Financial transactions in transfer pricing. What to watch out for to avoid errors and penalties?

Transfer pricing has been a topic of increasing attention from tax authorities worldwide in recent years. The growing number of transfer pricing audits and ever more detailed regulations have made transactions between related parties – particularly financial transactions – one of the key areas of interest for tax authorities.

In Poland, as in many other jurisdictions, the tax authorities place significant emphasis on financial transactions such as loans, guarantees, refinancing (re-lending), as well as more complex operations like bond issuances or cash pooling.

With the approaching deadline for fulfilling transfer pricing obligations for the 2024 financial year (for taxpayers whose tax year coincides with the calendar year, the deadline falls at the end of November 2025), now is an excellent time to review which areas deserve particular attention in the context of financial transactions.

The purpose of this article is to identify the key risks and common mistakes associated with financial transactions in transfer pricing, and to explain how best to prepare in order to mitigate these risks ahead of a potential tax audit.

Why financial transactions are under the microscope?

The increased focus on financial transactions in transfer pricing stems primarily from the ease with which such transactions can be identified. Tax authorities have extensive access to information provided directly by taxpayers, for instance through TPR forms.

Additionally, with the introduction of new tools such as JPK_CIT and KSeF, tax authorities will soon have access to an even broader range of data concerning taxpayers’ transactions.

Another reason for this heightened scrutiny is the relatively straightforward way in which profits can be transferred within a corporate group across borders.

The most common financial transactions that may lead to an artificial reduction in the tax base include, among others, loans, guarantees and refinancing arrangements.

Given the growing level of detail in transfer pricing audits, it is crucial for taxpayers to adequately prepare in order to mitigate risks prior to a potential transfer pricing inspection – particularly for financial transactions, which are becoming easier to identify and are frequently subject to in-depth tax examinations.

Different types of financial transactions in transfer pricing

Financial transactions encompass much more than just loans – they include a wide range of arrangements that warrant careful consideration from a transfer pricing perspective.

Special attention should be paid to security transactions such as guarantees and sureties. A typical example of such a transaction is a situation where a group company obtains external financing from a bank. In such cases, the bank often requires additional security in the form of a guarantee provided by the shareholder.

Transactions of this type, concluded between related parties, may take various forms – either with or without remuneration for the guarantor. Uncompensated guarantees are particularly easy to overlook when identifying documentation obligations. It is essential to remember that the absence of remuneration does not exempt such transactions from transfer pricing obligations.

Furthermore, a guarantee provided free of charge may be considered a gratuitous benefit. Therefore, intra-group guarantees without remuneration can also create risks in other tax areas.

In addition to guarantees and sureties, other types of financial transactions also require careful analysis, including:

• • bond issuances,
  • cash pooling,
  • deposits,
  • refinancing.

Refinancing is an example of an atypical financial transaction that is often confused with a standard loan. It frequently occurs within corporate structures – for example, when a parent company receives financing from a shareholder and subsequently re-lends those funds to its subsidiaries or SPVs.

In such cases, there are effectively two separate transactions between related parties:

1. 1. a loan granted by the shareholder to the parent company, and
   2. a loan (re-lending/refinancing) from the parent to its subsidiaries.

Each of these transactions involves different functions and risks, making it necessary to conduct two distinct transfer pricing analyses in order to determine the appropriate arm’s-length remuneration for each lender.

The parent company acts as an intermediary performing a refinancing function, and its remuneration for that role will differ from the return that a direct lender would receive in a standard loan transaction.

It is also important to carefully review the company’s financing structure. A key consideration is whether the capital used in business activities originates from shareholders’ equity or from external sources such as loans or credit facilities. Each financing method is governed by different principles and may require a separate comparability analysis in order to comply with transfer pricing obligations and reduce tax risks.

Other financial transactions that may also fall under transfer pricing rules include:

• • intra-group insurance,
  • hedging,
  • factoring,
  • foreign exchange transactions,
  • reinsurance,
  • and other similar operations.

The range of financial transactions subject to transfer pricing obligations is broad and covers not only loans but a variety of other economic arrangements. Each transaction should be carefully reviewed to avoid tax risks and to meet the documentation and reporting requirements in the area of transfer pricing.

In practice, it often happens that several different financial instruments exist within a group, yet only a single benchmark study is prepared. Such an approach may be insufficient, as tax authorities could conclude that the financial instruments represent distinct types of transactions requiring separate comparability analyses. This, in turn, increases the risk that the arm’s-length nature of the financial conditions will be challenged during an audit.

Therefore, it is vital to prepare dedicated comparability analyses for each specific form of financing used within the group. A well-prepared, comprehensive transfer pricing documentation or benchmark is not only a matter of regulatory compliance but also a genuine safeguard against potential disputes with the tax authorities.

The end of the “magic benchmark” – time for a deeper analysis

In the past, having a simple benchmark study was often sufficient to meet transfer pricing requirements. Today, however, with evolving regulations and increasingly detailed tax audits, a benchmark alone is no longer enough.

Tax authorities now scrutinise how the comparability analysis was performed, which data were included, and how conclusions regarding arm’s-length conditions were drawn.

When analysing financial transactions for transfer pricing purposes, attention should be paid to the following key aspects:

• • Nature of the transaction – the first step is to identify the precise type of financial transaction under review. Each one should be analysed separately, as a loan, a refinancing arrangement, or cash pooling differ fundamentally. Where multiple financing types exist within a group, a single benchmark may be inadequate and risky. The tax authority could determine that non-comparable transactions were analysed together, undermining the validity of the results.
  • Risk of recharacterization – if the financing terms deviate significantly from market practice, the tax authority may recharacterise the transaction – not as debt but as equity financing. For example, an excessively long repayment term, symbolic interest rate, or lack of enforcement of repayments could indicate that the loan is merely nominal. Such a transaction may be treated as a capital increase, leading to serious tax consequences, such as disallowance of interest deductions and an increased taxable base. In such cases, the authority may treat the transaction as a change to the company’s articles of association (e.g. a capital increase or shareholder contribution), which could also trigger PCC (civil law transaction tax) obligations. This risk applies not only to loans but to other types of financial arrangements as well.
  • Debt capacity – it is particularly important to assess whether the related party has the capacity to incur and service debt. Tax authorities may review this aspect to evaluate whether the transaction is in line with market conditions. If the entity lacks genuine creditworthiness, even the best-prepared analysis may not suffice to defend the transaction. Demonstrating, through a debt capacity analysis, that the company could have obtained external financing from unrelated parties on comparable terms is essential to support arm’s-length pricing.
  • Remuneration for guarantees – for transactions involving guarantees and sureties, it is necessary to ensure that appropriate compensation has been determined and that its value reflects market conditions.
  • Economic rationale – transactions lacking commercial substance may indicate an attempt to manipulate profits or reduce the tax base. Tax authorities increasingly examine whether a financial transaction brings a genuine economic benefit to the company rather than merely a tax advantage. The absence of a sound business rationale may lead to the disallowance of the transaction and income adjustments.

The days when benchmark studies were treated as a mere compliance formality are over. What now matters are their relevance, quality, and consistency with the functional analysis and the company’s actual circumstances. A comprehensive approach to financial transactions in transfer pricing significantly reduces tax risk and increases the likelihood of a favourable outcome in a potential tax audit.

Dynamic financial markets and the need to update analyses

Financial markets are inherently volatile. Factors such as fluctuations in interest rates, changes in credit ratings, inflation, and macroeconomic conditions directly affect the terms of financial transactions.

Under the applicable rules, transfer pricing analyses should be updated at least once every three years; however, in practice, more frequent updates may be necessary. For example, changes in interest rates resulting from central bank decisions may require adjusting the interest rates applied to intra-group loans and other financial transactions in order to ensure compliance with the arm’s-length principle.

A change in a company’s credit rating is also crucial for determining appropriate financing terms. A downgrade in creditworthiness typically results in higher interest rates, which in turn requires updating the transfer pricing analysis. Similarly, significant changes in a country’s sovereign rating or macroeconomic situation may justify updating the comparability analysis more frequently than every three years.

A proactive approach to transfer pricing analysis is essential to avoid errors and the risk of recharacterisation. Rather than responding reactively to tax audits, it is better to prepare comprehensive documentation in advance that meets the expectations of the tax authorities.

Regular updates, attention to market conditions, and thorough documentation help minimise the risk of recharacterisation and other disputes during inspections.

Summary

The approaching deadline for transfer pricing obligations for the 2024 financial year presents an excellent opportunity to focus on financial transactions in transfer pricing. These obligations must be fulfilled by the end of November 2025.

To ensure no deadlines are missed, we recommend our Transfer Pricing Calendar 

If you require assistance with preparing your TP documentation for 2024 or in the ongoing analysis of financial transactions, please contact us. Our experts will be pleased to help you tailor your documentation to current regulations and to the specific nature of your transactions.

Engaging professional advisers in the area of transfer pricing significantly reduces the risk of errors that may lead to adverse outcomes during tax inspections.

It is worth remembering that expert support in TP not only ensures compliance with legal requirements but also substantially mitigates the risk of transfer pricing disputes – an essential element in maintaining the company’s overall tax security.