Extraordinary transactions requiring transfer pricing documentation

This article will answer the following questions:

• Which extraordinary transactions or events must be covered by transfer pricing documentation?
• Do unpaid transactions require transfer pricing documentation?

Transactions between related entities, after exceeding the set thresholds, require preparation of transfer pricing documentation ("TPD"). It is worth noting, however, that the obligation to prepare TPD and file a TPR-C form does not apply solely to transactions between related entities (more information about related entities in the transfer pricing context can be found here). There can be situations in which the obligation to prepare TPD applies also to transactions with independent entities or to economic events which are not "transactions" in the strict sense of the word. 

In this article, we will take a closer look at a few non-obvious situations which, although it may not seem so at the first glance, require transfer pricing documentation.

Tax haven transactions

Tax haven transactions are carried out with entities based in tax havens, including with wholly independent entities. The list of tax havens (in Polish) can be found here.

It is worth emphasising that in 2021, new thresholds for preparing TPD were introduced with regard to transactions with entities from tax havens. The said thresholds are PLN 2.5 million for financial transactions and PLN 0.5 million for transactions other than financial. 

These thresholds apply to both transactions with independent entities and to transactions with related entities simultaneously being "tax haven" entities – instead of the standard thresholds of PLN 10 million (financial and commercial transactions) and PLN 2 million (services and other transactions).

Transactions with independent entities where the conditions have been agreed upon or imposed due to affiliations

A less obvious example of transactions which may require TPD are such whose conditions have been agreed upon or imposed due to affiliations. 

Imagine a situation in which a taxpayer purchases goods from an unrelated supplier, and the conditions of the transactions and the price for the goods have been negotiated with the unrelated supplier by the related parent entity. In such a case, the transaction is made between unrelated entities (the taxpayer and the supplier), but its conditions, including the price for the goods, have been "imposed" on the taxpayer by the parent company. 

If the transaction exceeds the threshold, it is necessary to prepare transfer pricing documentation for the said transaction. 

Transactions with a permanent establishment and transfer pricing documentation

Conducting business activity through a permanent establishment may give rise to transfer pricing obligations due to allocating the profit (loss) to the permanent establishment. The legislation makes no distinction of the term "permanent establishment" between a permanent establishment of a foreign entity and a permanent establishment of a Polish entity. 

If the value of the revenues or expenses allocated to the establishment exceeds PLN 2 million, the obligation to prepare TPD arises. 

It is worth noting that the type of revenues and expenses incurred by the establishment is irrelevant. For the purposes of checking whether the obligation to prepare TPD arises, it is necessary to break down all the expenses allocated to the permanent establishment, without regard to their uniformity. Such a position is substantiated e.g. in the Individual Ruling of 26 February 2021, file no. 0111-KDIB2-1.4010.496.2020.1.AR.

Salaries of key decision makers

Another not glaringly obvious transaction which might require TPD is e.g. payment of compensation for management board members. It is a controlled transaction, as management board members have the actual power to make key economic decisions by the legal entities in the management board they sit. 

Such a transaction should be classified as "other", and the PLN 2 million threshold should be applied to it. 

The obligation to prepare TPD for such transactions is warranted e.g. by the Individual Ruling  from October 2022, file no. 0114-KDIP2-2.4010.17.2022.3.RK. It should be noted, however, that transactions should be grouped according to their uniformity, i.e. the threshold of PLN 2 million should be applied to the aggregated compensation for all the management board members. 

Gratuitous benefits – Is it necessary to report them and prepare TPD for them?

When identifying TPD obligations, one should take into account controlled transactions for which no compensation is payable. Such transactions may be easily missed, as they might not be visible in the accounting and business management software. 

Unpaid transactions may consist of e.g. guarantees or suretyships given to a related party to secure repayment of other liabilities. 

The fact that there is no fee due to a guarantor or surety assigned to such group transactions does not translate to a lack of requirement to carry out an analysis of such transactions and to prepare TPD.

Events regulated in the Code of Commercial Companies and transfer pricing documentation

In accordance with the General Ruling of the Ministry of Finance no. DCT1.8203.4.2020 of 29 December 2021, such events as payments of dividends or additional capital contributions, as regulated in the Polish Code of Commercial Companies, do not constitute economic events, and as a consequence, TPD is not required for them.

However, the same is not true for increasing the company's share capital. Such operations require TPD when the threshold of PLN 2 million is exceeded. 

Furthermore, the key date for determining the period for which TPD is to be prepared is the date when the capital was raised (covered) by shareholders, and not the date on which a resolution of the general meeting was adopted or an entry into the National Court Register was made. It might be relevant if such a transaction is carried out at the turn of the year. Such a position was substantiated in e.g. the Individual Ruling of 18 November 2021, file no. 0111-KDIB2-1.4010.351.2021.2.AR. 

One should also take into account such events as mergers or demergers of companies. They are not events which are clearly associated with transfer pricing, but in practice, they often need to be analysed and covered by TPD (and as soon as their "value" exceeds the threshold of PLN 2 million).

Extraordinary transactions and transfer pricing documentation – summary

As you can see, the list of non-obvious transactions which may require analysis and TPD presented in this article is extensive, but it is not exhaustive. 

As such, verification of the obligation to prepare transfer pricing documentation is not an easy task. One should approach it in a thorough manner and verify not only "standard" transactions with related entities, such as purchase of goods or provision of services, but also analyse other operations and transactions carried out with both related and independent entities. 

Transfer pricing and related documentation – Feel free to contact RSM Poland's experts

If you are interested in transfer pricing analysis or local transfer pricing documentation, and if you need assistance in verifying transfer prices in line with legal regulations and principles of due diligence, or if you wish to keep up to date with all relevant changes so as not to face penalties imposed by tax authorities, feel free to contact our experts. 

Our tax advisory services include, but are not limited to, assistance in adopting the transfer pricing policy and preparation of tax documentation, including local file and master file. We also carry out benchmarking studies and compliance analyses. We are available to discuss any problematic issues concerning transfer pricing as well as any compliance matters.