A significant amendment to the Corporate Income Tax (CIT) and Personal Income Tax (PIT) laws in Poland has come into force on 1 January 2019, which will bring rules related to transfer pricing in line with updated OECD guidelines and the OECD's Action Plan on BEPS.
The newly introduced changes are partly beneficial for taxpayers:
- Under certain conditions, in relation to low value-added services or intercompany loans with a principal of up to PLN 20 million (approximately EUR 4.8 million), the tax authorities are no longer entitled to assess income in intercompany transactions. The introduction of this "safe harbour" concept will simplify intra-group settlements, in particular in the areas of accounting, HR, and IT.
- The corresponding adjustment mechanism, which has previously been used in relation to cross-border transactions, is now also applicable to domestic intercompany transactions.
- The obligation to set up transfer pricing (TP) documentation in domestic transactions is now limited to cases in which one or both parties report a tax loss or benefit from income tax exemptions.
- The value thresholds that trigger the requirement to prepare TP documentation have been significantly increased and now depend only on the nature of the transaction, rather than on the amount of revenues or costs of the entity performing the transaction.
- The obligation to prepare a master file now depends on a consolidated revenue threshold, and this file may be prepared and kept in English, so that a translation would only be required upon written request of the tax authorities.
The new rules also include some tools for the tax authorities, enabling them to better react to profit shifting:
- The tax authorities can now reclassify the nature of an intercompany transaction if they discover during a tax audit that the transaction realized between related parties is not in line with market standards.
- If the tax authorities recognize that none of the TP methods listed and described in the CIT law apply to the audited transaction, they have the right to use another method for income estimation, even if this method is not regulated by provisions of the law.
- The amendments introduce a requirement to send TP information in an electronic (XML) format. The purpose of this is to equip the tax authorities with data for later transfer pricing analyses and benchmarks, as well as to help select taxpayers for further audits.
The second area of change in Polish CIT law relates to withholding tax on interest and dividends: In order to benefit from a lower withholding tax rate or an exemption from withholding, based on a double taxation treaty or the EU Parent/Subsidiary Directive, the payer of the interest or dividends has to prove that these are to be paid to their beneficial owners. In the absence of such proof, payments above an annual threshold of PLN 2 million (approximately EUR 0.5 million) made to foreign recipients will be subject to the local CIT rate (20% for interest and 19% for dividends). In theory, the tax may later be refunded by tax authorities. The refund procedure has not yet been defined.
To benefit from a double taxation treaty or the EU Parent/Subsidiary Directive without the above-mentioned limit, a Polish payer of dividend or interest has to:
- fulfil the beneficial owner test mentioned above;
- collect the relevant tax certificates and statements from the beneficial owner;
- electronically submit a statement to the Polish tax authorities confirming that the recipient of the payments is the beneficial owner;
- obtain from the tax authorities a statement confirming the right to apply a withholding tax exemption or a lower withholding tax rate without the limits mentioned (binding for 36 months from its issuance).
In summary, while the regulations that took effect on 1 January 2019 simplify the TP documentation requirements, they also give the tax authorities additional tools. In the area of withholding tax, the newly introduced amendments impose on Polish taxpayers' significant compliance obligations, shifting the burden of proof from the tax authorities to the taxpayer in terms of evidencing that the recipient of certain payments is the beneficial owner. Noncompliance with these obligations may have negative consequences both for the payer and the recipient of interest and dividends.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.