- Exemption of income from participation in the profits of CIT taxable general and limited partnerships
- An office in Poland constitutes a tax permanent establishment
- Impact of COVID-19 on transfer pricing
- The concept of a controlled transaction of a unitary nature
- The Supreme Administrative Court confirms the possibility of using the privileges of UPO for a limited partnership
- Exemption of income from participation in the profits of CIT taxable general and limited partnerships
The exemption from Article 22 (4) of the CIT Act applies to revenue from participation in the profits of a general partnership or limited partnership obtained from the date on which those entities became CIT taxpayers – such conclusion follows from the general interpretation of the Ministry of Finance dated 17th December 2021 (DD5.8203.2.2021).
The above interpretation focuses on the possibility of applying an exemption from taxation of income derived from participation in profits of CIT taxpayers, which from 2021 include general and limited partnerships. The interpretation contains a list of entities that may take advantage of such exemption, as well as the conditions that must be met to benefit from it. At the same time, the Ministry of Finance confirmed the right of partners to the exemption.
The general interpretation indicates that the exemption may cover a specific catalogue of revenues listed in Article 7b (1) point 1 letters a, f and j of the CIT Act.
According to the above regulation, the exemption covers:
- Income actually received in connection with a profit distribution made by a general and limited partnership to its partners;
- The equivalent of the profits of a general or limited partnership allocated to increasing its share capital;
- The value of undistributed profits in a general and limited partnership and the value of profits transferred to capitals other than the share capital of such a company in the case of its transformation into a company which is not subject to CIT.
In order to benefit from the exemption, it is necessary to meet the conditions indicated in Article 22 (4) of the CIT Act. These include: (i) the company paying out the dividends and other revenues from participation in the profits of legal persons is a company with its registered office in Poland; (ii) the company receiving the income (revenues) from dividends and other revenues from participation in the profits of legal persons is a company subject, in Poland or another EU or EEA state, to income tax on its entire income, regardless of where it is earned; (iii) the company obtaining the above-mentioned incomes (revenues) holds directly not less than 10% of shares in the company’s capital; (iv) the company obtaining the above-mentioned incomes (revenues) does not use exemption from taxation on its total income, regardless of the source from which it is earned.
Details of the Ministry of Finance interpretation can be found in our article: link.
2. An office in Poland constitutes a tax permanent establishment
The Head of the National Fiscal Information issued on 16 December, 2021 an individual interpretation (0111-KDIB1-2.4010.476.2021.2.MS) concerning determination whether in case of having an office in the territory of Poland it is treated as a tax permanent establishment within the meaning of Article 4a point 11 of the CIT Act and Article 5 of the agreement between Poland and the Federal Republic of Germany for the avoidance of double taxation with respect to taxes on income and on property (UPO PL-DE).
According to the facts described by the applicant (the Company), it is a company under German law (the equivalent of a Polish limited liability company) which is a corporate income taxpayer in the Federal Republic of Germany. The company sells fuel at its own and partner petrol stations. The Company’s management is effectively based in Germany and business decisions are taken there. At the beginning of 2021 the Company decided to lease office premises in Poland in order to increase its market share and expand the Company’s customer base with entities having their business premises in Poland and Lithuania. This objective is pursued by, inter alia, obtaining local support for the Company, in particular by seeking potential customers – forwarding companies based in Poland and Lithuania interested, due to the nature of their business, in purchasing fuel in Germany using fuel cards. In addition, the Company’s employees working in Poland provide customers with fuel cards previously generated in Germany and provide ongoing support in the event of any problems arising during refuelling.
In the Company’s opinion, taking into account its overall activity, the activities performed in Poland are of preparatory and supportive nature in relation to the main subject of the Company’s business activity, therefore an establishment within the meaning of Article 4a point 11 of the CIT Act and Article 5 of the UPO PL-DE does not arise.
The Director of National Fiscal Information (KIS Director) found the Company’s position to be incorrect due to the fact that after the Company presented the characteristics of the activities performed in the Polish office, in his opinion the activity of the Polish office is partially identical with the activity of the parent entity and the preparatory or support character of the office’s activity cannot be mentioned here.
The KIS director pointed out that the office in Poland fulfils all the conditions according to the UPO PL-DE to be considered a permanent establishment, i.e.:
- there is a place where the activity is carried out (an establishment),
- it has a permanent character,
- the activity performed in the office is not of a preparatory or supportive nature.
In support of his position, the KIS Director quoted point 24 of the Commentary to Article 5 of the Model Tax Convention, as well as the judgment of the Supreme Administrative Court of 4 April, 2012, ref. II FSK 1864/10 and stated that “It is often difficult to distinguish activities which are of a preparatory or support nature from those which are not. Certainly, a permanent establishment, the purpose of which is identical to that of the enterprise as a whole, does not conduct activity of a preparatory or supportive character“.
In addition, the KIS Director pointed out that based on the OECD Model Tax Convention and its Commentary, the necessary conditions for the permanent establishment, which in his opinion the Company fulfils in points 1-3, are:
- the existence of a permanent establishment,
- the economic right to dispose/manage the said establishment, and
- using the aforementioned establishment to carry out business activities, i.e. activities of significant size and value directly for third parties, or
- independently of the above conditions, the existence of a person who acts on behalf of the enterprise, i.e. acts as a representative and has and habitually exercises a power of attorney to conclude contracts in the country concerned. This is the case, in particular, if the declaration of intent of this person creates a binding state for the represented enterprise.
3. Impact of COVID-19 on transfer pricing
On September 28, 2021, the 13th Transfer Pricing Forum was held during which the Transfer Pricing Forum Recommendations on the impact of COVID-19 on transfer prices of Polish taxpayers were adopted. These recommendations were included in the document “Impact of COVID-19 on transfer pricing. Collection of good practices” published on the website of the Ministry of Finance.
The content of the “Collection of good practices” refers to the recommendations presented by the OECD on the application and verification of transfer pricing during the pandemic period in the document “Guidance on the transfer pricing implications of the COVID-19 pandemic” published on 18 December, 2020.
The purpose of this the Ministry of Finance (MF) document is to provide taxpayers and representatives of tax authorities with good practices on transfer pricing determination and verification in the context of the prevailing COVID-19 pandemic. They are intended to provide a template/support on how the arm’s length principle should be applied in the currently extraordinary circumstances that may have and may affect global supply chains, including transactions between related parties. “Collection of good practices” is divided into the following chapters, which address, inter alia, the following issues:
- Comparative analysis during the COVID-19 period
For comparative analysis, it is recommended that taxpayers reliably verify whether and to what extent the pandemic has affected their business. When preparing a comparative analysis in the period of occurrence of the pandemic, entrepreneurs should take into account the principles set out in § 2(3) of the Transfer Pricing Documentation Regulation. If the entrepreneur does not have data (internal as well as external) that meet the conditions of comparability for the period of occurrence of COVID-19 then it is recommended to carry out a reconciliation on the basis of which it is probable that the conditions applied in the controlled transaction are consistent with the conditions that would be agreed between unrelated parties.
- Allocation of COVID-19 exceptional costs between related parties to the transaction
According to the document, such costs include, among others: IT costs related to the initiation of remote working by the employees of a company, costs of security measures for employees related to COVID-19. On the other hand, the analysis of the legitimacy of incurring extraordinary costs associated with the occurrence of COVID-19 may include, in particular, an analysis of the value and structure of costs incurred in the previous year/ years (i.e. before the occurrence of COVID-19), a comparison and analysis of information from the financial statement, e.g. for 2020 with the statement from the previous year, or an analysis of possible changes in agreements with related parties during the COVID-19 period.
- Anti-crisis support
For example, the Collection of good practices indicate that with respect to the impact of the anti-crisis support on the benchmarking analysis, one should consider the relevance of changing the previously used profitability ratio for verifying the marketability of the terms of the controlled transaction. This change may be dictated e.g. by the intention to reduce/ eliminate the impact of the received anti-crisis aid by the entity on the determined profitability range or/ and to eliminate the impact of the received anti-crisis aid by entities in the sample adopted for the determination of the profitability range.
- Transfer pricing documentation for COVID-19 period
In this chapter the MF points out that when presenting the impact of COVID-19 on a controlled transaction, in particular changes in the economic environment (micro and macroeconomic factors), changes in the functional analysis, benchmarking results and behaviour of unrelated parties should be described.
- Advance Pricing Agreements (APA)
The MF pointed out that during the period covered by COVID-19, the provisions governing the proceedings of an Advance Pricing Agreement, the requirements for submission of documents for its negotiation remain unchanged. On the other hand, agreements issued prior to the occurrence of COVID-19 remain valid during COVID-19, in accordance with their duration.
- Transfer pricing adjustment within the meaning of Article 11e of the CIT Act (Article 23q of the PIT Act)
The document indicates that the mere occurrence of COVID-19 does not automatically mean that there are grounds for making a subsequent transfer pricing adjustment of all controlled transactions. The reason in accordance with Article 11e of the CIT Act (respectively, in the meaning of Article 23q of the PIT Act) is the impact of a change in material circumstances on the terms of the transaction that makes the terms originally market – non-market.
4. The concept of a controlled transaction of a unitary nature
On 9 December, 2021. The Ministry of Finance issued a general interpretation on the concept of controlled transaction of homogeneous nature (DCT2.8203.2.2021).
The interpretation indicates which elements should be taken into account when assessing whether a given controlled transaction is of homogeneous nature – in accordance with Article 23w (5) of the PIT Act and Article 11k (5) of the CIT Act – they are:
- the economic unity of the transaction, which is to be understood as similarity of the subject matter of the transaction and other main features of the transaction relevant for transfer pricing, in particular:
- the contractual terms of the transaction,
- the functions performed by each party to the transaction, taking into account the assets used and the risks incurred
- the financial parameters of the transaction,
- the characteristics of the goods or services transferred
- the business strategy applied;
- comparability criteria listed in the Decrees of the Minister of Finance of 21 December, 2018 on transfer pricing for personal income tax/ corporate income tax), i.e.:
- the characteristics of the goods, services or other performances,
- the course of the transaction, including the functions performed by the entities in the transactions under comparison, the assets employed by them and the risks incurred, taking into account the ability of the parties to the transaction to perform a function and to bear a given risk,
- the terms of the transaction set out in the contract, agreement or other evidence documenting those terms,
- the economic conditions existing at the time and place at which the transaction was effected, and
- the economic strategy.
– in addition, as indicated in the interpretation, “As a rule, the features affecting the creation of added value in a chain of a given good, service or provision, the contractual terms of the transaction, the assets involved, the functions performed by each party to the transaction (e.g. the producer or distributor) should be analysed. In case of doubt, the relevant aspects of the transaction should be those that would have been considered by unrelated parties in assessing the transaction if they had entered into it”;
- transfer pricing verification methods – the application of the same transfer pricing verification method to each of the transactions constituting a unitary transaction provided that other relevant circumstances of that controlled transaction do not indicate otherwise (transactions where different transfer pricing verification methods are applied may also be considered as unitary transactions);
- other relevant circumstances of the transaction – the catalogue of premises necessary to determine whether a transaction is of homogeneous nature is not closed. The legislator allows for the possibility of other significant circumstances. Such circumstances include the use of the safe harbour simplification. Transactions covered by the safe harbour simplification are not homogenous with respect to transactions not covered by the simplification. In a situation in which there is a bundle of loan transactions and only some of them benefit from the safe harbour, there are two homogeneous transactions.
The interpretation also includes an indication as to what is irrelevant for the assessment of the homogeneity of the transaction – the quoted art. 23w (4) of the PIT act and art. 11k (4) of the CIT act indicate, among others: the number of accounting documents, making or receiving payments and related entities with which the controlled transaction is concluded. The purpose of this is to prevent artificial division of transactions into parts.
5. The Supreme Administrative Court confirms the possibility of using the privileges of UPO for a limited partnership
On 21 September, 2020. The Provincial Administrative Court (PCA) in Gliwice issued a positive judgment (I SA/Gl 121/20) regarding the application of the Polish-German double taxation treaty to tax transparent limited partnerships. The Supreme Administrative Court (SAC) confirmed this position in the judgment of 6 July, 2021 (II FSK 101/21).
The dispute before the PAC was based on a question raised by a company in a request for an individual interpretation concerning the possibility of benefiting from preferential conditions for withholding tax (WHT) resulting from the Polish-German Double Tax Treaty (DTT). In the opinion of the Director of National Fiscal Information, such a possibility is excluded because a partnership (limited partnership) not subject to income tax cannot benefit from the preferential terms of WHT. In the opinion of the tax authority, the person benefiting from these privileges is a partner of a partnership and in relation to this entity it depends whether the receivables paid by a Polish tax resident should be taxed.
Both the PAC and the SAC agreed with the company, indicating that the subjective scope of the DTT is regulated in Article 1, according to which the DTT applies to persons having their domicile or seat in both Contracting States. The courts pointed out that in this provision we are dealing with prerequisites for certain entities to be covered by the agreement – having the status of a person and having a domicile or seat. Another prerequisite analysed was tax residency in Poland or Germany.
In the justification for the ruling, the SAC explicitly indicated that in the case of German limited partnerships that are recipients of receivables paid by the company, despite the fact that they are not taxpayers of corporate income tax, on the basis of Article 4 (4) of the DTT, it is possible to apply a legal fiction of the residence of the partnership in Germany. These companies, pursuant to Article 4 (4) of the DTT, have their registered office in Germany and income earned by these companies, including among others receivables paid by the company, as income attributable to a permanent establishment of their partners located in Germany, is subject to taxation in Germany. Thus, the application of a reduced tax rate or not charging tax on the basis of DTT on dues paid to them by the company is justified provided that the company has valid certificates of residence.