In the article you will learn:
- why the regulations on transactions with tax havens are questionable;
- how the position of the Director of the National Tax Information affects documentation obligations;
- what were the intentions of the Legislator when introducing the new regulations.
Junior Tax Consultant w RSM Poland
The Ministry of Finance, the Transfer Pricing Forum and the Director of the National Tax Information, in many documents, try to interpret the provisions on transactions with the so-called tax havens. Unfortunately, the explanations we receive are not always what the taxpayers want. In the individual ruling of January 11, 2022, the Director of the National Tax Information presented a position unfavorable for taxpayers regarding the so-called haven transactions. How can this affect entities carrying out indirect haven transactions?
What are the latest changes in the rules on direct and indirect haven transactions?
Changes in the scope of transactions with the so-called tax havens, which have been in force since 2021, introduced, among others, obligation to verify transactions in terms of correspondence with market price principle, in which the beneficial owner has a place of residence, seat, or management board in a tax haven.
For the so-called direct haven transactions – that is, transactions carried out with entities with their place of residence, seat, or management board in a tax haven – the documentation threshold is PLN 100,00. Remember – in this case the documentation obligation covers both purchase and sales transactions.
However, for the so-called indirect haven transactions, that is, transactions carried out with unrelated entities and, if the actual owner has a place of residence, seat, or management board in a tax haven, and if the contractor makes settlements with the haven entity, the documentation threshold is PLN 500,000. Additionally, for indirect haven transactions, the documentation obligation covers only purchase transactions.
Indirect haven transactions from the perspective of the Tax Capital Group
The dominant copartnership, which established the Tax Capital Group (hereinafter referred to as „TCG”) with other companies, asked the Director of the National Tax Information for an individual interpretation.
The company concludes with related entities – both being and not being members of the TCG (hereinafter “Subsidiaries”) – controlled transactions, the value of which exceeds PLN 500,000. These subsidiaries may enter into further transactions – and thus make settlements – with entities seated or with management board in a territory applying harmful tax competition.
Doubts about transactions with tax havens
The doubt of the company applying for the interpretation was raised by the point, whether in the case of concluding a controlled transaction with a subsidiary, which is or is not a TCG member, exceeding the value of PLN 500,000 in the tax year, in a situation, when this company makes settlements with a haven entity, the Proponent will be entitled to take advantage of the exemption from the obligation to prepare transfer pricing documentation pursuant to Art. 11n point 4 of the CIT Act and Art. 11n point 1 of the CIT Act (exemption for domestic transactions carried out by entities that did not suffer a tax loss), assuming that the statuatory conditions resulting from the indicated regulation are met.
What was the position of the Director of the National Tax Information on indirect domestic transactions?
The Director of the National Tax Information noted that by introducing changes to the Haven regulations, the Legislator’s intention was to extend the existing documentation obligations also to transactions as a result of which the domestic entrepreneur receives a payment from an entity „located” in a tax haven.
In the case of a controlled transaction concluded by a Company that is a member of TCG with another company belonging to the same TCG (when this company makes settlements with a paradise entity), it should be stated, that in such a case the documentation obligation referred to in Art. 11o paragraph 1a, 1b of the CIT Act is not created. Thus, it is also not possible to apply the exemption under Art. 11n pointt 4 of the CIT Act.
On the other hand, with regard to a controlled transaction (exceeding PLN 500,000 in the tax year) concluded by a Company that is a member of the TCG with a company not belonging to that TCG (when this company makes settlements with a haven entity), the Proponent will not be entitled to apply the exemption specified in Art. 11n point 1 of the CIT Act, in the event of a possible obligation to prepare local transfer pricing documentation resulting from Art. 11o paragraph 1a, 1b of the CIT Act.
The Director of the National Tax Information explained that such understanding by the legislator of the mutual relationship between Art. 11n and 11o of the CIT Act is also confirmed by the Act of January 1, 2022, under the so-called of the Polish Deal, change of the introduction to the enumeration in Art. 11n. Currently it reads: The obligation to prepare local transfer pricing documentation referred to in Art. 11k paragraph 1 does not apply to controlled transactions.
What does the position of the Director of the National Tax Information mean for taxpayers?
On the one hand, the authorities are trying to ease the provisions on haven transactions – it happens, for example, through:
- issuing a general interpretation with reference to DCT2.8203.2.2021, pursuant to which the provisions of Art. 11o paragraph 1a and 1b of the CIT Act, as a rule, relate only to cost transactions;
- issuing an answer to a parliamentary question No.19562 – and an indication in it that the documentation limit of PLN 500,000 is determined on the basis of a homogeneous transaction, concluded with one contractor;
- issuing a reply to the parliamentary interpretation No. 23727 – stating that there is no obligation to prepare group documentation, of the obligation to prepare local transfer pricing documentation results only from concluding a transaction with an unrelated entity, which has its seat in the so-called tax haven;
- elimination of the obligation to prepare transfer pricing analyses in the case of the so-called haven transactions with unrelated entities (change introduced as part of the so-called Polish Deal);
- issuing a draft of tax explanations No. 5 on transfer pricing confirming the above guidelines: Obligation to prepare local transfer pricing documentation for the so-called indirect haven transactions referred to in Art.11o paragraph 1a and 1b of the CIT Act and Art. 23za paragraph 1a and 1b of the PIT Act.
On the other hand, the discussed interpretation points to a completely opposite direction – extending the existing documentation obligations. The complexity of these provisions makes it very important to properly verify contractors and their real beneficiaries. Therefore, if you have any questions or need to discuss the topic, we strongly encourage you to contact our expert, Tomasz BEGER.