of double taxation between Poland and the country (i.e., country of the domestic entity’s related-party) will provide for the opportunity to do so. An application regarding such adjustments should be filed within three years since receiving the decision on assessing the additional income of the contracting party.

In addition, regulations relating to income adjustment apply also to permanent establishment.

Analogous elimination of double taxation is not allowed by Polish regulations in case of domestic related transactions.

Audit risk/transfer pricing scrutiny

The number of transfer pricing audits has steadily increased and the risk is growing. The risk of scrutiny and a very detailed approach of the tax authorities during transfer pricing audit and consequently a tax assessment are high. While the acceptance of OECD guidelines and international practices has increased, the local approach tends to prevail during audits. Local benchmarks are preferred over pan-European ones. The pricing information from cross-controls in the industry is used for benchmarking. Internal third-party transactions are used as a comparison for application of the CUP method, which is preferred by the tax authorities. Moreover, the tax authorities have increased cooperation in the exchange of information with other countries.

The compliance regime is still rigorous in Poland. The court rulings focus mainly on legal rather than economic issues. The most frequently audited types of transactions are limited risk structures such as limited risk distributors or contract manufacturers, immaterial services (including cost-sharing arrangements) and loans.

APA opportunity

The APA regulations came into force on 1 January 2006. The APA procedures are described in Articles 20a-20r of the Tax Ordinance Act.

An APA concluded for a particular transaction is binding on the tax authorities with regard to the method selected by the taxpayer. APAs in Poland may apply to transactions that have not yet been executed or transactions that are in progress at the time the taxpayer submits an application for an APA. Under the Polish rules, three types of APAs are available:

• Unilateral Agreement: This type of APA is defined in the Tax Ordinance Act as an agreement on the method of setting transfer prices between:
  • Two domestic entities — those without foreign capital links
  • A domestic entity and its related foreign party
  • A domestic entity related to a foreign entity and another domestic entity related to the same foreign entity
• Bilateral Agreement: This is an agreement concerning cross-border transactions which can be given by the Polish Ministry of Finance upon the request of a domestic entity, but only after consultations and upon obtaining consent issued by the tax authorities of the related foreign entity
• Multilateral Agreement: If the agreement concerns a transaction concluded by a domestic entity with foreign entities from more than one country, in order to conclude such an agreement, the consents of all foreign entities’ tax authorities are required

There are no transaction value limits to be covered by the APAs. In order to submit an application for an APA, the taxpayer must pay a fee which is usually 1% of the transaction value. However, the Tax Ordinance Act sets the following fee limits:

• Unilateral APA — fee cannot be lower than PLN5,000 and cannot exceed PLN50,000
• Unilateral APA concerning a foreign entity — fee cannot be lower than PLN20,000 and cannot exceed PLN100,000
• Bilateral or multilateral APA — fee cannot be lower than PLN50,000 and cannot exceed PLN200,000

The mandatory elements of an APA application are:

• The suggested method for determining prices and an indication of the pricing method recognized by the tax authorities
• A description of the manner of application of the suggested method, with an indication of the principles for price calculation, forecasts and analyses on which the calculation is based
• A description of the circumstances which may affect the prices
• The documents which may determine the transaction price (agreements, arrangements and other documents indicating the intentions of the parties to the transaction)

The suggested length of the APA arrangement:

• A list of entities with whom the transaction will be concluded, including their agreement to submit to the tax authorities all documents and provide necessary explanations with regard to the relevant transaction
• The application must be submitted in the Polish language

The Tax Ordinance Act precisely defines the terms under which the APA procedure is to be completed:

• The unilateral APA must be issued without unnecessary delay within six months of the start of the APA application procedure
• The bilateral APA must be issued without unnecessary delay within 12 months of the start of the APA application procedure
• The multilateral APA must be issued without unnecessary delay within 18 months of the start of the APA application procedure

The APA is issued by the Ministry of Finance in the form of an administrative decision and the general administrative procedure resulting from the Tax Ordinance Act applies to the APA. In consequence, the above time limits for the APA procedure may be extended if necessary.

The period for which the APA may be concluded must be no longer than five years. The APA may be extended for another five years if the criteria applied in concluding the APA have not changed or the entity applies for an extension of the APA not later than six months before it expires. The decision is valid from the date of its delivery to all parties (including the Polish and foreign — if applicable — tax authorities).

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