How to set the documentation obligation for intragroup loan transactions

For the purpose of establishing the documentation obligation, the value of the loan capital understood as the highest value of the outstanding capital made available in the tax year for which the documentation is drawn up should be taken into account, such a conclusion being based on the most recent individual interpretation at the date of application of the tax ruling. 11 July 2022[1], the recent dominant position of tax authorities on multiannual loans and renewable limits.

On 11 July 2022 an individual interpretation has been issued to establish the documentation obligation for a loan of less than the amount of the contract and for a multi-annual loan. The proposal is common to both cases, for the purpose of establishing the documentation obligation, account should be taken of the value of the loan capital understood as the highest value of the capital made available, which is outstanding in the tax year for which the documentation is drawn up.

The applicant, which is a parent company in the Group and implements, inter alia, financial transactions involving the granting of financing to the Group entities, requested an individual interpretation of the following planned transactions:

the granting of a loan to a related party on the basis of a contract in the amount indicated in the contract above the documentation threshold (i.e. threshold 10,000,000 PLN), from which the borrower in a given tax year will use the amount of the loan's capital up to the threshold (the loan capital will not be paid to the borrower in full).

the granting of a loan to a related party on the basis of a contract in the amount indicated in the contract above the documentation threshold (i.e. threshold 10,000,000 PLN), of which the borrower will use the total amount of the loan capital in a given tax year (the capital of the loan will be paid to the borrower in full) and In the next the tax year of the borrower shall repay part of the capital of the loan, so that the value of the capital of the loan remaining to be repaid by the borrower at the end of the following tax year and in subsequent years the loan shall not exceed the documentation threshold.

Therefore, the applicant had doubts as to the determination of the value of the controlled transaction for the verification of the transfer price documentation obligations for the financial transactions described. Furthermore, for the purposes of the application, he indicated that the transactions described Under point 1) and 2) they are not homogeneous transactions and should therefore be considered separately.

In its explanatory memorandum, the Authority draws attention to the reference to ‘actual behaviour of the parties’ in the definition of controlled transaction (Article 11a(1)(6)) CIT Act[2]).

In accordance with the provision, "as far as a controlled transaction is concerned in this Chapter - this means identified on the basis of the actual behaviour of the parties to the activity of an economic nature, including the attribution of income to a foreign establishment whose conditions have been established or imposed as a result of links".

It also stresses that such behaviour “should be identified with the rationality of the action, i.e. those activities which are based on legitimate and genuine grounds which, once implemented, will prove effective. Effectiveness in turn means action to the intended purpose’[3].

The Authority also refers to the General Interpretation of 29 December 2021 on the definition of a controlled transaction in which the Minister of Finance also draws attention to similar features of ‘actual behaviour of the parties’[4].

In addition, it stresses that the purpose of the loan agreement is not to conclude it itself and to raise a certain amount of capital by the borrower, so the rationality of the action is to obtain it.

By focusing on the subject of the proposal and clarifying the concept of the value of capital, the Authority points out that ‘by means of the concept of ‘capital values’ referred to under Article 11l(1)(1) The CIT Act should be understood as the highest amount of capital made available during the reporting period resulting from the contract or other documents.

This is also due to the website podatki.gov.pl - TPR Transfer Prices Information – Questions and Answers (issue second, October 2021 - answer to the question 84)[5]”.

He also refers to the published reply of the Minister of Finance to the parliamentary interpelling from 15 December 2021 on the inclusion of loans in transfer pricing records[6], who holds a similar position.

Therefore, when establishing the documentation obligation in the case of a loan transaction, it is necessary to establish on the basis of a contract or other document and, where this is not possible, on the basis of payments received or transmitted, whether the value of the loan capital exceeds the statutory thresholds.

In the case of multi-annual contracts, the entity should examine whether the value of the capital of a given loan exceeds the documentation threshold In the first and each subsequent tax year of the duration of the loan.

‘The value of the capital for a given tax year shall be determined on the basis of the highest value of the capital made available, outstanding in the tax year for which the documentation is drawn up’.

In view of the above arguments, the Authority considered the position of the Company to be correct and in accordance with it:

Where a loan is granted to a related party on the basis of a contract, the amount indicated in the contract above the documentation threshold (i.e. threshold 10,000,000 PLN), In contrast, the borrower will use a loan capital amount not exceeding the threshold in a given tax year (the loan capital will not be paid to the borrower in full),

• it is the company for the purpose of establishing the documentation obligation for a given tax year that should accept the actual value of the capital used for the loan, so the company will not be required to draw up the tax transfer pricing documentation for the transaction described in that tax year.

Where a loan is granted to a related party on the basis of a contract in the amount indicated in the contract above the documentation threshold (i.e. threshold 10,000,000 PLN), and the borrower will use the total amount of the loan's capital in a given tax year (the capital of the loan will be paid to the borrower in full) and In the next the tax year of the borrower shall repay part of the capital of the loan, so that the value of the capital of the loan remaining to be repaid by the borrower at the end of the following tax year and in subsequent years the loan shall not exceed the documentation threshold,

• it is a company for the purpose of establishing the documentation obligation for a given tax year in determining the value of the transaction that should accept the amount of the capital actually made available (which remains at its disposal) in a given year on the basis of the contract, rather than the amount of the capital itself recorded in the contract, so that in the year of the conclusion of the agreement and making all the capital available to the company, the company will be required to draw up the tax documentation of the transfer prices, and in subsequent years, when, as a result of the repayment of part of the capital, the value of the capital will not exceed the document threshold, the company will not have that obligation.

Author: Monika Lew, consultant Russell Bedford Poland, office in Katowice