Restructuring transactions at transfer prices. The necessary data and information to document transactions

Restructuring at the level of transfer pricing regulation has a slightly broader definition than the restructuring law. In accordance with the Regulation of the Minister of Finance of 21 December 2018 on corporate income tax transfer pricing (i.e. Journal of Laws of 2021, item 1444 as amended)[1] restructuring is a type of controlled transaction consisting in the reorganisation of the activities of related entities.

According to section 2. Whenever the regulation refers to restructuring, it means reorganising:

(a) including a significant change in commercial or financial relations, including the termination of existing contracts or the modification of their material conditions, and

(b) a transfer of related functions, assets or risk categories between entities if, as a result of that transfer, the projected average annual financial result of the taxpayer before interest and taxation (EBIT) would have changed at least three years after that transfer by at least 20% the expected average annual EBITDA during the same period, if no transfer was made.

Restructuring transactions meet the definition of a transaction controlled in the understanding of transfer pricing rules. The intention of the legislator was also to include a definition of issues which may not be considered as a transaction in the common sense of that word.

The above-mentioned Regulation not only defines restructuring as controlled transactions, but also sets out the stages of the reorganisation transaction valuation study. The concept of restructuring is the remuneration paid in such transactions, often called a compensation fee.

A key issue for examining the marketability of transactions is the appropriateness of the fee and its amount. Circumstances of determining the level of remuneration, as well as criteria which affect the determination of its amount. That Regulation, section 17, also regulates the issue of the comparability test:

„In the case of restructuring, the comparability test shall also cover the following steps:

1. identification of commercial or financial relations between related entities before and after restructuring, including:

(a) the correct identification of actual transactions consisting of restructuring, in particular by determining the actual functions, risks and assets of associated entities before and after restructuring, including the ability of associated entities to carry out the functions assigned to them as a result of the restructuring, to bear risks and to involve assets,

(b) an analysis of the economic causes of the restructuring as well as the benefits expected as a result of the restructuring, in particular the synergy effects,

(c) an analysis of the options realistically available to related parties;

1. identification of the tax consequences of actual transactions involving restructuring;
2. determining the extent to which the restructuring has resulted in a transfer of potential to generate profit, in particular as a result of the transfer of valuable assets or rights to those assets, including intangible assets, or the dissolution or substantial renegotiation of existing contracts, or the transfer of an organised part of the undertaking;
3. determining whether a restructuring remuneration is due taking into account the value of the potential transferred to generate profits;
4. if the remuneration is due, determine whether its amount is reasonable, in particular taking into account:

(a) revenue and profits that the transferor might have expected if no restructuring had taken place,

(b) the obligation to pay compensation resulting from other legal provisions, such compensation being assessed in the light of whether, under the circumstances in question, unrelated parties would agree to such compensation and whether the compensation provided for in other legal provisions is not too high or too low in relation to the compensation to which unrelated parties would agree,

(c) the relationship between the restructuring remuneration and the expected remuneration transferor from the transaction with the acquirer’

[2]

Examples of restructuring transactions may be:

• the transfer of production between related parties resulting in a change in the entity's production function;
• the transfer of distribution activities to another entity;
• transfer intangible assets to associated entities (patents, trademarks, know-how);
• transfer material assets, e.g. production lines or production hall.[3]

The documents necessary to document the transaction and its market level shall depend on the type of restructuring transaction.

On the example of a standard connection transaction two we can indicate that the documenter of this event will be a protocol from the general meeting of shareholders/shareholders, and, above all, a plan for the merger of affiliated entities.

If we are talking about less obvious transactions, we will certainly need all the contracts and agreements on the basis of which the restructuring transaction was carried out.

If you have doubts about the correct qualification of the transaction in terms of transfer prices, please contact us and meet the transfer pricing team at which we already have 17 November we will discuss and present on an example how to examine the documentation obligation and how to select a controlled transaction.

Author: Darya Bannaya. Tax consultant in Russell Bedford Poland. Graduate of Law at the Faculty of Law and Administration at the University of Warsaw, graduate of Global Business, Finance and Management at Warsaw School of Economics. Winner of the Ministry of Finance competition “Tax of Leaders” 7. edition.

Conducting trainings and conferences for foreigners in tax aspects of conducting and establishing business in Poland. He specializes in tax law, advising clients on current matters relating primarily to income taxes. From 2021 Specializes in transfer pricing.

Together with an experienced team, he supports leading companies in fulfilling tax obligations in terms of transfer prices. Author and co-author of a tax law publication.