Free-of-charge share redemption and transfer pricing consequences – recent Polish Supreme Administrative Court rulings

The Supreme Administrative Court (SAC) is increasingly indicating that certain capital transfers may also constitute a controlled transaction within the meaning of transfer pricing regulations. Such an approach also applies to arrangements that were previously often regarded as tax-neutral, including the free-of-charge share redemption.

In practice, this may entail an obligation to conduct a thorough transfer pricing analysis and, in certain cases, to prepare transfer pricing documentation and file a TP-R form. The latest SAC case law demonstrates that what matters is not the legal form of the transaction, but its actual economic effect.

Is the free-of-charge share redemption subject to transfer pricing provisions?

The cases considered by the SAC concerned situations in which a shareholder declares to terminate their participation in the company, and their shares are redeemed through a voluntary share redemption with no compensation. This transaction takes place based on the shareholder’s consent and through on a resolution of the shareholders’ meeting, and thus in accordance with the provisions of the Commercial Companies Code.

The key issue is whether such an action – though permissible under commercial law and not involving the determination of compensation – could constitute a controlled transaction within the meaning of Polish transfer pricing regulations.

In previous practice, it was often assumed that the free-of-charge share redemption did not fall within the established definition of transactions between related parties and thus remained outside the scope of transfer pricing regulations.

However, the SAC’s position leads to the conclusion that such an approach is not justified under transfer pricing regulations, particularly in light of the broad interpretation of the concept of a controlled transaction and the growing importance of economic analysis in relationships between related parties.

The SAC’s position – what matters is the economic effect, not the legal form

In its most recent rulings, the SAC has clearly moved away from an approach based solely on the formal classification of share redemption as a corporate action.

The SAC emphasized that shares represent property rights and are associated with specific economic rights, such as:

• the right to dividends,
• a share in future profits,
• influence over the company’s operations,
• the ability to participate in decision-making processes.

Consequently, the free-of-charge share redemption may lead to a real transfer of value between related entities.

The SAC also highlighted the aspect of economic rationality. It is, after all, unusual for a shareholder to resign from assets without receiving any compensation.

Importantly, the absence of compensation does not preclude the application of transfer pricing regulations. On the contrary – it may be treated as an argument for a more in-depth analysis of the market nature of the transaction.

Share redemption as a controlled transaction

The SAC’s position confirms an interpretive approach in which the concept of a controlled transaction is understood broadly and functionally. The definition of controlled transaction in the transfer pricing regulations is autonomous in nature, meaning it should not be limited solely to conventional commercial relationships, such as the sale of goods or the provision of services.

Consequently, the scope of transfer pricing regulations may also cover various types of capital events, including restructurings, changes in ownership, or transactions involving shares – provided they have an economic nature and their terms may be influenced by existing relationships between entities.

This approach is reflected both in the latest case law of the SAC and in the practice of tax authorities. It is increasingly accepted that, for transfer pricing purposes, the actual course and economic effects of a given transaction are much more important than merely its formal classification.

For taxpayers, this means the need for a broader identification of potential controlled transactions in intra-group relations. Transactions that were previously considered neutral – in particular, certain capital-related arrangements – may require appropriate analysis and, in certain cases, the preparation of transfer pricing documentation.

What does this mean for taxpayers?

The approach presented by the SAC significantly impacts the scope of taxpayers’ obligations in the area of transfer pricing.

In practice, this may mean the need to:

• assess on a case-by-case basis whether a given transaction – including the free-of-charge share redemption – may constitute a controlled transaction within the meaning of transfer pricing tax regulations,
• analyze the economic nature of the activity and its actual economic effect,
• verify whether the terms of the transaction may be influenced by existing relationships between the entities,
• determine whether documentation obligations arise, including the obligation to prepare, among other things, transfer pricing documentation, a transfer pricing analysis, the TP-R form, and group documentation,
• consider the need to prepare an appropriate transfer pricing analysis, whether in the form of a compliance analysis or a benchmarking analysis, particularly in the context of assessing the arm’s length nature of the transaction.

The economic rationale for the entire transaction takes on particular significance. Taxpayers should be prepared to demonstrate why the free-of-charge share redemption was carried out in this specific manner and whether similar terms could have been accepted by unrelated parties.

At the same time, one should expect increased scrutiny from tax authorities regarding capital transactions and the potential risk of income reassessment.

What should be done in practice?

In light of the latest SAC case law, taxpayers should adopt a more systematic approach to analyzing intra-group transactions, particularly those that are capital-related.

In particular, it is advisable to:

• assess on a case-by-case basis whether a given transaction may constitute a controlled transaction,
• verify whether the terms of the transaction result from existing relationships between the entities,
• analyze the economic nature of the transaction,
• verify TP documentation and reporting obligations,
• consider the need to prepare a compliance analysis or a benchmarking analysis.

Particular attention should be paid to transactions such as the free-of-charge share redemption, changes in ownership structure, or broadly defined capital events, including restructurings. It is precisely in such cases that the risk of the tax authorities challenging the adopted approach may be significantly higher, due to the typically substantial materiality of these transactions.

Summary

Recent SAC case law shows that the free-of-charge share redemption is no longer viewed solely as a technical corporate transaction. It is increasingly treated as an event that may be subject to transfer pricing regulations.

For taxpayers, this means the need for a more thorough analysis of capital transactions between related parties, particularly with regard to:

• economic effect,
• business rationale,
• the market nature of the transaction,
• transfer pricing documentation requirements.

In practice, the neutrality of such transactions under transfer pricing rules should not be assumed automatically.

To better understand the trends in the approach of tax authorities and courts to controlled transactions, including capital-related arrangements such as the free-of-charge share redemption, we encourage you to read our latest publication – TP Case Law Review 2025 (https://www.mddp.pl/transfer-pricing-in-case-law-a-review-of-trends-in-2025/) regarding the application of transfer pricing regulations.