Transfer Pricing in Poland

Transfer pricing (TP) refers to the establishment of internal prices for transactions (goods, services) within a company that differ from market prices. These internal prices are applied when goods are sold from one division of the company to another. Such transactions are typically conducted between related parties (associated enterprises) within the same holding company or corporate group.

Since these prices are often lower than market rates, transfer pricing can be used for tax optimization. Therefore, the primary objective of transfer pricing is to minimize taxes. Transfer pricing mechanisms can also be used to shift income within a corporate group across different countries, including those with lower tax rates. As a result, income may not be taxed where it was generated. Instead, profits are shifted to entities entitled to preferential tax treatment.

Related Entities in Transfer Pricing

Related entities in the context of transfer pricing are companies that have specific relationships with each other, which can affect the terms and prices at which they conduct transactions. Understanding related entities is a crucial aspect of TP, as it helps determine how prices for goods, services, or assets are established between these organizations.

Criteria for Determining Related Entities:

• Control: If one company controls another (e.g., by owning more than 50% of shares), they are considered related.
• Influence: Companies may be considered related if one has significant influence over the other. This can occur even with ownership of less than 50%, provided it is sufficient to impact decisions.
• Joint Ownership: Companies may be linked through joint ventures or other forms of collaboration.
• Family Ties: In some jurisdictions, familial relationships between owners or managing entities are also considered.

Examples of related entities include parent and subsidiary companies, branches, joint ventures, or companies with common shareholders.

Legislation on Transfer Pricing in Poland

The main tax regulations in the field of transfer pricing in Poland are contained in the following:

1. The Personal Income Tax Act (PIT): This act also includes provisions on transfer pricing concerning sole proprietors and individuals conducting business.
2. The Corporate Income Tax Act (CIT): This is the primary law governing corporate taxation in Poland. It contains provisions on transfer pricing, including the requirement to comply with the “arm’s length principle.” This means that the prices for transactions between related parties must correspond to market prices.
3. Regulations Issued by the Minister of Finance.
4. The Tax Code: General provisions of tax law also apply to transfer pricing matters, including reporting and documentation requirements.
5. International Agreements: Poland is a party to various international agreements and conventions, such as the OECD Convention on Base Erosion and Profit Shifting (BEPS). These agreements influence national legislation and practices in transfer pricing.
6. OECD Guidelines: Although not mandatory, they serve as a significant benchmark for Polish tax authorities and companies. They provide methods for assessing market prices and principles that should be followed in transactions between related parties.

Transfer Pricing

Transfer Pricing Documentation in Poland

In Poland, as in other countries, transfer pricing requires compliance with specific norms and documentation standards. A key aspect is the three-tier documentation framework introduced to ensure transparency and compliance with tax authorities’ requirements. This system is based on OECD recommendations and applies to both local and group-level transfer pricing.

Three Levels of Documentation:

1. Master File: Provides general information about the group of companies, including group structure, primary activities, financial data, transfer pricing policies, descriptions of business models, and details of functions, risks, and assets associated with various activities of the group.
2. Local File: Contains information specific to a particular company or jurisdiction. It includes descriptions of transactions between related parties, the methods used for transfer pricing, a comparative analysis of market prices, financial results of the company related to the transactions, and documentation supporting compliance with the arm’s length principle.
3. Country-by-Country Report (CbCR): Provides information on the distribution of income, profits, taxes, and economic activities by country. It includes consolidated financial data for the group, income distribution by country, information on income taxes paid in each country, the number of employees, and assets in different jurisdictions.

NOTE: The arm’s length principle is a tax law requirement to ensure that the terms of transactions between related parties comply with market conditions. It is a universal standard for evaluating the independent nature of transactions between related entities. This principle was developed by the Organisation for Economic Co-operation and Development (OECD) and is reflected in the OECD Model Tax Convention, which serves as a template for double taxation agreements, as well as in the OECD Transfer Pricing Guidelines.

All Three Levels of Documentation Ensure:

• Increased Transparency regarding the internal structure of the corporate group and its operations.
• Compliance with Legislation – having such documentation helps companies meet the requirements of tax authorities and minimize the risks of tax disputes.
• Simplified Interaction with Tax Authorities – well-structured documentation facilitates the review process by tax authorities.

Companies must approach the preparation of this documentation carefully to avoid potential issues with tax authorities.

Who Must Prepare Transfer Pricing Documentation:

Members of corporate groups or taxpayers conducting transactions with related entities must prepare transfer pricing documentation.

Additionally, it is necessary to compare transaction thresholds, exceeding which determines the obligation to prepare transfer pricing documentation, with the value of transactions concluded during the financial year. The current documentation thresholds are:

• 10,000,000 PLN – for goods transactions.
• 10,000,000 PLN – for financial transactions.
• 2,000,000 PLN – for service transactions.
• 2,000,000 PLN – for transactions other than those listed above.

This documentation, according to the applicable rules, is prepared at the end of the year, i.e., after the close of the entire financial year, and must be submitted no later than the end of the 10th month of the following year. It is filed electronically.

The documentation includes details about with whom the company traded, how the trade occurred, and under what conditions. It concludes with a justification that these conditions aligned with those that would have been expected if the same goods or services were acquired on the open market, rather than exclusively from a related party.

Taxpayers are required to provide detailed information on applied transfer prices by the end of the 11th month of the following year, one month later than the deadline for preparing the documentation.

Risk Analysis in Transfer Pricing

Taxpayers engaging in significant transactions with related entities are required to provide specific information on transfer pricing to tax authorities by submitting, where applicable:

• A simplified report on transactions with related parties and parties based in countries and territories practicing harmful tax competition (PIT/TP, CIT/TP).
• Information on transfer pricing (TPR-P, TPR-C).

The purpose of such reporting is to enable the tax administration to analyze risks in the field of transfer pricing, particularly to improve the efficiency of selecting taxpayers for audits.

“Safe Harbor” in Transfer Pricing

“Safe Harbor” in transfer pricing refers to a set of rules or conditions that provide companies with certain guarantees regarding the application of tax legislation and transfer pricing assessment methods. These rules allow companies to avoid tax disputes with tax authorities if they adhere to the established criteria.

The concept of “Safe Harbor” is an important tool in transfer pricing, enabling companies to minimize risks and simplify compliance with legislation. It helps create a more predictable and stable tax environment for multinational companies conducting transactions between related parties.

Tax Havens in Transfer Pricing

Tax havens in transfer pricing refer to jurisdictions or countries that offer favorable tax conditions for companies, enabling them to minimize their tax liabilities. These conditions may include low corporate tax rates, no tax on certain types of income, or special tax regimes that make such jurisdictions attractive for business placement.
Tax havens play a significant role in the transfer pricing strategy of many international companies. While they can provide substantial benefits in terms of reducing tax obligations, the use of such jurisdictions also involves risks and requires strict compliance with both local and international laws.

If you have any questions, please contact us at office@progressholding.pl