Polish transfer pricing legislation generally follows the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines) and applies where a domestic entity is related to a foreign entity or two domestic entities are related. If intercompany transactions are not arm's length, the Polish tax authorities are entitled to assess the taxable income.
The arm's length principle and the transfer pricing documentation obligations are included in the Polish Corporate Income Tax Act. Detailed provisions on the methodology for applying the arm's length principle and the content of the transfer pricing documentation are included in the regulations issued by the Minister of Finance. These regulations help to implement the principles described in the OECD Guidelines in Poland. The OECD Guidelines do not constitute a part of the Polish legal system; however, in some cases Polish courts will refer directly to the OECD Guidelines.
Consequently, the Polish transfer pricing regulations consist primarily of provisions of the relevant statute, supplemented by regulations and official explanations of the Ministry of Finance. Taxpayers may also apply, in individual cases, for private tax rulings to confirm an interpretation of binding law.
Moreover, an advance pricing agreement (APA) procedure is available in Poland. See 7 Advance Pricing Agreements for further detail.
Polish transfer pricing regulations have undergone frequent and far-reaching changes in recent years. Although the arm's length principle has been the guiding principle for many years, the provisions related to transfer pricing documentation have changed significantly in recent years.
Beginning in 2017, the Polish requirements as to the scope of the obligatory transfer pricing documentation have more closely followed the OECD developments. This was the year in which the obligation to prepare a benchmarking analysis was introduced, which means that – effectively – the burden of proving that a transaction has taken place at arm's length has been transferred to the taxpayer. Moreover, 2017 was the year in which the local file/master file format for the documentation was introduced.
An additional amendment to the regulations came into force on 1 January 2019. After this amendment, the Polish regulations related to documentation closely followed the OECD Guidelines. Moreover, these changes have reduced the compliance burdens for some taxpayers by raising the transfer pricing documentation thresholds for master file and local file submissions and introducing safe harbours.
The criteria for determining the obligation to prepare local transfer pricing documentation has also changed: a taxpayer's turnover is no longer relevant in determining the obligation to prepare the documentation. The obligation to prepare the local file is now based on the value of the transaction and the transaction value thresholds were defined for different types of transactions, as described in 8.1 Transfer Pricing Penalties and Defences.
Although preparation of transfer pricing documentation is more time-consuming under the new regulations (eg, a benchmarking study is now required in all local files), the number of transactions that are subject to documentation requirements has decreased.
The Polish transfer pricing rules apply when one entity has a significant impact on the other entity. Significant impact means the following.
Related entities also include partnerships and their partners.
Moreover, if there are relationships between entities that are not established or maintained for justified economic reasons, including those aimed at manipulating the ownership structure or creating circular ownership structures, the entities between which such relationships occur are considered as related entities.
Five transfer pricing methods described in the OECD Guidelines were adopted in the Polish Corporate Income Tax Act and described in more detail in the regulations issued by the Ministry of Finance. These methods include:
In addition, in some cases, other valuation methods/techniques may be applied.
The Polish provisions explicitly provide for an exception to the application of the five transfer pricing methods described in the OECD Guidelines and listed in the Polish Corporate Income Tax Act (which are listed in 3.1 Transfer Pricing Methods). According to the exception, where it is not possible to apply the listed methods, another method, including valuation techniques, that is most appropriate under the circumstances shall be used.
The regulations indicate that in selecting the method that is most appropriate under the circumstances, particular consideration should be given to:
In the Polish transfer pricing regulation, there is a certain hierarchy of methods. First, the application of one of the five methods listed in the Corporate Income Tax Act must be considered (see 3.1 Transfer Pricing Methods). As to selection of one of the five methods, the most appropriate method for the documented transaction should be applied.
Only if it is not possible to apply one of the methods listed in the Act, shall another method, including valuation techniques, most appropriate in the given circumstances be applied.
The use of ranges and statistical measures is necessary when it is required by the applied transfer pricing method. In such a situation, an indication of the range resulting from the analysis together with a description of the statistical measures, if applied, is necessary.
According to the Polish transfer pricing regulations, transactions may be deemed comparable if any differences between the transactions or entities being compared could not significantly affect the price in such comparable transaction, or if reasonably accurate comparability adjustments can be made to eliminate any significant effects of such differences.
Consequently, a comparability adjustment should be made if it is necessary to achieve a higher degree of comparability.
The typical adjustments recognised in OECD papers – such as working capital adjustments, adjustments for accounting differences or country risk adjustments – are acceptable in Poland.
The Polish transfer pricing regulations include some specific provisions relating to the transfer pricing of intangibles. In particular, there are some differences with respect to comparability analysis and the preparation of transfer pricing documentation for transactions involving intangibles.
In transactions involving intangibles, the comparability analysis should cover the assessment of the parties' ability to perform a given function and bear the given risk connected with intangibles.
The Polish transfer pricing regulations include specific provisions relating to hard-to-value intangibles. Hard-to-value intangibles are defined in Poland as intangible assets for which, at the time of their transfer between related parties:
In transactions involving hard-to-value intangibles, the comparability analysis should cover an assessment of whether unrelated entities in comparable circumstances:
It is also necessary to determine if the transfer price forecast as of the date of the transaction took into account all predictable circumstances, affecting the level of the price.
Moreover, the tax authorities are entitled to a retrospective verification of a transaction if there is a discrepancy between the forecast and actual data. Reassessment of a tax basis is possible if the difference in the transfer price in hard-to-value intangibles transactions amounts to at least 20% of the transfer price calculated on the basis of the forecast data.
Polish regulations do not contain a specific pricing method regarding cost sharing/cost contribution arrangements. The tax authorities may analyse the comparability of the conditions set out in the cost contribution agreement concluded with the related entity with the conditions that would be established between non-related entities.
Polish regulations refer to cost sharing/cost contribution arrangements in the context of an advance pricing agreement (APA). It is possible to cover a cost contribution agreement with an APA.
Generally, transfer pricing adjustments should be made before the annual tax return is filed. In Poland, legal entities file their annual tax returns by the end of the third month after the end of the tax year.
The taxpayer may, however, recognise the transfer pricing adjustment in the tax books of the tax year to which the adjustment relates and correct the previously filed annual tax return for that year, provided that numerous conditions are met.
Transfer Pricing Adjustment – Requirements
Beginning from 2019, a rule was introduced stating that a transfer pricing adjustment is a revenue or deductible expense, as appropriate, in the year to which it relates. However, formal conditions were introduced to recognise in tax settlements such transfer pricing adjustments.
Therefore, in order to benefit from the above rule, the following conditions must be met jointly:
Therefore, the provisions introduce an approach whereby the transfer pricing adjustment should be included in the period to which it relates and not in the period when the correcting invoice or other document confirming the adjustment was issued.
Thus, transfer pricing adjustments have been excluded from the general rule applicable in Poland, according to which:
Guidance to Be Issued by the Ministry of Finance
The Ministry of Finance is working on some guidance related to the application of the above regulations on transfer pricing adjustments. As part of this work, the Ministry has published draft guidance with explanations.
In the draft guidance the Ministry has clarified when the taxpayer is required to have a statement from the related entity that it has adjusted the transfer prices in the same amount as the taxpayer. The Ministry explains that the taxpayer should have the statement no later than the date on which the adjustment is entered into the tax books. However, according to the draft guidance, only if the taxpayer does not have the statement at the time of the annual tax return submission should it not include that adjustment in its annual tax return for the period covered by the adjustment.
Moreover, the guidance confirms that upon receipt of the relevant statement from a related entity, the taxpayer may include the adjustment in the tax year to which the adjustment relates and correct its annual tax return.
It is important to note that the draft guidance indicates that the statement is required for a taxpayer who makes an "in minus" correction. A taxpayer who makes an "in plus" correction does not need to have a statement.
Moreover, according to the draft guidance, the statement may take the form of an email or a letter received from the related entity signed by an employee of the related entity responsible for recognising the adjustment in the tax books of this related entity or by an employee of the accounting office/group entity to whom the related entity outsources its bookkeeping.
Moreover, if a related entity issues an accounting document (eg, a debit note or an invoice documenting the correction) which constitutes the basis for making the correction and provides the taxpayer with this document, this document constitutes the statement. However, if an in minus correction is made without the taxpayer receiving an accounting document, the taxpayer should obtain the related entity's statement.
The EU Directive concerning the mandatory automatic exchange of information in the field of taxation (Directive 2014/107/EU) has been implemented in Poland. Poland has applied a uniform global standard for tax information exchange, including automatic information exchange.
The Polish regulations on exchange of information are to a large extent similar to those in force in the EU and OECD member states, as well as in other countries that have committed to exchange tax information in co-operation with the OECD.
Poland participates in the exchange of information under the Common Reporting Standard and the US Foreign Account Tax Compliance Act (FATCA). Country-by-country reporting was also introduced in Poland.
Poland has an advance pricing agreement (APA) programme that allows taxpayers to conclude an agreement with the tax authorities regarding transfer pricing.
Taxpayers may request an APA in order to negotiate and agree on a transfer pricing approach to related-party transactions. The Polish regulations provide for the possibility of concluding unilateral, bilateral and multilateral agreements. APAs may cover present and future transactions between related entities. A taxpayer applying for an APA must submit complete documentation for the transaction in question and pay the appropriate administrative fee. The process of obtaining an APA is time consuming.
The only competent authority for conducting the APA proceedings and concluding the arrangements is the APA department in the National Tax Administration, where a dedicated team of experts operates.
In Poland there is co-ordination between the APA process and mutual agreement procedures. It is possible to meet with representatives of the Ministry of Finance for both procedures jointly, which may ensure that both procedures are conducted more efficiently.
Filing an application under the mutual agreement procedure does not interfere with filing an APA application. Both procedures can run at the same time.
An APA may not be issued for controlled transactions:
APAs may cover a maximum period of five years starting from the beginning of the applicant's tax year in which the application is filed.
The APA procedure is subject to a fee corresponding to 1% of the value of the transaction concerned. However, the fee may not exceed the minimum and maximum amounts specified. The fee ranges:
An APA may cover up to five years.
An APA may have limited retroactive effect as it may cover the period from the beginning of the applicant's tax year in which the application is filed. Past years, however, cannot be covered by an APA.
The persons responsible for finance management and tax issues in an entity (eg, members of the board or the financial director) who:
may bear penal-fiscal liability and be punished with a fine.
According to the Polish Penal Fiscal Code, in FY 2021 the fine may amount to a maximum of PLN26.9 million.
This is particularly important since, as of FY 2019, in the above-mentioned statement confirming preparation of the local documentation, the board not only confirms that the documentation has been prepared, but also that the prices used are market-based (ie, meet the arm's length principle).
Consequently, the board may be personally liable in the case of a transfer pricing audit if the transfer prices do not correspond to market conditions.
Additional Tax Liability
Apart from the above personal liability of the persons responsible for finance management and tax issues in an entity, in the case of overstating the tax loss or not showing taxable income in whole or in part as a result of incorrect pricing in a controlled transaction, a decision on additional tax liability may be issued.
Additional liability may amount to 10% of the amount of the overstated loss or understated income (ie, in the case of an assessment: taxation at the standard corporate income tax (CIT) rate plus an additional penalty). These provisions are applicable where the additional income on the related-party transaction has been assessed by the tax authorities, whether or not the transfer pricing documentation has been duly presented. In certain cases, the additional tax liability may double or triple, and thus amount to 30% of the amount of overstated loss or understated income. Such cases include a situation where transfer pricing documentation has not been prepared at all, as well as in a situation where the basis for determining additional tax liability exceeds PLN15 million (in respect of the excess over that amount).
In Poland there are three levels of transfer pricing documentation, which in addition to the local and group documentation also includes country-by-country reporting based on the OECD's template.
Transfer pricing documentation is required in Poland. The obligation to prepare a local file for a transaction arises when the transaction value exceeds the following thresholds:
By way of exception, in certain cases preparing documentation for transactions concluded between Polish entities is not obligatory. To take advantage of this exception, the parties to the transaction may not benefit from a CIT exemption and may not report a tax loss in the year in which the transaction is carried out.
A local file must include certain essential information, including:
Documentation should be reviewed on an annual basis to determine if the functional and economic analyses are still relevant. A benchmarking study should be updated every three years or upon a significant change of economic circumstances.
Transfer pricing statement
Within nine months from the end of the tax year, taxpayers have to submit a statement confirming that:
As a rule, in the case of companies, the statement must be signed by all management board members and submitted electronically (through the official platform). The statement may not be submitted by an attorney.
The documentation itself should be filed with the tax authorities within seven days upon their request.
Group documentation must be attached to a local file developed by taxpayers who belong to a group of companies which prepares consolidated financial statements, and which earned in the previous year consolidated revenues of more than PLN200 million (or the equivalent in a foreign currency).
While the local documentation must be prepared in Polish, the master file may be submitted in English. The tax authorities may, however, request a translation into Polish, which has to be submitted within 30 days from such a request.
Transfer Pricing Report
Moreover, the transfer pricing information (TPR report) should be filed within nine months from the end of the tax year. Taxpayers submitting the report are required to indicate a range of information on controlled transactions. The report covers general financial information of the entity for which the form is submitted, including values of financial indicators measuring the financial situation (eg, operational margin, return on assets, return on equity).
Where the turnover of the capital group for the preceding tax year exceeded EUR750 million, a country-by-country report (CbCR) should be filed in one of the EU countries or in the country which introduced the CbCR obligations and concluded the agreement on exchange of information with Poland.
The CbCR must contain a wide range of information about the whole group, including information about every entity in the group such as basic financial data and scope of business activity.
If the CbCR is not filed in the applicable country, the Polish entity is obliged to file the CbCR in Poland within 12 months from the end of the tax year.
In addition, a Polish entity belonging to a group of entities will each time be obliged to submit by the end of a given tax year a notification indicating the company which will submit the CbCR for that year as well as the country in which the CbCR will be submitted.
Polish transfer pricing regulations do not significantly deviate from the standards set by the OECD Guidelines. However, Polish regulations are very concise compared to the OECD Guidelines and do not address many of the issues raised in them.
The Polish regulations explicitly refer to the OECD Guidelines on several points, which confirms that the OECD Guidelines are a model for Polish regulation and can be a useful tool when problems of interpretation arise.
It is possible to refer to the OECD Guidelines directly before the tax authorities or administrative courts, as in many cases the authorities and courts refer to them in the justifications of their decisions and rulings.
However, due to the fact that the OECD Guidelines do not form part of the Polish legal order, they are only of an auxiliary nature and cannot constitute an independent basis for interpretation of the law.
In Polish tax law, there is a primary, basic transfer pricing rule, which is the arm's length principle, according to which affiliated entities are obliged to set transfer prices on terms that would be agreed between unrelated entities. The regulations provide some, very limited, exceptions to the application of this rule (eg, applicable to controlled transactions, in which the price or method of determining the price of the subject of such controlled transaction results from the provisions of laws or normative acts issued on their basis).
Although OECD standards cannot be applied directly in Poland as they are not an official source of law, the impact of BEPS Actions 8–10 and Action 13 on Polish transfer pricing regulation was significant.
BEPS Action 13 was implemented to the greatest extent into the Polish transfer pricing regulation through the introduction of three-level transfer pricing documentation with a local file, master file and country-by-country reporting (see 8 Penalties and Documentation for further detail). Some of the Polish regulations in this regard are a direct translation of the model legislation proposed by the OECD.
Moreover, several solutions proposed in the BEPS Actions – which related to intangible assets, risk allocation or high-risk transactions – were introduced into the Polish regulations.
Polish transfer pricing regulation does not address the situation in which one entity bears the risk of another entity’s operations by guaranteeing that other entity a return. Such structures are generally not accepted by the Polish tax authorities (ie, in minus corrections of the results of a Polish entity related to an entity which are not transaction-based would not be accepted as a tax cost).
The UN Practical Manual on Transfer Pricing did not have a notable impact on Polish transfer pricing regulation.
Polish transfer pricing regulations include safe harbour measures for low value-added services and interest on loans between related parties. If using the safe harbour measure, there is no obligation to prepare a benchmarking study.
Low Value-Added Services
In the case of controlled transactions that constitute low value-added services, the tax authority may not question the taxpayer's income with respect to the amount of the mark-up on the cost of these services if the following conditions are jointly met.
Low value-added services can only be services from among the following categories:
Moreover, to qualify as low value-added services, the services:
It is necessary to provide the tax authorities with relevant information needed to verify that low value-added services have actually been provided.
Safe Harbour for Interest
The regulation of safe harbours for loans was introduced in Poland in 2019. The Ministry of Finance indicated that this regulation is addressed in particular to small and medium-sized taxpayers.
The tax authority may not question a taxpayer's income in terms of the interest rate of an intercompany loan if several conditions are met in total.
Poland does not have specific rules governing savings that arise from operating in Poland. Generally, the Polish tax authorities follow the OECD papers related to location savings.
The Polish tax authorities strongly prefer the application of a Polish comparable, if available.
Starting from 2018, limitations on the deductibility of intra-group service/licence fees were introduced in Poland. Although these limitations are formally not included in the transfer pricing provisions, they apply only to certain transactions with related parties.
Where the total amount of intangible asset costs exceeds PLN3 million per annum, a 5% EBITDA limit is imposed on tax deductible expenses incurred directly or indirectly by affiliated entities in excess of PLN3 million for the tax year resulting from:
EBITDA is calculated as the difference between:
The restriction does not apply to:
Moreover, expenses for all services, fees, and charges are not excluded from tax deductible costs if they do not exceed the threshold of PLN3 million per annum.
Consequently, only taxpayers that exceed PLN3 million in the fiscal year for the costs described above, incurred directly or indirectly for affiliated entities, cannot deduct any cost surplus above 5% of EBITDA.
However, it is possible to carry forward costs that were not deducted in a given tax year due to the above limitation for deduction in the next five tax years.
Import transactions between two related entities are treated as related-party transactions for customs valuation purposes. The price declared for the imported goods in such transactions may be examined by the competent authorities to determine whether it is affected by that relationship. Consequently, co-ordination between transfer pricing policies and customs valuation is required.
A transfer pricing audit is performed in Poland as part of each CIT audit and may also be initiated as a result of an audit conducted at a related entity. Many of the audits initiated in recent years have focused solely on transfer pricing. Transfer pricing audits are often conducted by specialised transfer pricing units created within regional Customs and Tax Offices.
The tax authorities are allowed to issue notices requiring taxpayers to provide specified information or documents. Moreover, the authorities may also request documents regarding periods other than those covered by the audit (eg, the authorities demanded the submission of transfer pricing documentation for years that were not covered by the ongoing tax audit).
Burden of Proof
The burden of proof regarding irregularities relating to tax liabilities generally rests with the tax authorities performing the audit. This principle means that the tax authority must prove a breach of tax law, if this has taken place.
As a significant exception to this rule, taxpayers are obliged to include in the transfer pricing documentation a benchmark analysis documenting the arm's length nature of the remuneration in intercompany transactions.
Proceedings before the Tax Authorities
If irregularities are found by the tax authorities, which are not corrected voluntarily by the taxpayer, the tax audit ends with the issuance of a tax decision specifying the level of tax arrears and default interest. The amount arising from the tax decision needs to be paid together with the interest on the tax arrears up to the date of payment of the amount of tax due.
Within 14 days after delivery of a decision with which the taxpayer disagrees, the taxpayer has the right to file an appeal against the decision issued by the tax authority of the first instance. The appeal is submitted to the tax authority of the first instance and is then forwarded to the second-instance body which reviews the case.
The issuance of a negative decision specifying the duty to pay tax arrears usually also entails a threat of the initiation of a tax crime investigation of the members of the management board or persons responsible for the discovered tax shortcomings.
Proceedings before the Administrative Court
If the taxpayer is not satisfied with the outcome of the appeal procedure, a complaint may be filed with the voivodeship (provincial) administrative court within 30 days from the date of delivery of the decision by the tax authority.
Payment of the tax is not suspended by the submission of a complaint against a negative decision.
The court with jurisdiction over the case is determined by territorial rules and the taxpayer has no choice in this regard.
Most importantly, the complaint must:
The tax authority responds to the charges raised in the complaint. The court reviews the complaint and issues a verdict (this usually takes up to several months).
The taxpayer may file to the Supreme Administrative Court a cassation petition within 30 days from the date the transcript of the unfavourable judgment by a voivodeship administrative court being delivered to the taxpayer.
The petition can only be based on either of the following grounds:
The judicial precedent on transfer pricing is not well developed in Poland.
With respect to transfer pricing in Poland, many of the court rulings issued so far concern rather specific formal issues related to, for example, documentation obligations. Moreover, many of the judgments issued over the past years have lost their relevance to the current legal state as a result of recent changes in the regulations.
Transfer Pricing Judicial Verdicts
Supreme Administrative Court verdict dated 13 October 2016
In this judgment, the Supreme Administrative Court ruled that the application of the 50% penalty rate (ie, the old penalty rate before the current rule of a 10% additional obligation was introduced), applicable in situations where the taxpayer's income is additionally assessed and there is a lack of transfer pricing documentation, must be delivered to the taxpayer within three years from the end of the calendar year in which the tax obligation arose.
Supreme Administrative Court verdict dated 27 August 2020
In this judgment, the Supreme Administrative Court questioned the possibility of recognising, in tax settlements, transfer pricing adjustment based on the profitability of a Polish-related entity. This court verdict represents an approach often taken by the Polish tax authorities by which in minus corrections of the results of a Polish-related entity based on profitability (not transaction-based) are not accepted as a tax cost.
Tax Authority Rulings
It should be noted that apart from court verdicts, rulings issued by the tax authorities have a significant impact on the application of transfer pricing regulations in Poland. There are two types of rulings issued by the tax authorities:
Private tax rulings
A taxpayer applying for a private tax ruling is required to describe exhaustively the facts or future event and its standpoint as to the legal evaluation.
A private ruling covers an evaluation of the applicant's standpoint. In case of a negative evaluation of the applicant's standpoint, the authority describes and justifies the position it considers should be adopted. If the taxpayer does not agree with the ruling, it is possible to challenge the ruling before an administrative court, which is often the case.
General tax rulings
The application for a general tax ruling needs to cover the presentation of an issue requiring general interpretation and an indication that the application of the provisions in question by the tax authorities in decisions, rulings and private tax rulings is not uniform.
A particularly significant recent ruling was the general tax ruling of 24 January 2018, No DCT.8201.1.2018, in which the Ministry of Finance resolved an important issue concerning the transaction value threshold, above which the transaction needs to be documented. Thresholds were set for one type of transaction. The question was whether the value of individual transactions of the same type concluded with different subsidiaries should also be added together.
The taxpayers argued that transactions with different subsidiaries should be treated separately. However, the Minister ruled that a transaction of one type covers all transactions of a given type – even if they are concluded with different related entities. Consequently, the transaction value threshold above which documentation is required is more likely to be exceeded.
Poland does not restrict outbound payments (eg, royalties) relating to uncontrolled transactions.
Certain outbound payments are subject to withholding tax. As a result, a foreign corporation may be liable for Polish income tax, even if it does not conduct business activity in Poland, if it derives from Poland:
Withholding tax (WHT) applies to controlled and uncontrolled transactions.
Based on the Polish domestic regulations:
However, under a number of conditions it is possible to apply the reduced tax rate or an exemption from WHT.
WHT Collection Rules
According to the Polish CIT Act implementing the EU Directives (Parent Subsidiary Directive and EU Interest & Royalties Directive), a full WHT exemption applies to interest/dividend payments made by Polish resident entities to non-resident entities, provided that, in particular, the following conditions are jointly met.
In the event the uninterrupted holding period of two years lapses after the date of payment, the above-mentioned WHT exemption is also applicable.
To benefit from the WHT exemption on interest/dividends, based on the Polish CIT Act implementing the EU Directives, the relevant double tax treaty needs to allow for an exchange of tax information between the tax authorities of Poland and the country of the payment recipient.
The application of the above exemption is conditional upon possession by the Polish interest/dividend-paying company of:
The Polish tax regulations that apply to WHT collection were changed by switching from the tax relief method to a refund method. However, under the special regulation of the Ministry of Finance, the application of the new WHT collection rules has been postponed until mid-2021.
Under the new WHT regime, in the case of interest/dividend payments exceeding in one tax year PLN2 million (approximately Euro460,000) to one foreign recipient, WHT will have to be collected by the paying entity in the full amount (20% or 19%) and no reduced rates or tax exemption would be available.
A foreign recipient as a taxpayer (or in certain cases a Polish tax remitter) will have the right to ask the Polish tax authorities for a refund, provided a number of formal requirements are met. The tax should be refunded within six months after the refund application is filed.
In some cases, however, the Polish tax remitter will be allowed to apply the reduced rate or tax exemption at the moment of payment:
It is particularly important to note that in order to apply a reduced rate or exemption, the recipient of the payment should conduct a genuine business activity according to the criteria described below.
Changes Already in Force
While the introduction of the above-mentioned new WHT collection mechanism was postponed, some changes to WHT introduced at the beginning of 2019 are already in force. This refers to the obligation of the paying agent (income tax remitter) to exercise due diligence before making payments. New substance requirements and a new definition of "beneficial owner" were also introduced.
According to the new definition, a beneficial owner is an entity that:
The existence of a genuine business activity may be assessed by the tax authorities based on, among other things, the following factors:
Poland does not restrict arm's length outbound payments (eg, royalties) relating to controlled transactions.
With respect to withholding, the same rules apply to controlled and uncontrolled transactions, as described in 15.1 Restrictions on Outbound Payments Relating to Uncontrolled Transactions.
Poland does not have specific rules regarding the effects of other countries’ legal restrictions.
Poland does not publish details related to APAs or transfer pricing audit outcomes. Only summary/statistical data is published.
The use of secret comparables is not possible for either the tax authorities or taxpayers. When conducting a benchmarking study, comparables, their source, how they were obtained and any other information used for this purpose shall be disclosed. A benchmarking study based on external data needs to cover comparables that are publicly available.
The COVID-19 pandemic has affected the transfer pricing landscape in a variety of ways, as the pandemic has a direct impact on the profitability of many multinational groups and their members.
Reporting Losses by Low-Risk Entities
Since many multinationals active in Poland operate transfer pricing models based on a non-Polish principal and low-risk Polish contract manufacturer (or Polish routine distributor), Polish entities with routine functions and limited business risks are expected to earn a small but fixed profit margin.
While low-risk Polish subsidiaries affected by various difficulties caused by the pandemic, including subsequent lockdowns, may report operating profits lower than expected or even losses, results below the target operating profit margin would need to be explained to the Polish tax authorities.
The tax authorities in Poland are often ready to accept well-grounded benchmarking adjustments related to extraordinary expenses or losses, as indicated by their practice to date. The authorities should not question the position when low risk entities report short-term genuine losses due to legitimate business reasons.
The unfavourable economic conditions triggered by COVID-19 should be regarded as such legitimate business reasons. The COVID-19 pandemic is an unforeseen and unprecedented event and its impact on the economy cannot be regarded as a typical business risk allocated between the related parties in the transfer pricing model.
However, to provide a successful defence during a future tax audit, it will be necessary to document the impact of COVID-19 on operating results using a quantitative analysis showing that the lower profit margin or loss was triggered by difficulties resulting from the outbreak of the pandemic.
Benchmarking Studies for the Year 2020
The preparation of benchmarking studies documenting results in the year 2020 requires a specific approach to reflect the COVID-19 outbreak. Since the results achieved by a tested entity in the whole of 2020 are evaluated against the results of comparable independent companies, the 2020 related-party transactions cannot be tested against the FY 2017–2019 financial results of comparable entities which have not been affected by the COVID-19 crisis.
The impact of COVID-19 on operating results may be reflected in a benchmarking analysis in two ways.
It is therefore advisable to collect detailed data on the impact of the difficulties caused by COVID-19 on the financial situation of Polish entities. Appropriate records need to be kept on a regular basis, which will make it possible to prepare documentation protecting against the risk of disputes with the tax authorities.
Since the beginning of the COVID-19 pandemic, certain simplifications have been implemented in the field of transfer pricing. However, these measures have had only a limited effect.
The simplifications introduced due to COVID-19 are as follows.
Procedural deadlines were suspended between March and May 2020. However, after this temporary suspension, they began running again. In practice, audits have not been stalled and continue. No significant impact of the pandemic on ongoing tax audits has been noted in Poland. However, the number of new audits initiated in 2020 was lower than in previous years.
General Transfer Pricing Trends in Poland
Increasing reporting obligations
For several years Poland has imposed a statutory obligation to document transfer prices and their arm’s length nature. Currently, the outline of the transfer pricing (TP) documentation required under the Polish TP regulations follows the OECD/G20 Base Erosion and Profit Shifting (BEPS) Action 13 recommendations on master files and local files.
In addition to the obligation to keep full TP documentation, an additional requirement to submit a transfer pricing disclosure form (TPR form) has recently been added. This disclosure form was filed for the first time for FY 2019. The information contained in the new TPR form is a concise duplication of the financial information contained in the local transfer pricing documentation. Compared to the information provided to the Polish tax authorities (PTA) in previous years, the scope of data provided to the tax authorities has significantly expanded. In particular, the reporting obligation covers:
It can be expected that the PTA will use data from TPR forms to conduct risk assessment analyses and make decisions about more frequent inspections of certain taxpayers. The PTA has declared that the new forms, due to the large scope of the required information, should allow for the reduction of the "income tax gap", as they may help the tax authorities in the more effective selection of entities for transfer pricing control.
More aggressive transfer pricing audits
Transfer pricing tax audits are carried out by regional customs and tax offices competent for a given region of Poland and by the local tax authorities.
Transfer pricing audit activity has increased significantly since 2016. The PTA have expanded their resources in the area of transfer pricing, both in terms of manpower and tools/databases. Regional customs and tax offices now have dedicated audit teams specially trained in transfer pricing and international tax matters. These dedicated transfer pricing teams specialise in conducting transfer pricing audits and help in transfer pricing audits carried out by local tax inspectors.
Our experience shows that, currently, the PTA appear to be focusing on the transfer pricing of loss-making entities, management fee structures, financial transactions and business restructurings.
Recently the PTA have reported a decrease in the number of tax audits (including TP audits) from the peak in 2016/2017. In 2019, regional customs and tax offices carried out 2,621 tax-related inspections, in 2018 there were 3,066 such inspections, and in 2017 there were 4,271. Similarly, the number of tax audits carried out by the local tax offices has also decreased. This trend has grown stronger in 2020 due to the pandemic. The total number of tax audits in 2020 was a record low and amounted to approximately 2,300.
On the other hand, the PTA have announced that the implementation of advanced IT tools facilitating the selection of entities for control, and the use of such tools during control activities, has contributed to an increase in the total value of assessments made during tax audits. This increase was reported during the years up to 2019 (in 2020, due to the pandemic, the assessments made during tax audits decreased compared to previous years).
Unfortunately, transfer pricing is still viewed by the PTA as an area of aggressive tax optimisation and is very high auditing priority. The new IT tools at the disposal of the tax authorities, as well as the recently updated reporting obligations, mean that each company will be verified on an ongoing basis and tax audits will be even better targeted in the future.
During TP audits, the auditors usually seek to discuss the issues at stake with the taxpayer and their adviser. Thus, a number of meetings usually take place in order to discuss or, if possible, resolve issues of importance that have arisen during the audit.
In practice, in TP audits in Poland, the parties very often come to an agreement as to the corrections of certain tax settlements and the case is not referred to court.
Pressure on business restructurings
The addition of guidance on business restructurings to the OECD Transfer Pricing Guidelines was critical in determining the Polish transfer pricing approach to changes in the functions, risks and assets of Polish taxpayers. Poland has quickly adopted the new OECD developments. Moreover, the Polish approach to business restructurings is very aggressive and sometimes deviates significantly from the OECD approach.
The PTA carefully review the tax and transfer pricing consequences of business restructurings in tax audits. In practice, tax inspectors often argue that a Polish restructured entity should be indemnified for a transfer of intangible assets, for termination of existing contractual relationships, clientele and/or for loss of "profit potential".
Moreover, another change in transfer pricing, which entered into force from 2019, was the right of the PTA to examine and question settlements between related entities by recharacterisation and omission of related-party transactions. The current Polish TP regulations clearly indicate that the PTA have both:
Our practice shows that during tax audits the PTA often challenge restructurings which they consider as aggressive based on the TP regulations and not the general anti-abuse rule (GAAR). This makes preparation of the proper TP defence files for restructurings particularly important.
Increasing interest in APAs
The advance pricing agreement (APA) procedure has been available in Poland for 15 years. However, for many years the number of APA applications submitted to the PTA each year, as well as the number of APAs concluded with the PTA, was very low. In the period from 2006 to 2017 the total number of APA applications filed to the PTA was 86 and the total number of APAs actually concluded was only 55. The procedure was very time consuming and costly.
The number of APA applications submitted in 2018 and 2019 increased significantly with 98 applications and 192 applications filed respectively in these years. Obviously, the reasons for the increased interest in APAs should be primarily attributed to the fact that the transactions covered by these agreements are excluded from the tax deductibility limitations resulting from Article 15e of the Corporate Income Tax Act. (limitation of intercompany services fees and royalties).
With the higher number of applications in mind, the APA team in the PTA was increased. Moreover, a simplified APA procedure applicable to certain transactions was announced. Unfortunately, this simplified APA procedure was never implemented.
Whether the strengthening of the APA team will be sufficient to analyse all applications remains to be seen. The number of APAs actually concluded in 2018 and 2019 was 10 and 15 respectively (which is nowhere close to the number of applications filed in the same years). This means that significant improvement in timing is still needed.
In 2020, due to the COVID-19 pandemic, there was a visible decrease in activities related to APAs. Based on the statistics published by the PTA, in 2020, only 50 new applications were submitted to the PTA (compared to 192 applications in 2019) and 18 APAs were concluded.
Summarising the above, APAs in Poland provide significant benefits related to both ensuring clarity related to intercompany pricing and securing tax deductibility of payments made abroad. However, the procedure remains time consuming and complicated.
Changes related to transfer pricing adjustments
Year-end and retrospective pricing adjustments are generally acceptable in Poland provided that they are transition-related and such adjustments comply with the arm’s length principle. For example, prices may be adjusted to take into account the actual circumstances that have occurred where only budgeted indicators were initially used to set transfer prices. The adjustment should be related to a flow of products or services and should be evidenced by invoices.
However, additional formal requirements related to the tax deductibility of TP adjustments were introduced beginning from 2019. These additional formal conditions could limit the possibility of including the TP adjustment in settlements. One of the requirements is that "at the time of the adjustment, the taxpayer has a statement from the related entity that it has adjusted the transfer prices in the same amount as the taxpayer". Such a provision is very restrictive and imposes additional administrative burdens. Moreover, in many cases the application of this provision is unclear and has triggered controversies when making annual corporate income tax filings for 2019.
Currently, the Polish Ministry of Finance (MoF) is working on a guidance paper for the application of the above provisions related to TP adjustments. As part of this work, the Polish MoF has published some draft guidance (it is not yet known when the final version of the explanations will be published). The draft guidance is useful in understanding the approach of the MoF. What is particularly important in the context of a statement from a related counterparty, is that the Ministry explains that a taxpayer should have the statement no later than on the date on which the adjustment is entered into the tax books. However, only if the taxpayer does not have the statement at the time of the annual tax return submission, shall it not include that adjustment in its annual tax return for the period covered by the adjustment. The MoF also directly indicated that upon receipt of the relevant statement from a related entity, the taxpayer may include the adjustment in the tax year to which the adjustment relates and correct its annual tax return.
The draft explanation also confirms that the statement is required only for a taxpayer who makes an in minus correction. A taxpayer who makes an in plus correction is not obliged to collect a statement.
According to the draft explanations, the statement may take the form of an email or a letter received from the related entity signed by an employee of the related entity responsible for recognising the adjustment in the tax books of this related entity or by an employee of the accounting office/group entity to whom the related entity outsources bookkeeping.
Transfer Pricing Challenges Arising from the COVID-19 Pandemic
The fiscal years 2020 and 2021 will be for many entities particularly challenging from a TP perspective, as their financial results will be impacted by the COVID-19 pandemic. Many multinational groups operating in Poland may be forced to revisit transfer pricing policies and address new challenges in applying the arm’s length principle during the economic crisis. It is advisable to consider the possible consequences of the crisis, from a transfer pricing perspective, in advance and to prepare for possible future talks with the PTA.
The practical TP considerations include:
For further information on the impact of COVID-19 on transfer pricing in Poland, please refer to the Poland Law & Practice chapter in this guide, particularly 17 COVID-19.