Transactions with entities from ‘tax havens’ at transfer prices

In 2022 There have been several changes in transfer pricing legislation, including deadlines for drawing up tax records for transactions between related parties.

As is known, such documents may be drawn up not only for transactions with related parties, but also for transactions with entities domiciled, established or managed in the territory or country applying harmful tax competition (referring more simply to entities from so-called tax havens).

With this she was also in 2022 a not very transparent obligation for taxpayers to be involved in so-called "intermediate paradise transactions".

Transactions with entities from tax havens are closely related to transfer pricing and have been for a long time. It is worth looking at how the legislative approach has been shaped and how the legislation has changed. This will make it clear that the question of setting the market price level for transactions with a tax paradise entity should be no less important than a similar price setting for transactions with related parties.

Before 2017 The provisions on transfer pricing were not particularly extended, the same was true for transactions with entities from tax havens. Their recipe was quite simple.

According to Article 9a(3) Corporate Income Tax Act as before 1 January 2017: The obligation to draw up documentation shall also include a transaction whereby the payment of a claim resulting from such a transaction is made directly or indirectly to the resident, established or managed entity in the territory or in a country applying harmful tax competition if the total amount (or equivalent) resulting from the contract or actually paid in the tax year the total amount payable in the tax year of benefits exceeds the equivalent 20,000 EUR.

It is worth noting that to 2019 documentation thresholds[1] are expressed in euro. Their conversion took place at the average rate announced by the National Bank of Poland, in force on the last day of the tax year preceding the tax year in which the transaction was concluded (the contract) covered by the documentation obligation.

In 2017 entered into force first a serious change in transfer pricing rules. Not only has the scope of the information provided in the transfer pricing tax records been expanded, the level of the documentation thresholds has changed, but the issue of the examination of the documentation obligation has been further complicated.

How easy it was to determine whether a transfer pricing tax record should be drawn up for a given transaction, it shows for example Article 9a(1) Corporate Income Tax Act (according to the wording of the years 2017 – 2018).

Tax collectors:

1. whose revenue or costs, within the meaning of the accounting provisions, determined on the basis of the accounts kept exceeded the equivalent in the year preceding the tax year 2,000,000 EUR:

(a) transactions with related parties during the tax year (...), having a significant impact on their income (losses), or

(b) including in the tax year other events in the accounts the conditions of which have been established (or imposed) with associated entities (...) having a significant impact on their income (losses)

- or

1. making, directly or indirectly, payment of a claim to an entity resident, established or managed in a territory or in a country applying harmful tax competition resulting from a transaction or other event recorded in the accounts, if the total amount (or equivalent) resulting from the contract or actually paid in the tax year of the benefit exceeds the equivalent amount 20,000 EUR, or
2. containing with the resident entity, established or managed in the territory or country applying harmful tax competition:

(a) an agreement of a company not a legal person if the total value of the contributions contributed by the shareholders exceeds the equivalent 20,000 EUR or

(b) an agreement of a Joint Undertaking or other agreement of a similar nature in which the value of the jointly implemented project as defined in the Agreement and, in the absence of a determination in the Agreement of that value as expected at the date of conclusion of the Agreement, exceeds the equivalent 20,000 EUR

• are obliged to draw up tax records for these transactions or other events, hereinafter referred to as "tax records".

However, this regulation did not apply for too long, as already in January 2019 another change has come into force. Among other things, the scope of the information to be included in the tax records has increased further. New transaction thresholds were also introduced (at last in terms expressed in PLN). Transactions with ‘paradise entities’ were discussed, among others, under Article 11o Corporate Income Tax Act (initially from 2019).

Tax payers are also required to prepare local transfer pricing documentation:

1. making, directly or indirectly, payments to an entity resident, established or managed in a territory or country applying harmful tax competition, if the total amount resulting from the contract or actually paid in the financial year exceeds the total amount of benefits due that year 100,000 PLN or the equivalent of that amount, or
2. containing with the resident entity, established or managed in the territory or country applying harmful tax competition:

(a) an agreement of a company which is not a legal person if the total value of the contributions contributed by the shareholders exceeds 100,000 PLN or the equivalent of that amount, or

(b) a Joint Undertaking agreement or other agreement of a similar nature in which the value of the jointly implemented project as defined in the contract and, in the absence of a determination of that value in the contract as foreseen at the date of conclusion of the contract, exceeds 100,000 PLN or the equivalent of that amount.

Amounts concerned Under section 1, expressed in foreign currency, shall be converted into gold at the average rate announced by the National Bank of Poland, in force on the last working day preceding the day of implementation of the economic operation.

This provision had points in common with the provision in force in the years cited above 2017 – 2018, in particular, the passages concerning the conclusion of a partnership agreement or a joint venture agreement.

In 2021 further changes have been made. He started to apply section 2a added to Article 11k Corporate Income Tax Act.

According to him, in the case of controlled transactions with an entity resident, established or managed in the territory or in a country applying harmful tax competition, the documentation threshold shall be 100,000 PLN, regardless of the type of transaction. The recipe was pretty clear.

What was less clear is change under Article 11o Corporate Income Tax Act introducing the concept of "indirect Paradise transactions". The recipe after the changes was as follows:

Tax payers and companies other than legal persons carrying out transactions other than a controlled transaction with a resident, established or managed in a country applying harmful tax competition shall also be required to draw up local transfer pricing documentation if the value of the transaction for the tax year and in the case of non-legal persons for the financial year exceeds 100,000 PLN. Provisions Article 11k(3-5), Article 11l, Article 11q(1) and Article 11r shall be applied mutatis mutandis.

1a.

Tax payers and non-legal persons carrying out a controlled transaction or a transaction other than a controlled transaction shall be obliged to draw up local transfer pricing documentation if the beneficial owner is resident, established or managed in a country applying harmful tax competition and the value of that transaction for the tax year, and in the case of non-legal companies for the financial year, exceeds 500,000 PLN.

Provisions Article 11k(3-5), Article 11l, Article 11q(1) and Article 1ir shall be applied mutatis mutandis.

1b. For purposes section 1a the actual owner is presumed to be resident, established or managed in the territory or country applying harmful tax competition, if second the transaction page in question Under section 1a, shall settle in the tax year or financial year with the entity established or managed in the territory or country applying harmful tax competition. When determining these circumstances, a taxable person or a company other than a legal person shall be obliged to exercise due diligence.

Value of the transaction in question Under section 1 and 1a, expressed in foreign currency, shall be converted into gold at the average rate announced by the National Bank of Poland, in force on the last working day preceding the day of implementation of the economic operation or conclusion of the contract.

As could be foreseen, the idea of drawing up tax records when a counterparty enters into transactions with paradise entities (as mentioned above) under Article 11k(1b)), did not like entrepreneurs. It is hard to be surprised, in addition to the many questions related to the regulations introduced, many of them did not facilitate the fulfilment of their duties.

The legislature apparently realized this because in second half 2022, Working also on a bill introducing a package of changes commonly known as "Polish Deal 3.0.”, He also proposed further changes to the transfer pricing rules, particularly in the cumbersome issue of transactions with "paradise entities".

one the proposed changes were to increase part of the transaction thresholds for transactions with paradise entities (direct and indirect). In the case of direct Paradise transactions, it has been proposed to double the documentation threshold of relevance (i.e. 200,000 PLN).

In the case of indirect transactions, different materiality thresholds were adopted for certain types of transactions - the basic materiality threshold would remain at the level 500,000 PLN, but for financial and commodity transactions would be 2,500,000 PLN.

At the same time, the scope of the documentation obligation for so-called indirect Paradise transactions would be clarified. Namely, the documentation obligation would apply to those taxpayers, non-legal companies and entities who would receive a claim resulting from the transaction.

This means that the examination of the transaction for the existence of a real owner in a tax haven or settlement with a paradise entity would concern only the recipient. The presumption in question would also be abandoned under Article 11o(1b) Corporate Income Tax Act.

Instead, it was proposed to exempt the documentation obligation for so-called indirect Paradise transactions in certain cases.

In the end, the legislator agreed to the votes that were expressed at the stage of the opinion of the bill, according to which deleting the provisions on "indirect Paradise transactions" would be a good idea. This does not mean that all the proposals have been abandoned, mainly the documentation thresholds for direct transactions with tax havens (although the threshold of 2,500,000 PLN was introduced only for financial transactions.)

In accordance with the current 2023 Article 11k(2a) The corporate income tax laws, the case of controlled transactions with a resident, established or managed entity in the territory or in a country applying harmful tax competition or a foreign establishment located in the territory or in a country applying harmful tax competition, shall be the document threshold respectively. 2,500,000 PLN for a financial transaction, and 500,000 PLN for transactions other than financial transactions.

On the other hand, Article 11o(1) The corporate income tax law, as it stands, is as follows:

Tax payers and non-legal persons carrying out a transaction other than a controlled transaction shall also be obliged to draw up local transfer pricing documentation with the resident, established or managed entity in the territory or in a country applying harmful tax competition or a foreign establishment located in the territory or in a country applying harmful tax competition if the value of that transaction for the tax year and in the case of non-legal companies for the financial year exceeds:

• 1) 2,500,000 PLN - in the case of a financial transaction,
• 2) 500,000 PLN - for transactions other than financial transactions
• - Regulations Article 11k(1)(3-5), Article 11l, Article 11n(3)(6-8), Article 11q(1) and Article 11r shall be applied mutatis mutandis.

Fortunately for entrepreneurs, section 1a and 1b in the previous version, have been deleted.

As can be seen above, transactions with so-called "paradise entities" have been linked to transfer pricing for a long time. Given how often changes have taken place in recent years, it cannot be excluded that the legislator will still bow to this issue.