The exemption from the obligation to draw up transfer pricing documentation shall be granted to taxable persons who have not suffered a loss from the source of revenue to which the transaction is carried out, as confirmed by the Director of the KIS in its interpretation of 1 June 2020.
The relationship between the exemption of domestic transactions, the exemption of transactions in Tax Capital Groups and the rules for setting the document threshold remains unclear.
one the exemption from the obligation to draw up the tax documentation provided for by the legislator (Article 11n Updop) the so-called ‘exemption of domestic transactions’ shall apply to controlled transactions concluded exclusively by related entities residing, established or managed in the territory of the Republic of Poland in the tax year in which each of these related entities meets the following conditions:
- is not an entity exempt from corporate income tax on the basis of Article 6 adopt;
- did not achieve tax-exempt revenues (due to obtaining a permit to operate in SEZs or obtaining a decision to support, in accordance with the Law on the Promotion of New Investments), on the basis of Article 17(1)(34)(34a) adopt;
- did not suffer a tax loss.
The issue which raises the greatest interpretational doubts about the possibility of exemption from the documentation obligation of national entities is the concept of ‘tax loss’ which has not yet been defined for the purposes of transfer pricing legislation.
Reflecting on this issue means looking for answers to questions:
- will the exemption from documentation be granted only if the lack of loss relates to all sources of income? and
- whether the exemption will occur when the loss occurs on one revenue source, while the transaction itself will affect the amount of income from second Sources?
Over the last few months, the tax authorities have seen a changing approach to this issue, but the positions of the authorities seem to be slowly moving towards a uniform direction.
Below is the latest interpretation of the day 1 June 2020, The signature. 0111-KDIB1-1.4010.140.2020.1.BK defining the concept of tax loss for documentary purposes.
On the basis of the facts set out in the tax ruling, there is doubt as to whether national entities may benefit from an exemption from the obligation to produce documentation where the controlled transaction is carried out with companies outside the PGK and which suffer losses from PGK companies
Presentation of the facts
In the interpretation under consideration, the applicant indicated that it was part of a tax group and is also a parent company in another group. Within the framework of the cooperation, the applicant shall enter into controlled transactions, within the meaning of the provisions of the update, with related entities that are members of the tax group and with related entities that are not members of the group.
Both the applicant and the related entities distinguish two sources of income, i.e. income from capital gains and income from other sources of revenue.
As regards controlled transactions covered by this proposal, the applicant and related companies are established in the territory of the Republic of Poland and do not benefit from the exemption referred to in Article 6 and from the exemption referred to in Article 17(1) Pact 34 and 34a updop.
The applicant questioned whether, if the applicant or the related company containing a controlled transaction with the applicant demonstrates income in one of the sources (which include these transactions) and loss in the other, this transaction will be able to benefit from the exemption from the obligation to draw up local transfer pricing documentation on the basis of Article 11n(1) Corporate Income Tax Act?
Authority position
According to the Authority’s position, only if none of the related entities referred to in the request, which are parties to the controlled transaction, is loss-making from the source of revenue to which the transaction will be included, will be exempted from the obligation to draw up local transfer pricing documentation on the basis of Article 11n(1) Updop.
Thus, the authority in this interpretation took a favourable position from the point of view of the taxable person, stating that the taxable person may benefit from the exemption from the obligation to draw up transfer pricing documents unless a tax loss has been incurred from that source to which the transaction is linked.
The issue of tax loss from the second revenue source, which therefore remains irrelevant from the point of view of the exemption. It should be stressed that this exemption applies only to national entities, i.e.
resident, established or managed in the territory of the Republic of Poland and is subject to the fulfilment of the other 2 conditions resulting from Article 11n(1) Updop.
The same positions were also presented in earlier interpretations, including individual interpretation from 3 January 2020, The signature. 0111-KDIB1-3.4010.481.2019.1.IZ, Interpretation by day 7 October 2019, The signature. 0111-KDIB1-3.4010.341.2019.1.APO.
This means the formation of an interpretative line favourable to taxpayers, but still at the turn of August and September 2019 the tax authorities held an unfavourable position for taxpayers, indicating that, since the provision does not specify where the source of revenue cannot be loss so that the taxpayer can benefit from the preferences, that loss cannot occur on both sources of income.
Therefore, the existence of a loss on capital gains would exclude the possibility of benefiting from an exemption, even though the transaction itself most often translates into operating income/losses, according to the individual interpretation of the day 22 August 2019, The signature. 0111-KDIB1-2.4010.260.2019.1.MS.
Doubts
On the basis of the facts set out in the tax ruling, there is doubt as to the possibility that national entities may benefit from an exemption from the obligation to produce documentation when the controlled transaction is carried out with companies outside the PGK and which suffer losses from PGK.
The issue of exemption from the obligation to draw up transfer pricing documentation for transactions between companies forming a tax group directly regulates Article 11n(4) Updop.
However, it is worth considering whether the loss incurred by the companies of the PGK with which the controlled transaction is carried out will not affect the possibility of benefiting from an exemption from Article 11(1) adopted by other non-member companies.
The current rules do not give a clear answer to the doubts expressed above. Nor has this issue been raised by the tax authorities so far and is the subject of the above interpretation, although this is an element of the facts on which the interpretation was based.
The relationship between the exemption of domestic transactions and the exemption of transactions between taxpayers belonging to PGK is still unclear – taxpayers may have doubts, among other things, whether the value of intra-PGK transactions should be taken into account for the purpose of establishing that the document threshold is exceeded and other exemptions applied.
If you use the exemption from documentation obligations, it is worth reviewing the documentation obligations, having regard to each of the current provisions and current positions, as indicated, inter alia, in those tax rulings.