tax advisor, Junior Tax Manager at RSM Poland
The obligation to prepare tax documentation in the case of transactions by/with partnerships has been a source of confusion among taxpayers for a quite long time. To prepare or not to prepare? That’s the question! – such a paraphrase of the famous Shakespearian quote clearly illustrates the dilemma that many taxpayers have had to face.
The TP documentation obligation – Is it or is it not?
Until the end of 2014, the issue of TP documentation was troublesome insofar that it was not clear whether the commercial nature of transactions made by partnerships may be verified by tax authorities and thus, if the authorities have the right to estimate the taxpayer’s income (e.g. co-owner of such partnership) or not.
Such right granted to tax authorities is, for obvious reasons, of material importance for the level of potential tax risk. One of the best methods to minimize the risk is professionally prepared and comprehensive TP documentation. And here our dilemma arises. On one hand – partnerships were not (and are not) obliged to prepare TP documentation. Regulations on TP impose such obligation on taxpayers and provided that partnerships are not the income-tax payers (with the exception of a limited joint-stock partnership), this obligation is not applicable to partnerships. This issue is so important since the legislator juggles the notions of a taxpayer, domestic entity, foreign entity, related entity… and the mentioned are obviously not equivalents that can be used interchangeably.
Art. 9a of the Corporate Income Tax Act (Art. 25a of the Personal Income Tax Act), which indicates who and when is obliged to prepare TP documentation, refers to a taxpayer, whereas Art. 11 of the Corporate Income Tax Act (Art. 25 of the Personal Income Tax Act), which regulates, among others, relations between parties, refers to the notion of an entity. Provided that statutory conditions regarding the relations between parties are met and that thresholds for values of transactions are exceeded, the TP documentation obligation could apply only to partners of partnerships, because it is them who are income-tax payers. On the other hand – despite the lack of the documentation obligation – a stance (confirmed by some judges of administrative courts) occurs that tax authorities have the right to verify transactions to which partnerships are parties, because the regulation does not specify if «the conditions agreed on or imposed» refer only to certain conditions of transactions between related parties. The bare minimum is only, which results from the location of this regulation, that one of domestic entities – related party within the meaning of Art. 11 of the Corporate Income Tax Act – shall be an income-tax payer (Voivodship Administrative Court in Poznań in the judgement of 13 October 2010, file ref. no. I SA/Po 526/10). The message was, therefore, as follows: „Dear Taxpayer, are you making transactions with or as a partnership? Do not worry, there is no need for TP documentation. Still, please do not feel surprised if we decide to verify the commercial nature of such transactions and estimate your income (and you will have nothing to defend yourself with)”.
If in trouble, nothing but TP documentation
The above statement is certainly a considerable simplification. It is not that in such a hypothetical situation, a taxpayer is totally defenseless. As part of an investigation or tax procedure, the taxpayer could use a whole range of evidence (unless they go towards proving that tax authorities have no right to verify the prices they applied). Nevertheless, it is clear that well-thought out documentation which had been already prepared, would be a far more solid line of defense. Taking the above into account, many taxpayers – notwithstanding the lack of such obligation – used to decide to prepare the TP documentation regarding transactions to which partnerships were parties. Just in case.
One problem less, two problems more…
Since January 2015, the dilemma of TP documentation is no longer the case for the legislator specified the notions of domestic and foreign entities that can be considered related parties. The ranks of „the lucky” were joined by a new category – organizational units without legal personality, which include partnerships. Therefore, transactions to which partnerships are parties (e.g. transactions between a limited company and a partnership, transactions between two partnerships and transactions between a partner and a partnership) may be subject to estimation of income by tax authorities. Similarly to how it was before, the obligation to prepare TP documentation will be imposed on partners of a partnership and not the partnership itself.
A new element introduced when amending the Art. 9a of the Corporate Income Tax Act (Art.25a of the Personal Income Tax Act) is the obligation to document one of the following “transactions” between two related taxpayers: conclusion of the articles of association of a company that is not a legal person, joint venture agreement or any agreement of a similar nature. At the first sight, it seems that tax authorities will be able to verify the commercial nature of conditions of the agreements, especially the rules on the rights of partners (the parties) to share in profits and losses, which rules are established in an agreement. Is this feasible? That is a good question which we will try to answer in future posts. At present, we can only quote lyrics of the song of the Piersi band and say: There will be! There will be fun! A lot will happen!...