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Date added: 26.06.2024

Branch of a foreign company and simplification of documentation for micro and small entrepreneurs

As of 2021, micro and small entrepreneurs can benefit from a documentary simplification when preparing their local transfer pricing documentation without the need to include a benchmarking or compliance analysis.

In connection with this simplification, there were doubts among taxpayers whether branches of foreign companies could benefit from this simplification.

The Director of the National Fiscal Information Service ruled on this issue by issuing a tax ruling on 25 April 2024, 0111-KDIB1-2.4010.41.2024.1.EJ. In this tax ruling, the Director of the National Fiscal Information gave an answer to the taxpayer’s question whether the status of a micro and small enterprise for the purposes of applying the simplification should be determined solely on the basis of the data of the branch, i.e. without taking into account the data of the head office.

Factual state

The applicant, which is a branch of a company from Austria, carried out controlled transactions with the company that exceeded the documentation thresholds. During the period 2019-2022:

  • the branch’s annual turnover and total assets did not exceed EUR 10 million.
  • the average annual number of employees was less than 50.

The branch provided services to the company, the value of which exceeded the documentation thresholds thus an obligation to prepare transfer pricing documentation arose on its part. Due to the fact that the above-mentioned annual turnover and number of employees met the definition of a small entrepreneur, a doubt arose whether the branch could benefit from the documentation simplification and not prepare a comparative analysis or a compliance analysis. It should be pointed out that a branch is treated as an independent and autonomous entity for transfer pricing purposes.

Applicant’s position

The branch was of the opinion that the status of a micro or small entrepreneur, needed to benefit from the documentary simplification of the benchmarking or compliance analysis, should be determined solely on the basis of the data of the branch itself, omitting the data of the head office. According to the definition of a micro and small entrepreneur, which can be found in the Entrepreneurs’ Law and to which the CIT Act refers, it is a natural person, a legal person or an organisational unit that is not a legal person, to which a separate act grants legal capacity, performing business activity.

In addition, according to the double taxation treaty between Poland and Austria and the interpretation of the Minister of Finance of 15 April 2020 (SP4.8223.1.2020), a branch is treated as an independent entity in terms of tax settlements, independently of the head office. Therefore, the Applicant believed that it met the criteria of a micro/small entrepreneur and should be exempt from the requirement to prepare a comparative analysis on the basis of branch-only data.

Tax authority’s position

The tax authority disagreed with the applicant’s position. In justification, it indicated that although the branch operates in Poland, it is an integral part of the Austrian head office and not a separate, independent legal entity. The taxpayer and its foreign branch are related entities, which means that the data of both the branch and the head office should be taken into account when analysing the status of an entrepreneur.

The definitions of micro and small entrepreneur in the Entrepreneurs Act refer to the whole enterprise and not its part (branch). The applicant, being part of the Austrian company, must take into account the data of the whole enterprise, i.e. the Head Office, when determining its status.

In addition, the tax authority pointed out that the transfer pricing provisions are intended to ensure that transactions between related parties are carried out at arm’s length. The exemption from benchmarking or compliance analysis for micro and small entrepreneur  is intended to simplify procedures for small entities with limited administrative resources. A branch, which is part of a larger company, does not meet this criterion.

What’s more, the tax authority emphasised that granting an exemption to a branch on the basis of its data, disregarding that of its head office, would be contrary to the principles of consistency and uniformity of tax rules. The applicant cannot be treated as an independent entity in isolation from its head office, as it constitutes a single economic and legal entity with it. On the basis of the above arguments, the tax authority considered that the status of micro and small entrepreneur should be determined on the basis of the combined data of both the branch and the head office, which excludes the possibility of benefiting from the simplification of the comparative analysis for the branch.

Moreover, the tax authority pointed out that the provisions of the Entrepreneurs’ Law do not apply to foreign entrepreneurs operating in Poland through a branch, and thus a branch of a foreign entrepreneur, treated for transfer pricing as a related party of the head office, is not entitled to apply the benchmarking simplification.

Summary

The above position of the tax authority indicates that the application of the documentary simplification for micro and small entrepreneurs is not possible in the case of a branch of a foreign company. What is equally important, for the purposes of examining the prerequisites of this simplification, the data of the branch and the parent company should be examined jointly.

In summary, foreign entrepreneurs operating in Poland through branches must prepare full transfer pricing documentation for the branch, without the possibility to benefit from the simplification. Therefore, it is worthwhile to look into the issue of transfer pricing documentation well in advance in order to meet the obligations on time.

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