What is an MDR procedure and which entities must have it in place?

This article will answer the following questions:

• When is an entity obliged to establish an MDR procedure?
• What elements should an internal MDR procedure contain?
• What penalties are provided for in Polish law for failure to fulfil the obligation to establish an MDR procedure?

What is an MDR procedure?

An MDR procedure is an internal procedure for counteracting non-performance of the obligation to disclose information on tax arrangements.

As pointed out by the Ministry of Finance in its explanations about MDR, the purpose of adopting the regulations imposing the obligation to establish an MDR procedure on entities in Poland is:

• to create a necessary tool which will enable promoters to perform their obligations to provide information in a timely and appropriate manner,
• to facilitate the process of defining the scope of responsibility of individuals involved in activities which are necessary for the fulfilment of the obligation to disclose information on tax arrangements (such as the obligation to report or disclose an arrangement to the Head of the National Revenue Administration),
• to indicate the correct mode of the fulfilment of promoters' obligation to provide information to users.

Who must have an MDR procedure in place?

An internal MDR procedure must be established by the following legal entities and organisational units without legal personality: 

• which are promoters, employ promoters, or effectively pay them remuneration, 
• whose revenue or expenses displayed in accounting records (within the meaning of accounting regulations) exceeded the equivalent of PLN 8,000,000 in the year preceding the fiscal year.

It should be remembered that a promoter is not always a professional provider of tax or legal advisory services, but also a company giving advice to other companies belonging to the same group or making decisions concerning other entities in the group. As a result, entities which should establish an MDR procedure are often holding companies or parent companies. 

In addition, it is worth establishing an MDR procedure even when an entity is not obliged to have it in place, simply because it is very helpful and useful in organising all matters related to MDR. 

What are the mandatory elements of an internal MDR procedure?

An MDR procedure must define in particular: 

• activities performed to counteract non-performance of the obligation to disclose information on tax arrangements,
• measures adopted to properly fulfil the obligation to disclose information on tax arrangements,
• rules of storing documents and information,
• rules concerning the obligations to disclose information on tax arrangements to the Head of the National Revenue Administration,
• rules concerning the dissemination of MDR knowledge among employees,
• rules of reporting by the employees of factual or potential cases of breach of MDR provisions,
• rules of internal inspection or audit of compliance with MDR provisions and with the code of conduct defined in the internal procedure.

It should be remembered that the nature, kind, and size of the activity carried out by a particular taxpayer should be accounted for while establishing the above elements of the MDR procedure.

What are the penalties for failure to establish an MDR procedure?

In accordance with the provisions of the Tax Ordinance Act, entities which have failed to establish an MDR procedure despite having been obliged to do so are subject to a penalty payment. The penalty payment is imposed by the Head of the National Revenue Administration, by way of a decision, in the maximum amount of PLN 2,000,000.

Importantly, if an entity has failed to establish a procedure despite having been obliged to do so, and if a court rules, in a final and non-appealable judgment, that a promoter being a natural person employed by or effectively receiving remuneration from that entity has committed an act listed in Article 80f of the Polish Fiscal-Penal Code (liability of natural persons related to non-compliance with the duties regarding disclosing of information on tax arrangements), that entity may be subject to a penalty payment in the maximum amount of PLN 10,000,000.

Changes in reporting tax arrangements taking effect on 1 July 2024 

Following the implementation of Council Directive (EU) 2021/514 of 22 March 2021 amending Directive 2011/16/EU on administrative cooperation in the field of taxation (DAC7), the purpose of which is to refine and expand the applicable provisions within the scope of information exchange and administrative cooperation in tax matters, there have been changes in the provisions of the Tax Ordinance Act concerning MDR. 

The act implementing the DAC7 Directive introduces the following elements within the scope of tax arrangements: 

• the definition of a "controlling entity" (Article 86a(1)(6a) of the Tax Ordinance Act), which is understood as the beneficial owner within the meaning of Article 2(2)(1) of the Anti-Money Laundering and Countering the Financing of Terrorism Act of 1 March 2018,
• the obligation to inform individuals in writing, imposed on promoters and supporters, within the scope of disclosing information relating to these individuals on the collection, processing, and disclosure of information, and also the obligation to provide information on any breach of personal data if such information may involve high risk of violation of the rights or freedoms of these persons (Article 86da (1-2) of the Tax Ordinance Act).

It is worth noting that the new obligation to inform individuals may involve the necessity to update the internal MDR procedures in place in a given company, the purpose of which is to counteract the non-performance of the obligation to disclose information on tax arrangements. 

Audit of MDR procedures

The provisions of the Tax Ordinance Act concerning MDR procedures contain a list of issues which must be regulated by the said procedure. Among them are the rules of internal inspection or audit of compliance with MDR provisions and with the code of conduct defined in the internal procedure. 

It means that the organisations which have implemented an MDR procedure are obliged to verify whether or not the provisions of the implemented procedure are observed. 

If you have established an MDR procedure, please keep in mind that there is an obligation to perform an internal inspection or audit of the procedure under the rules set out in the MDR procedure, allowing to verify the effectiveness and applicability of the internal MDR procedure.

If, due to the changes in the Polish law effective from 1 July 2024, you need support in the update of the MDR procedure, or if you are looking for professionals who will be able to carry out a comprehensive audit of your MDR procedure, feel free to contact our experienced MDR experts.