Can tax authorities recharacterize transactions made before 2019?

The instrument of recharacterization and non-recognition of transactions was introduced to the transfer pricing regulations on 1 January 2019. Tax authorities may decide that in comparable circumstances third parties would not have made a given controlled transaction or would have entered into a different transaction (the so-called ‘proper transaction’). If that is the case, the authority may determine the taxpayer’s income (loss) without taking into account the controlled transaction or from the ‘proper transaction’ in relation to the controlled transaction.

Since when do authorities use this tool?

Practice shows that tax authorities use the recharacterization tool to determine income in relation also to transactions made before 2019. In such situations, taxpayers often challenge the decisions to administrative courts. The courts, in turn, increasingly often take into account taxpayers’ complaints and admit that the recharacterization is available only from 2019. One example is the judgment of the District Administrative Court in Białystok of 4 January 2023 (ref. I SA/Bk 474/22).

Facts of the case and position of the authorities

The case concerned a license agreement for the use of trademarks which was made by the company with a related entity. The 1st and 2nd instance authorities unanimously stated that the terms of the transaction agreed between the parties did not take into account the proportional distribution of benefits from the trademarks in the functions performed and the costs of their production (i.e. development, improvement, maintenance and use). The authorities claimed the remuneration of the related entity was determined disproportionately to the functions that the company owning the trademarks actually performed in 2016 (i.e. the function of legal protection of trademarks and participation in the costs of marketing services).

Therefore, the authorities recharacterized the license agreement transactions and replaced them with administrative, legal and marketing services. This resulted in the ‘removal’ of expenses on license fees for the tax result of the company using the trademarks. In consequence, the authorities found that the company overstated its tax deductible costs for 2016 by almost PLN 52 million! The company filed a complaint against the decision with the District Administrative Court.

The position of the court

The District Administrative Court overturned the decisions of both instances. The court decided that in the wording applicable in 2016, the provision of Article 11 of the CIT Act did not give the authorities grounds to non-recognition of the tax consequences of the license agreement transaction and to recharacterize it.

Moreover, according to the District Administrative Court, before 1 January 2019, there was no legal norm in Poland that could constitute a competence standard for the tax authorities to non-recognize or recharacterize a transaction made by related parties. Therefore, this instrument should only be used by authorities for transactions made after 31 December 2018.

The court found that the only legal basis to be used in this period for non-recognition or recharacterization of the transaction – from 15 July 2016 – was the general rule against tax avoidance, provided all the conditions were met. However, in the analyzed case the authority did not use this option. In the justification, the District Administrative Court in Białystok also added that the OECD Guidelines, which are not a source of law and cannot extend the powers of tax authorities, could not have been an independent basis for such a decision. Therefore, taxpayers and tax authorities should only see them as a set of good practices.

The judgment of the District Administrative Court is not final.


An analysis of the case law from the last year reveals that the positions of the District Administrative Court and the Supreme Administrative Court are not unanimous as to when the notion of recharacterization was introduced in the transfer pricing regulations and whether the authorities can use this tool for transactions made by related parties before 2019.

However, the judgment in question is another – after the judgment of the Supreme Administrative Court in Poznań of 9 June 2022 (ref. II FSK 2508/19) – favorable from the perspective of taxpayers. We hope that in the next cases concerning recharacterization before 2019, the courts will maintain a consistent case-law and will unanimously state the tool cannot be used for transfer pricing before 2019.


Martyna Leszczyńska

Consultant, Transfer Pricing Practice

Tel.: +48 503 975 116