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21-07-2017
CHANGES TO CIT ACT

On 12 July 2017 the Ministry of Finance published draft amendment act on income taxes, including amendments to Corporate Income Tax Act [Draft Act]. The scope of amendments to Corporate Income Tax Act [CIT Act] also addresses transfer pricing matters.

The entities whose shareholder is State Treasury

Accordingly with point 11 letter a) art. 2 of the Draft Act, art. 11 clause 4 of the CIT Act, which defines related entities, is the subject of an amendment.

The new wording states that the entities whose shareholder is State Treasury or territorial self-government unit will not be considered related on that basis and therefore will not be obliged to prepare transfer pricing documentation under art. 9a of the CIT Act. Moreover, article 4 of the Draft Act says that the proposed amendment will apply to incomes obtained as of 1 January 2017. These entities will not be obliged to fulfil new transfer pricing requirements which came into force as of 1 January 2017.

The change may be deemed significant since tax rulings and decisions made so far have been recognizing these entities as related. The question of personal relations is still to be verified – no exemptions were proposed within this respect.

Tax Capital Group (TCG)

Under article 2 point 9 of the Draft Act the obligation to prepare transfer pricing documentation will not apply to transactions or other events between entities of a TCG. Although this matter was not explicitly addressed before, the approach of tax authorities regarding this obligation within TCG did not differ. In consequence, the proposed amendment could be treated as a clarification of the regulations and formalisation of the existing tax practice.

 

However, even though there will be no obligation to prepare transfer pricing documentation, the proposed amendments indicate the need to apply the arm’s length principle to transactions made between TCG entities.

Costs of financing

The Draft Act introduces changes to the limits for treating the cost of debt financing as tax deductible costs.

According to clause 15 art. 2 of the Draft Act, taxpayers must exclude the cost of debt financing from tax deductible costs in proportion in which this cost exceeds the amount of 30% of the tax base income, increased by the value of tax deductible depreciation write-offs and the positive difference between finance revenues and costs (EBITDA). The limit does not apply to taxpayers whose surplus of debt financing does not exceed PLN 1,200,000 and to financial institutions.

The cost of debt financing includes the cost of obtaining financing from both related and non-related entities.

Intangible services and assets

According to the Draft Act, the limit of tax deductible costs will apply also to the costs of purchasing intangible services and intangible assets.

For:

·        intangible services (including advisory, accounting, market research, legal, marketing, management and control, data procurement, recruitment, insurance, guarantee and suretyship and similar services),and

·        intangible rights and assets, royalties and liabilities,

the limit of tax deductible costs is 5% of the tax base income, increased by the value of tax deductible depreciation write-offs and the positive difference between finance revenues and costs (EBITDA) with regard to the costs which exceed PLN 1,200,000. With regard to intangible rights and assets, royalties and liabilities, the limit does not apply to those royalties and liabilities which were deemed direct tax deductible costs of creating the good or service.

Moreover, the costs which were not deductible in a given fiscal year due to the limit cannot be deducted in the following years.

The limits of tax deductible costs include both transactions with related and non-related entities.

In MDDP’s opinion changes in this scope are very strict and do not reflect business specific. There are companies with high costs of these services fueled by their regular activity and specific nature of their operational area and not because of tax optimization (e.g. high costs of guarantees in construction and development).

 

 

 

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Should the occasion arise or if necessary, please contact us at:

 

Renata Dłuska   tel. + 48 22 322 68 80,

Magdalena Marciniak tel. + 48 22 322 68 84

 

or the Company’s MDDP advisor.

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