The documentation obligation regarding transfer pricing applies to both PIT (personal income tax) and CIT (corporate income tax) taxpayers. According to regulations, related entities are required to prepare local transfer pricing documentation for the tax year to demonstrate that transactions were concluded on terms that would have been agreed upon between unrelated parties.
Definition of Related Entities
In determining whether documentation for transfer pricing is required for a specific transaction, it is first worth considering whether the transaction in question was concluded between related entities. According to tax laws, related entities include:
- entities where one entity exerts significant influence over at least one other entity;
- entities over which the same other entity or spouse, relative, or second-degree relative of a natural person exert significant influence over at least one entity;
- entities without legal personality and their shareholders;
- limited partnership and limited joint-stock partnership and their general partners or general partnerships and their partners;
- taxpayer and their foreign branch, and in the case of a tax capital group – a capital company included in it and its foreign branch.
Significant influence, as mentioned above, occurs if at least one of the following conditions is met regarding the relationship between entities:
- ownership by the entity directly or indirectly of at least 25% of shares in the capital, voting rights in controlling bodies, constituting or managing bodies, or shares or rights to participate in profits, losses, or assets, or their expectations, including units of participation and investment certificates in another entity;
- possession by a natural person of the actual ability to influence key economic decisions made by a legal entity or an organizational unit without legal personality;
- marriage or the existence of a kinship or affinity to the second degree.
Requirement for Transfer Pricing Documentation
The obligation to prepare transfer pricing documentation applies to entities that conducted controlled transactions in the tax year. Documentation is prepared for homogeneous transactions whose value, net of VAT, exceeds the following documentation thresholds in the fiscal year:
- 10,000,000 PLN – for commodity transactions;
- 10,000,000 PLN – for financial transactions;
- 2,000,000 PLN – for service transactions;
- 2,000,000 PLN – for other transactions.
Additionally, if the tax authority identifies circumstances indicating the likelihood of undervaluing the value of a controlled transaction or failing to meet the conditions for the taxpayer’s use of the so-called safe harbor, the authority may, in certain cases, request the taxpayer to prepare local transfer pricing documentation, even if the transaction thresholds have not been exceeded. In such cases, the local transfer pricing documentation must be submitted to the authority within 30 days from the date of receipt of the request.
Requirement for Local Transfer Pricing Documentation in Case of Tax Haven Transactions
Taxpayers entering into controlled transactions with an entity residing, having its registered office, or management in a country practicing harmful tax competition or with a foreign branch located in the territory of such a country are also subject to the obligation to possess transfer pricing documentation. In the case of such transactions, the legislator provides for a reduced documentation threshold, which is:
- 2,500,000 PLN – for financial transactions;
- 500,000 PLN – for transactions other than financial transactions.
The precise list of countries practicing harmful tax competition, commonly known as tax havens, is published by the Minister of Finance by ordinance.
Entities that, despite being subject to the obligation to maintain transfer pricing documentation, fail to do so may be subject to various penalties and sanctions.
If you are interested in understanding step by step how transfer pricing works and what obligations it imposes on taxpayers, we encourage you to read our article ABC of Transfer Pricing Documentation.
Maria Ratajczyk
Kacper Tokarz
Piotr Zarański