Binding instructions to subsidiaries

On 13 October 2022, the amendment to the Commercial Companies Code entered into force[1]. It introduced provisions on the group of companies, including a new instrument: binding instructions. According to the new provisions of the holding law, the parent company may issue a binding instruction to a subsidiary in order to pursue the common interest of the group of companies. The binding instruction is to apply to managing the company’s affairs. As such, it can affect the company’s business operations and the legal and tax matters involved in them, including transfer pricing

Conditions for issuing a binding instruction

The amended provisions of the Commercial Companies Code require a binding instruction to be issued under certain conditions. A binding instruction may be issued between capital companies belonging to a formalized group of companies. The participation of a subsidiary in such a group must be confirmed by a resolution of the shareholders and filed with the register of entrepreneurs, together with an indication of the parent company. A binding instruction should feature:

  • an indication of the expected behavior of the subsidiary,
  • an indication of the interest of the group justifying the execution of the instruction,
  • expected benefits or damages of the subsidiary, resulting from the execution of a binding instruction, and
  • the expected manner and deadline for compensating the subsidiary for the damage suffered as a result of having executed a binding instruction.

A subsidiary may refuse to execute a binding instruction if (i) the execution of the instruction could, in the company’s opinion, lead to its insolvency or (ii) if the instruction is contrary to its interests and could cause damage to the company that cannot be repaired by the parent company.

At the same time, the members of the management board, the supervisory board, the audit committee and the liquidator of the subsidiary will not be liable for damage caused by the execution of a binding instruction.

What does this mean in practice in terms of transfer pricing?

In practical terms, it should be assumed that the binding instruction may concern and have an impact on transfer prices in a subsidiary. Executing the instruction may result in significant tax consequences, for which the company and the management board will be liable.

Pursuant to transfer pricing regulations, related entities – when making controlled transactions – must set prices on terms that would be agreed between third parties. A controlled transaction is also one that is made with an unrelated counterparty where the conditions were imposed as a result of relationships with another entity. The terms of such a transaction with an unrelated counterparty may be imposed on the subsidiary by the parent company as part of a binding instruction. In the case of executing a binding instruction of the parent company, the subsidiary should pay special attention to whether the conditions resulting from the instruction do not violate the arm’s length principle. Otherwise, the company and the management board may be held liable since this liability is not excluded by the amended provisions of the Commercial Companies Code.

In the case of non-arm’s length terms of a transaction, tax authorities – as part of a potential control – establish the taxpayer’s income (loss) without taking into account the conditions resulting from existing relationships (e.g. conditions imposed by a binding instruction). Furthermore, tax authorities may impose an additional tax liability ranging from 10% to 30% of undue loss or unreported income. Moreover, the member of the management board who signs the TP-R form and the statement that the transfer prices have been agreed at arm’s length is also personally liable. If a management board member signs a statement in a situation where his/her company has executed a binding instruction of the parent company and has made non-arm’s length transactions based on it, then he/she is facing fiscal penal liability. Pursuant to Article 80e of the Fiscal Penal Code, the fine in this case is 720 daily rates (i.e. approximately PLN 28 million).

Summing up, the provisions of the Commercial Companies Code regarding the group of companies and binding instructions were introduced in isolation from tax regulations, in particular the provisions on transfer pricing. Liability exclusion for management board members under the provisions of the Commercial Companies Code – for a loss suffered by the company as a result of having executed a binding instruction – does not exclude the liability they face under tax and penal-fiscal regulations. The execution of a binding instruction by a subsidiary requires a detailed analysis of the potential tax and transfer pricing effects. If the execution of a binding instruction is to result in negative consequences, the subsidiary – under the provisions of the Commercial Companies Code – may refuse it and justify its decision accordingly.

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[1] Act of 9 February 2022 on amending the act – Commercial Companies Code and some other acts, Journal of Laws of 2022 Item 807 (

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