In March and May 2020 Director of KIS issued two interpretations in cases where taxpayers asked for a documentary obligation in the case of transactions involving In the first where the share capital increase is made by making a monetary contribution by one of shareholders, and In the second the acquisition of shares without remuneration from the shareholder and then the redemption of those shares and the reduction of share capital to cover balance sheet losses.
Unfortunately, the explanations are not exhaustive the subject concerned. There is still a great deal of uncertainty about the transfer pricing law introduced a year and a half ago.
Both the applicants were limited liability companies and the activities mentioned above concerned their share capital. The applicants asked the Director of KIS whether, in connection with these activities on the part of the company, a tax documentation would be required.
In both cases, the interpretative authority’s response was yes, clearly indicating the existence of such an obligation. In this text, I would like to present what were the key aspects of the situation being resolved and my own observations on the interpretation body's findings.
There are still no clear interpretive guidelines that we can use to determine whether we are dealing with a transaction referred to in the transfer pricing legislation. However, there is a clear tendency for interpretative bodies to conclude in dubious situations that a documentary obligation exists, based on the adoption of a fairly broad definition of the concept of "transaction"
Increase in share capital.
The applicant indicated that its foreign shareholder (Slovak company) is planning to make a monetary contribution of value 5,000,000 EUR, which will be allocated in part to share capital and in part to reserve capital. The company asked whether there would be an obligation to draw up the tax documentation in connection with this activity.
Under Article 11k(1) The CIT Act, indicating at the same time its own position in which it itself stated that such an obligation would arise in its assessment.
In giving its interpretation, the Director of the CIS agreed with the applicant’s position, indicating that since the contribution was fixed at the amount 5,000,000 EUR, it means that it will exceed the threshold indicated under Article 11k(1)(4), or 2,000,000 PLN, and therefore the need to draw up the tax documentation in the Authority’s assessment is without doubt.
In this particular interpretation, neither the applicant nor the body analysed whether the capital increase activity falls within the concept of ‘transaction’. Under Article 11a(1)(6).
On the other hand, the Authority indicated that the transaction could not benefit from the exemption for the domestic transactions in question under Article 11n(3), because it is a ‘capital transaction’ which is explicitly excluded from the scope of the exemption.
Individual interpretation of the Director of National Tax Information dated 15 May 2020, reference no. 0111-KDIB1-2.4010.81.2020.2.MS
Acquisition of own shares for redemption
In the second that interpretation has been indicated by the applicant by the planned activity consisting in the redemption of shares acquired from one of the partners.
This operation would take place in the envisaged mode under Article 199 ksh, the company plans to acquire 60,000 shares of value 6,000,000 PLN from one of the shareholders, to make their redemption with the consent of that partner, with the redemption to be made without remuneration.
The value of the decommitted shares is intended to cover the loss of the Company.
In this case, the applicant company submitted its position that, in its assessment, such an act does not entail the need to draw up a tax documentation, thus presenting a logical and exhaustive justification.
The company refers to the fact that the provisions of the Ksh allow for the possibility of redemption of shares without remuneration, and therefore, since such an operation is carried out under the relevant provision of the Ksh, there are no grounds for applying Article 11c(2) The CIT Act (allowing the possibility of estimating the price) because such an estimate would conflict with the nature of the legal institution to redeem the shares without remuneration.
The applicant also indicated that for the activities described, there are no elements such as the sale, the price or any arrangement determining that price.
Furthermore, in the applicant's view, such acquisition of own shares is a specific type of non-named contract which should not be compared to the sale of shares, and consequently, the existence of market conditions for this particular type of transaction cannot be mentioned.
The Director of KIS disagreed with the position presented by the Applicant, indicating in the interpretation given that the act described in the proposal constitutes a transaction referred to in the provisions of the CIT Act on Transfer Prices. In fact, the whole argument put forward by the interpretative body is to show that the actions described by the applicant:
- they are carried out in the course of their economic activity;
- constitute a transaction within the meaning of Article 11a(1)(6) CIT Act.
Referring to the definition of the transaction, the Director of KIS refers to the understanding of the dictionary of this concept (The Dictionary of the Polish Language, sjp.pwn.pl), according to which it is a ‘trade operation for the purchase or sale of goods or services’ or a ‘trade agreement for the purchase or sale of goods or services’.
At the same time, the Authority indicates that the dictionary definition does not exhaustive all doubts relating to the application of that term and refers also to the case law of the NSA, in the light of which the term ‘transaction’ is synonymous with the term ‘contract’ (e.g. NSA judgment) dated 8 March 2016, reference no.
II FSK 4000/13. In the light of the jurisprudence, the view is that all types of legal acts resulting in the transfer of ownership of goods which affect the taxpayer's income (loss) is considered to be transactions within the meaning of the CIT Act.
Consequently, the interpretation authority concludes that the activities indicated by the taxpayer concerning the redemption of shares should be considered to be a transaction subject to a documentary obligation.
Unfortunately, the interpretative body leaves the questions raised by the applicant concerning the specific nature of the write-off of the shares without remuneration as a regulated institution of the KSH and the duly indicated objective failure to compare the situation with any conditions that could be considered as ‘market conditions’.
Individual interpretation of the Director of National Tax Information dated 30 March 2020, reference no. 0111-KDIB1-1.4010.121.2020.1.ŚS
Still more questions than answers
In my opinion, the two decisions of the Director of KIS do not fully explain the key aspects of share capital transactions.
There are still important doubts not only in the context of the existence of a documentary obligation, but also in general as to the possibility of estimating the price or the possibility of setting conditions which could be considered comparable for the activities indicated.
It is not explained, among other things, how the tax administration considers that the contribution of money should be examined on market terms.
It is not indicated to which events and data the taxable persons carrying out the acquisition of shares in order to redeem under strictly regulated KSH rules would refer to show that the transaction they carry out is carried out on market terms.
The company’s argument in this regard seems logical, and expecting documentation for such events means the need to prepare documents of a purely formal nature.
In my view, there are still no clear interpretive guidelines that we can use to determine whether we are dealing with a transaction in a given situation as referred to in the transfer pricing legislation.
However, there is a clear tendency for interpretative bodies to conclude in dubious situations that there is a documentary obligation, based on the adoption of a rather broad definition of the term "transaction".
It is quite noticeable that there is no reference to the characteristics of specific types of transactions, including those carried out under specific commercial law.
There is also a lack of a deeper analysis of the question of who is actually party to the activities carried out on the capital of a capital company – whether it is actually (or in any case) a company, or whether the burden of a possible documentation obligation should be identified on the part of the partner who carries out the activity.
To some extent the current situation is explained by the fact that it has only been about a year and a half since the new rules on transfer pricing came into force, and so we are still in the period during which the practice of jurisprudence takes place. Both of the above-mentioned interpretations have been issued recently and perhaps one of these cases will continue in the proceedings before the administrative court.
Author
Leszek Dutkiewicz, partner Russell Bedford Poland. Associated with the company from 2011. Director of RBP office in Katowice. In years 2008 – 2011 worked for leading consulting companies (Ernst&Young, KPMG, BDO) providing tax advisory services.
He specializes in tax and economic law, primarily in international tax law, tax proceedings, VAT and transaction prices. Author of a publication on tax, civil and international law issues. Lecturer in tax law training. He has legal education, in 2008 graduated from the Faculty of Law and Administration of the Jagiellonian University.