Transfer pricing in advance tax rulings

Kamila DOBOSZ
Tax Consultant at RSM Poland

Today, we will once again discuss the most interesting advance tax rulings in individual cases that have been published recently. We hope it will give you some insight into transfer pricing and make it easier for you to prepare your 2019 tax documents. The advance tax rulings that will be analysed here apply to the legislation in force as of 1 January 2019. We will briefly discuss tax rulings on: partnerships, exemptions from the documentation obligation as regards a loss from a revenue stream including the controlled transaction, and the documentation obligation for a cash contribution.

Exemption from transfer pricing documentation for partnerships

The subject of the advance tax ruling of 25 May 2020 ref. no. 0111-KDIB1-1.4010.136.2020.1.SG and 0111-KDIB1-1.4010.137.2020.1.SG is to examine the exemption from transfer pricing documentation obligation for partnerships.

The request for an advance tax ruling presented the following facts: the group of related entities includes a Limited Liability Company as the Applicant and the F. Limited Liability Company, as well as 2 limited partnerships, namely SPK1 and SPK2. The Limited Liability Company performs the role of a limited partner, whereas the F. Limited Liability Company performs the role of a general partner in limited partnerships. Thus, each limited partnership (SPK1 and SPK2) has two partners: the Applicant, i.e. the limited partner, and the general partner. The Applicant has shown that SPK1 and SPK2, in which he is a partner, conclude controlled transactions with related entities being legal entities.

The Applicant wonders which of the following entities: limited partnerships (SPK1 and SPK2) or partners of limited partnerships should be assessed when it comes to meeting the conditions for exemption from the transfer pricing documentation obligation referred to in Article 11n item 1 of the CIT Act. According to the Applicant, the exemption from the transfer pricing documentation obligation should be assessed in respect of individual partners of partnerships, namely the limited partner and the general partner.

The tax authority stated that compliance with conditions for exemption from the documentation obligation should not be verified at the level of a partnership participating in the transaction, but its partners being income tax payers. In line with the objective set by the legislator, i.e. to reduce the documentation burden for domestic entities taxing their income in Poland, partners, and not a partnership (which does not have the status of income tax payer) shall be income tax payers. The reason behind this is that the revenues and costs generated by a partnership are included in their tax base.

This has been confirmed in earlier tax rulings:

• advance tax ruling of 15 October 2019 ref. no. 111-KDIB1-3.4010.294.2019.2.IZ,
• advance tax ruling of 3 July 2019 ref. no. 0114-KDIP2-2.4010.200.2019.2.AM and ref. no. 114-KDIP2-2.4010.202.2019.1.JG,
• advance tax ruling of 1 July 2019 ref. no. 0114-KDIP2-2.4010.199.2019.2.SJ.

Exemption from the documentation obligation vs. the lack of loss from the revenue stream that includes the controlled transaction

Advance tax ruling of the Director of the National Revenue Administration Information Centre (DKIS) of 19 May 2020 ref. no. 0111-KDIB2-1.4010.68.2020.1.BKD on the obligation to prepare tax records by companies belonging to a tax capital group, and potential exemption from this obligation. A Joint Stock Company and its subsidiaries form a tax capital group (in Polish: PGK), where the Joint Stock Company, being the parent company in the capital group, represents PGK with respect to the obligations under the CIT Act and Tax Ordinance. In 2019, the Joint Stock Company concluded transactions with its related entities, i.e. companies X and Y. On 31 December 2019 (the last day of the fiscal year), companies X and Y were merged through the acquisition of company Y (the target company) by company X (the acquirer). Due to the fact that the books were not closed, any costs of the target company from 1 January 2019 until the acquisition date were recognised in the CIT-8 return submitted by the acquirer. In this respect, company X should recognise income from other revenue streams. And since companies X and Y did not generate any costs or revenues when it comes to income from capital gains, any transactions concluded with the Joint Stock Company shall be included in other revenue streams. Transactions concluded with companies X and Y in 2019 were included in other revenue streams by the Joint Stock Company.

Therefore, a question has emerged whether transactions concluded by the Joint Stock Company with companies X and Y can be exempt from the obligation to prepare a local file for transfer pricing pursuant to Article 11n item 1 of the CIT Act? It should be added here that both the Joint Stock Company and its subsidiaries (X and Y) had their registered offices on the territory of the Republic of Poland in 2019 and did not benefit from the exemption referred to in Article 6 of the CIT Act nor the exemption referred to in Article 17 par. 1 item 34 and 34a of the CIT Act. The position of the Joint Stock Company as the Applicant is that the transactions concluded with companies X and Y in 2019 may be exempt from the obligation to prepare a local file for transfer pricing referred to in Article 11n item 1 letter c of the CIT Act.

The DKIS agreed with the Applicant, because a precondition for exemption from the obligatory transfer pricing documentation is that none of the related entities involved in a controlled transaction has incurred a loss from the revenue stream that includes this transaction. The basis for determining whether an exemption from obligatory transfer pricing documentation applies shall be a loss from the revenue stream that includes the transaction subject to this obligation. If the transaction pertains to a specific revenue stream, it should be examined whether the taxpayer incurred a loss from this stream only. In this case, it is irrelevant if there was a loss from any other revenue stream or not. Similar interpretations can be found in the following advance tax rulings:

• 23 April 2020 ref. no. 0111-KDIB1-3.4010.101.2020.1.IM,
• 7 October 2019 ref. no. 0111-KDIB1-3.4010.341.2019.1.APO, as well as the
• ruling of 9 January 2020 ref. no. I SA/Wr 861/19.

Cash contribution vs. documentation obligation

In line with the advance tax ruling of the DKIS of 15 May 2020 ref. no. 0111-KDIB1-2.4010.81.2020.2.MS, an increase of the share capital through making a cash contribution to a limited liability company shall be subject to a documentation obligation pursuant to Article 11k par. 1 of the CIT Act. In the discussed advance tax ruling, the Applicant was a limited liability company, which was subject to an unlimited tax liability as a legal entity in Poland. The company was seated in Poland, and its 100% shareholder was an entity based in Slovakia. Due to a direct shareholding of more than 25% of its capital, the shareholder of this limited liability company had a material influence on the Applicant. Therefore, the parties to the transaction are related entities pursuant to Article 11a par. 1 item 4 letter a) in connection with Article 11a par. 2 item 1 letter a) of the CIT Act. The company being the shareholder of the Applicant planned to increase its capital in February 2020 through a cash contribution in the amount of EUR 5 million. The said contribution was supposed to be partly allocated to the Applicant’s share capital and partly to its supplementary capital (agio). As yet, the parties have not decided on the percentage division of the contribution into individual capitals of the Applicant.

In view of the above, the Applicant asked if he is obliged to prepare a local file for transfer pricing referred to in Article 11k par. 1 of the CIT Act. In his opinion, after conversion into PLN, the cash contribution in the amount of EUR 5 million will exceed the threshold referred to in Article 11k par. 2 item 4 of the CIT Act, i.e. the threshold of PLN 2 million for a transaction other than those specified in items 1-3. In the present case, the exemption referred to in Article 11n item 3 of the CIT Act will not apply, because the said transaction shall be classified as a “capital transaction” referred to in the said provision. Therefore, the Applicant is of the opinion that he will have to prepare a local file for transfer pricing. This DKIS agreed with the Applicant’s position.

Summary

The line of interpretation for the discussed regulations in force since 2019 seems to be coherent and transparent, in particular as regards the exemption from the documentation obligation and the lack of tax loss. In early tax rulings on this subject, the tax authorities argued that the exemption from the documentation obligation does not apply if the tax loss was incurred in the revenue stream other than the one which included the controlled transaction. At present, a majority of advance tax rulings offer the view that the tax loss shall pertain to the revenue stream that includes the transaction in question. This is obviously a positive trend and we are of the opinion that it is reasonable to examine only the revenue stream that includes the controlled transaction. However, it may be problematic to allocate the transaction to an appropriate revenue or cost stream, in particular in the case of comprehensive or intangible services.

At this point, I would like to draw your attention to the fact that transactions subject to the exemption referred to in Article 11n item 1 of the CIT Act should be indicated in the TP-R form. For transactions exempt from the documentation obligation, the information on transfer pricing you have to submit is clearly much less complex than in the case of transactions subject to the documentation obligation.