Transfer pricing refers to the terms and conditions applied in transactions between related entities. What are transfer prices? What are their functions? Is their documentation mandatory? Find the answers in the article below. We invite you to read!
Table of Contents
- What are transfer prices in Poland?
- Who are affiliated and non-affiliated entities?
- What are the functions of transfer pricing in Poland?
- Is transfer pricing documentation mandatory?
- What are the transfer pricing limits?
- Does transfer pricing in Poland involve risk?
- Transfer pricing in Poland – summary
What are transfer prices in Poland?
Two Acts regulate transfer pricing in Poland:
- Corporate Income Tax Act,
- Personal Income Tax Act.
The legislator defines the concept of transfer price. It is the financial outcome of terms agreed upon or imposed as a result of existing connections, including:
- the price,
- a financial result or
- a financial ratio;
How is the concept of transfer pricing understood in practice? To put it simply, they refer to the prices of goods, services and intangible assets.
Transfer prices are set by affiliated entities, especially within a corporate group. They deviate from market prices, i.e., those currently used by non-affiliated entities. Transfer prices significantly impact the final profits and losses. They also influence the competitiveness of a specific corporate group.
Each country individually defines legal regulations on transfer pricing. However, most of them are based on the guidelines of the Organization for Economic Cooperation and Development (OECD). According to them, transfer prices are a crucial factor in determining tax liabilities. They take into account the division into countries in which certain international companies operate.
Who are affiliated and non-affiliated entities?
- natural persons,
- legal persons,
- organisational units without legal personality,
- foreign establishments,
that participate in the management or control of another enterprise or have a share in the capital and profit of that enterprise.
Legislation establishes criteria to determine whether entities are affiliated. According to the regulations, they include:
- entities of which one exercises significant influence on at least one other entity,
- entities on which a significant influence is exercised by: the same other entity or the spouse, or a relative by consanguinity or affinity up to the second degree of a natural person exercising a significant influence on at least one entity, or
- a partnership without legal personality and its shareholder
- the taxpayer and his foreign establishment. In the case of a tax capital group – the capital company participating in it and its foreign establishment.
The exercise of a significant influence means:
- owning, directly or indirectly, of 25% or more shares of the capital or the voting rights in the controlling, constituting or managing bodies, or of shares or rights to share in profits, losses or assets, or an expectancy thereof, including participation units and investment certificates,
- the actual ability of a natural person to influence key economic decisions taken by a legal person or an organisational unit without legal personality,
- being the spouse or a relative by consanguinity or by affinity up to the second degree
|Types of connections
|Kinship and affinity
|Combining management and supervisory functions in two separate entities
|Ownership of shares or voting rights
Commonly recognized affiliated entities include parent companies and their domestic or foreign subsidiaries. Another example is sister companies. This results from the flow of goods, trade, financial resources, or intangible values between them.
What are the functions of transfer pricing in Poland?
There are several functions of transfer pricing, as outlined in the table below.
|Risk Minimization Function
|The main purpose is to reduce the risk in transactions between affiliated entities.
|Income Division Function
|Related entities, when setting transfer prices, have some flexibility. This enables tax planning, affecting the taxable income amount.
|The managing function involves planning and coordinating actions that affect the operation of the enterprise.
|Transfer prices prevent actions that threaten the interests of the state and market competitiveness. They enforce tax planning and coordination within a capital group.
Is transfer pricing documentation mandatory?
According to regulations, affiliated entities must prepare electronic local transfer pricing documentation for the tax year. They must do this by the end of the 10th month after the end of the tax year. The purpose of transfer pricing documentation is to demonstrate that transfer prices were set on terms comparable to those applied by unrelated entities.
What are the transfer pricing limits?
The described transfer pricing documentation is prepared for a controlled transaction of a homogeneous nature. Its value exceeds the specified transfer pricing limits in the tax year. The table below presents the limits.
|Goods and financial transactions
|Service transactions and other transactions not specified above.
Does transfer pricing in Poland involve risk?
Transfer prices are used to transfer income between affiliated entities. This can be achieved by
- Increasing the costs of acquiring goods or services,
- Decreasing revenue.
Income transfer contributes to lowering the interest rate in a given corporate group. Alternatively, it can improve the financial results of the dominant enterprise. If income is understated, the tax authority can calculate it as if there were no relationship between entities.
The arm’s length principle limits the use of transfer pricing for income shifting. According to it, tax authorities in the related entities’ operating country can verify the accuracy of set transfer prices. It occurs by comparing terms set by related parties to those set by unrelated parties.
Transfer pricing in Poland – summary
Polish tax law regulates transfer pricing. It has a significant impact on the profits and competitiveness of capital groups. Functions of transfer prices include risk minimization, income splitting, and control over operations. Mandatory transfer pricing documentation aims to demonstrate that prices were set under conditions comparable to those applied by unrelated entities.
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