Tax loss and reporting obligation

Kamila DOBOSZ
Tax Consultant at RSM Poland

When preparing 2018 tax documentation, most related entities opted for the 2019 tax regime in order to benefit from the exemption from the reporting obligation for domestic transactions. Pursuant to Article 11n of the CIT Act (Corporate Income Tax Act), related entities having their place of residence, registered office or management board on the territory of the Republic of Poland can be exempt from the obligation to prepare a local file in transfer pricing.

This exemption shall apply if none of the related entities involved in a given transaction:

• applies CIT exemptions referred to in Article 6 of the CIT Act,
• applies the exemption provided for in Article 17 par. 1 item 34 and 34a concerning among others entities operating within special economic zones, and
• has incurred a tax loss.

These conditions must be met jointly.

While the first two premises listed in the Act do not leave any room for different interpretations, the one about the tax loss is not all that clear. That is why I would like to discuss it in more detail and present the scope of current expert discussions. The topic of tax loss in the context of the reporting obligation has brought about many individual interpretations recently. And even though the line of interpretation seems quite consistent, we can find some single different opinions here and there that are unfavourable for the taxpayer.

Tax loss vs. revenue streams

Firstly, what is important is the issue of tax loss in the context of a division of revenue streams in CIT. As of 1 January 2018, the CIT Act has introduced capital gains as a separate revenue stream (Article 7b of the CIT Act). Thus, the legislator has defined two revenue streams: from capital gains and from other sources (operating revenue). As explained by the Ministry of Finance, the reason behind introducing two revenue streams is that revenue from these two sources is calculated separately and capital loss cannot be offset against revenue from other business activity.

Therefore, we may ask a question: how to interpret incurring a loss from a given revenue stream in the context of the option of being exempt from the reporting obligation for domestic entities?

Most individual interpretations issued so far indicate that the lack of the reporting requirement should be determined on the basis of the loss from the revenue stream including the transaction to be reported. This means that if a transaction involves a specific revenue stream, what must be examined is whether the taxpayer has incurred the loss only from this stream. At the same time, any loss from a different revenue stream does not play a role if the exemption from the reporting obligation for domestic entities is to be applied. This position was presented, among others, in the interpretation of 7 October 2019 file no. 0111-KDIB1-3.4010.341.2019.1.APO, or in the individual interpretation file no. DPP13.8221.81.2019.CPXJ, issued on 8 November 2019, amended by the Head of the National Revenue Administration. In line with the interpretation of the DNRI (Director of the National Revenue Information) of 3 January 2020, file no 0111-KDIB1-3.4010.481.2019.1.IZ, the possible exemption from the requirement of transfer pricing documentation shall be determined by way of checking if the transaction subject to this requirement is included in the revenue stream in which related entities incurred a loss.

It should be mentioned here that two interpretations indicating that a loss from any revenue stream results in the obligation to prepare a local file for transfer pricing by domestic entities have been removed from the RIS (Revenue Information System), namely the interpretation of 22 August 2019 file no 0111-KDIB1-2.4010.260.2019.1.MS and the interpretation of 13 August 2019 file no 0111-KDIB1-2.4010.187.2019.1.AK. In these interpretations, the DNRI stated that the legislator has failed to specify revenue streams in which the taxpayer cannot incur a loss if the exemption is to be applied effectively; what follows, it should be assumed that the taxpayer should not incur a loss in any of the revenue streams in the current year.

Exemption in the case of partnerships

When it comes to partnerships where partners, and not the company, are income tax payers, the regulations on the exemption from the reporting obligation shall be applied to partners of partnerships. Thus, if partners in a non-taxable partnership have not incurred a tax loss when it comes to revenue and costs as well as income and losses connected with this partnership, the exemption from the reporting obligation under Article 11n item 1 letters a-c of the CIT Act can be applied.

The DNRI presented this position in the following individual interpretations issued in July 2019 file no.:

• 0113-KDIPT2-3.4011.283.2019.3.PR;
• 0114-KDIP3-1.4011.286.2019.1.EC;
• 0114-KDIP2-2.4010.200.2019.2.AM;
• 0114-KDIP2-2.4010.203.2019.1.RK;
• 0114-KDIP2-2.4010.211.2019.2.AG;
• 0114-KDIP2-2.4010.202.2019.1.JG;
• 0114-KDIP2-2.4010.199.2019.2.SJ;
• and interpretation file no: 0111-KDIB1-3.4010.294.2019.2.IZ. of 15 October 2019.

In this case, the line of interpretation is consistent; however, it seems highly questionable in the way it technically links the “tax loss” with the fact that the revenue/costs of a given partnership that concluded transactions with other related entities are allocated to its partner.

Settlement of losses from previous years

The interpretation of 17 April 2019 file no. 0114-KDIP2-2.4010.73.2019.2.SJ addresses the aspect of deducting losses from previous years and its impact on the analysed exemption. According to the Director of the National Revenue Information, if all premises set forth in Article 11n item 1 of the CIT Act are met, and the taxpayer did not incur a tax loss at the end of the year but merely deducts losses from previous years when determining the final tax base, there is no obligation to prepare a local file for transfer pricing.

Summary

As you can see, an issue that is regulated in too general terms in the legislation causes a lot of doubts in practice. The good news, however, is that quite a lot of interpretations on the tax loss in the context of the reporting obligation have already been issued and that tax authorities, in general, take a position favourable for taxpayers. Is this tendency going to last? Time will tell …