Indirect tax haven transactions – first thoughts of the tax authorities

In the article you will learn:

Magdalena MICHAŁOWSKA
Junior Tax Consultant w RSM Poland

The Ministry of Finance, the Transfer Pricing Forum and the Director of the National Revenue Administration Information Centre in many documents try to interpret the provisions on transactions with the so-called tax havens. Unfortunately, the explanations we receive are not always what the taxpayers want. In the individual ruling of 11 January 2022, the Director of the National Revenue Administration Information Centre presented a position unfavourable for taxpayers regarding the so-called tax haven transactions. How can this affect entities carrying out indirect tax haven transactions?

What are the latest changes in the rules on direct and indirect tax haven transactions?

Changes in the scope of transactions with the so-called tax havens, which have been in force since 2021, introduced, among others, the obligation to verify transactions in terms of their compliance with the arm’s length principle, in which the beneficial owner has a place of residence, seat, or management in a tax haven.

For the so-called direct tax haven transactions – that is, transactions carried out with entities with their place of residence, seat, or management in a tax haven – the documentation threshold is PLN 100 thousand. Remember – in this case the documentation obligation covers both purchase and sales transactions.

However, for the so-called indirect tax haven transactions, that is, transactions carried out with unrelated entities and, if the actual owner has a place of residence, seat, or management in a tax haven, and if the contractor makes settlements with a tax haven entity, the documentation threshold is PLN 500 thousand. Additionally, for indirect tax haven transactions, the documentation obligation covers only purchase transactions.

Indirect haven transactions from the perspective of the Tax Capital Group

A parent company, which established a Tax Capital Group (hereinafter referred to as „TCG”) with other companies, applied to the Director of the National Revenue Administration Information Centre for an individual ruling.

The company concludes with related entities – both being and not being members of the TCG (hereinafter “Subsidiaries”) – controlled transactions, the value of which exceeds PLN 500 thousand. These subsidiaries may enter into further transactions – and thus make settlements – with entities seated or with management in a territory applying harmful tax competition.

Doubts about transactions with tax havens

The doubt of the company applying for the ruling was raised by the point whether in the case of concluding a controlled transaction with a subsidiary, which is or is not a TCG member, exceeding the value of PLN 500 thousand in the tax year, in a situation when this company makes settlements with a tax haven entity, the Applicant will be entitled to take advantage of the exemption from the obligation to prepare transfer pricing documentation, pursuant to Art. 11n(4) of the CIT Act and Art. 11n(1) of the CIT Act (exemption for domestic transactions carried out by entities that did not suffer a tax loss), assuming that the statutory conditions resulting from the indicated regulation are met.

What was the position of the Director of the National Revenue Administration Information Centre on indirect domestic transactions?

The Director of the National Revenue Administration Information Centre noted that by introducing changes to the tax haven regulations, the Legislator’s intention was to extend the existing documentation obligations also to transactions as a result of which the domestic entrepreneur receives a payment from an entity “located” in a tax haven.

In the case of a controlled transaction concluded by a Company that is a member of TCG with another company belonging to the same TCG (when this company makes settlements with a tax haven entity), it should be stated that in such a case the documentation obligation referred to in Art. 11o (1a, 1b) of the CIT Act does not arise. Thus, it is also not possible to apply the exemption under Art. 11n (4) of the CIT Act.

On the other hand, with regard to a controlled transaction (exceeding PLN 500 thousand in the tax year) concluded by a Company that is a member of the TCG with a company not belonging to that TCG (when this company makes settlements with a tax haven entity), the Applicant will not be entitled to apply the exemption specified in Art. 11n (1) of the CIT Act, in the event of a possible obligation to prepare local transfer pricing documentation resulting from Art. 11o (1a, 1b) of the CIT Act.

The Director of the National Revenue Administration Information Centre explained that such understanding by the legislator of the mutual relationship between Art. 11n and 11o of the CIT Act is also confirmed by a change introduced in the Act of 1 January 2022, under the so-called Polish Deal, of the introduction to the enumeration in Art. 11n. Currently it reads: The obligation to prepare the local transfer pricing documentation referred to in Art. 11k (1) does not apply to controlled transactions.

What does the position of the Director of the National Revenue Administration Information Centre mean for taxpayers?

On the one hand, the authorities are trying to ease the provisions on tax haven transactions – it happens, for example, through:

• issuing a general ruling, ref. DCT2.8203.2.2021, pursuant to which the provisions of Art. 11o (1a and 1b) of the CIT Act, as a rule, relate only to cost transactions;
• issuing a reply to a parliamentary question No.19562 – and indicating in it that the documentation limit of PLN 500 thousand is determined on the basis of homogeneous transactions, concluded with one contractor;
• issuing a reply to the parliamentary question No. 23727 – stating that there is no obligation to prepare group documentation if the obligation to prepare local transfer pricing documentation results only from concluding a transaction with an unrelated entity residing the so-called tax haven;
• abolition of the obligation to prepare transfer pricing analyses in the case of the so-called tax haven transactions with unrelated entities (change introduced as part of the so-called Polish Deal);
• issuing a draft of tax explanations No. 5 on transfer pricing confirming the above guidelines: Obligation to prepare local transfer pricing documentation for the so-called indirect tax haven transactions referred to in Art.11o (1a and 1b) of the CIT Act and Art. 23za (1a and 1b) of the PIT Act.

On the other hand, the discussed ruling points to a completely opposite direction – extending the existing documentation obligations. The complexity of these provisions makes it very important to properly verify contractors and their ultimate beneficial owners. Therefore, if you have any questions or need to discuss the topic, we strongly encourage you to contact our expert, Tomasz BEGER.