How to determine the value of a consortium transaction and when transfer pricing documentation obligations arise

Consortia are a commonly selected form of cooperation for the execution of large-scale projects, particularly in the construction, engineering, and financial sectors. The formation of a consortium typically serves the purpose of jointly executing a specific commercial undertaking which, due to its financial, logistical, technical, or organisational complexity, exceeds the capacity of a single entity. The parties entering into such an arrangement sign a consortium agreement, which typically outlines the principles governing the allocation of profits and costs, as well as issues of liability. In most cases, consortium members also appoint a lead party, who is authorised to represent the consortium in the implementation of the project, enter into commercial agreements on behalf of the consortium, and liaise with the contracting authority, including invoicing.

The establishment of a consortium does not require the creation of a separate legal entity. Despite generally lacking legal personality, the relationships between consortium members may trigger transfer pricing (TP) obligations. A key element in determining whether TP obligations arise involves analysing whether there are any relationships between the consortium parties, understanding the nature of the consortium agreement itself, and establishing the transaction value, as these determine the necessity for documentation and reporting under TP regulations.

Does a consortium agreement constitute a controlled transaction?

Under the Corporate Income Tax Act (CIT Act), as amended from 1 January 2019, the legislator did not explicitly classify joint venture agreements (including consortium agreements) as controlled transactions requiring transfer pricing documentation. However, tax authorities have consistently held that where consortium participants are related in terms of capital, personal, or economic ties, as defined in the CIT Act, a consortium agreement does constitute a controlled transaction. Once the statutory thresholds are exceeded, such agreements are subject to transfer pricing documentation and TPR (Transfer Pricing Reporting) filing obligations.

Where a consortium is formed by unrelated entities, the agreement may still result in the creation of relationships, which may in turn render transactions between participants as controlled.

Does entering into a consortium agreement create related party relationships?

To date, the prevailing position of the tax authorities has been that entering into a consortium agreement results in the creation of related party relationships between the consortium participants. Therefore, the documentation obligation does not apply to the consortium agreement itself, but may arise in relation to transactions entered into by the parties after the agreement is concluded.

A different position was recently taken by the Provincial Administrative Court (WSA) in Warsaw in a non-final judgment (case ref. III SA/Wa 2643/23). According to the Court, entering into a consortium agreement by partners does not automatically alter the absence of related party status between them. In the examined factual circumstances, the Court found that the agreement did not result in either party gaining significant influence over the other. Thus, the condition necessary to treat a transaction as a controlled transaction was not met. As a result, in the Court’s opinion, transactions between consortium partners who were not related entities either before or as a result of forming the consortium are not subject to transfer pricing obligations.

Based on this, a broader conclusion may be drawn: if a consortium agreement does result in one party gaining significant influence over another, this would indeed create a related party relationship. Consequently, transactions between consortium members would become controlled transactions, and – if statutory thresholds are exceeded – would trigger documentation requirements.

In cases of doubt as to whether the conclusion of a consortium agreement creates related party status, a request for an individual tax ruling may be submitted.

However, up to now, the tax authorities have consistently considered that entering into a consortium agreement does create related party relationships. Therefore, it is advisable to ensure that the arm’s length principle is observed in transactions between consortium members. This principle applies to all transactions between related parties, regardless of their value – including transactions made outside the consortium context.

How to determine the value of a consortium transaction for the purpose of identifying obligations?

Income tax laws do not define which specific value should be taken as the value of a consortium transaction. The legislator has only indicated that the value of a controlled transaction should correspond to the value appropriate for the given controlled transaction.

A controlled transaction does not have to involve only the sale or purchase of goods – it can be any economic exchange that affects the taxpayer’s income. In the context of a consortium, this could include, for example, cost allocations, transfer of remuneration from the leader to a partner, or joint incurring of operating expenses.

According to the tax authorities’ position, the value of a controlled transaction resulting from the functioning of a consortium should be determined based on all settlements made under the consortium agreement between related parties. In particular, the leader’s remuneration alone does not represent the full value of the consortium transaction.

However, the authorities are not aligned on which threshold should apply to the value of a consortium-related transaction. Two approaches are currently observed:

First approach: The threshold of PLN 2 million (applicable to transactions other than service, financial, or goods transactions) should be used. This is based on the premise that the essence of a consortium agreement is to structure the settlement arrangements between the consortium members and to establish rules for how the parties interact with each other and with the client. The nature of the actual contract subject (e.g., services or goods) executed by consortium participants is considered secondary, as it arises from the contract with the client – i.e., between the consortium and the third party – rather than between the consortium members. Therefore, the type of cooperation resulting from the agreement is irrelevant for determining the documentation threshold.

Second approach: The transaction value can be related to the general documentation thresholds applicable to specific types of transactions, depending on the nature of the transactions carried out under the consortium agreement. For example, if the consortium agreement involves the provision of design and construction services between the consortium partners, and the value exceeds the relevant service transaction threshold, the related parties (the consortium members) are required to prepare transfer pricing documentation.

How to determine remuneration within consortium transactions?

The Corporate Income Tax (CIT) Act does not define the appropriate method for determining remuneration under a joint venture agreement, such as one established in the form of a consortium. It only sets out the rules for recognizing revenues and costs of participants in such a joint venture. According to Article 5(1) of the CIT Act:

“Revenues from participation in a non-corporate entity, joint ownership, joint venture, joint possession or joint use of assets or rights shall be combined with the revenues of each partner proportionally to their share in profit (or participation). In the absence of evidence to the contrary, it is assumed that profit shares are equal.”

Furthermore, under Article 5(2):

“The principles laid out in paragraph 1 and 1a apply accordingly to the allocation of tax-deductible costs, non-deductible expenses, tax exemptions and reliefs, and reductions of income, tax base or tax.”

According to the interpretation issued by the Director of the National Tax Information Office (KIS), reference number 0111-KDIB2-1.4010.299.2023.3.DD, dated 3 November 2023:

“Since the Consortium Members have specified in the Consortium Agreement the tasks assigned to each participant, the required expenditures, and the method of allocating profits and costs, these provisions are binding for the division of both revenue and expenses.”

Therefore, companies operating under a consortium should allocate revenues and costs based on the mutual arrangements between the consortium participants concerning assigned tasks, incurred expenses, allocated profits, and costs borne within the consortium.

The tax authorities have not provided a clear position in their interpretations regarding the specific method for calculating remuneration between consortium members in controlled transactions. What matters most is the actual course of the transaction and the real involvement of each party. It is advisable to carefully analyze the responsibilities, involvement, and contribution of each consortium member. The remuneration agreed upon between the participants should reflect the scope of work performed and the risks assumed.

Re-invoicing or margin? Or both?

Re-invoicing involves passing on incurred costs without adding a margin. In practice, this applies when one participant (e.g., the leader) covers joint costs (e.g., a site office) and passes them on to the others. The leader may also transfer part of the remuneration received from a third party to the partners, corresponding to their participation in the consortium, again without adding a margin.

Differences between re-invoicing and applying a markup

Sometimes, the consortium leader not only transfers costs or revenues to other consortium members but also receives compensation for his role—in such cases, a markup is added. As a rule, a markup is justified when the entity provides significant added value to the consortium’s operations or assumes substantial risks.

In dealings between related parties, when assessing whether a re-invoicing should include a markup or not, compliance with the arm’s length principle is crucial. This means that both the method of remuneration calculation and its amount must align with what an independent party would accept under comparable circumstances.

It is advisable to clearly define which types of costs are subject to pure re-invoicing and which should involve a markup. Additionally, having a transfer pricing analysis to justify the level of markup applied – or the decision to apply none – is important.

Transfer pricing documentation and reporting obligations (TPR-C, Local File, Master File)

If, prior to concluding the consortium agreement, the entities entering into the agreement were related parties within the meaning of transfer pricing regulations, then (after exceeding statutory thresholds) transfer pricing obligations will arise. These obligations apply both to the consortium agreement itself and to other transactions between consortium participants.

According to the current position of the tax authorities, the establishment of a consortium between unrelated partners creates relationships within the meaning of the CIT Act, and transactions between them (both within and outside the consortium) will be considered controlled transactions. While the automatic creation of relationships between participants as a result of signing a consortium agreement has been questioned by the Provincial Administrative Court (WSA) in Warsaw, the judgment is not final and does not guarantee the future stance of the tax authorities or the direction of court rulings.

Based on the current position of the authorities, it can be concluded that if the value of a controlled transaction between entities forming a consortium exceeds the statutory thresholds and the entities cannot apply any exemptions, it is necessary to prepare local transfer pricing documentation (Local File) and submit the TPR-C information. For larger capital groups, Master File documentation may also be required.

What to pay attention to when determining the transaction value?

How to determine the value of a transaction?

• It is crucial to analyze all settlements resulting from the consortium agreement – not only the payments to the leader, but the entirety of cash and non-cash flows between participants, including tangible and intangible contributions.

Most common mistakes in determining the transaction value in consortia:

• Considering only the value transferred by the leader instead of the overall settlements.
• Failing to include intangible services (e.g., consulting, management).
• Ignoring the relationships between partners that arise as a result of concluding a consortium agreement.
• Failing to apply the arm’s length principle when calculating a partner’s remuneration.

Summary and practical recommendations

• A consortium agreement concluded between related parties constitutes a controlled transaction and is subject to transfer pricing documentation and reporting obligations.
• The conclusion of a consortium agreement between unrelated entities (according to the prevailing position of tax authorities) creates related-party relationships, meaning that transactions between consortium participants may be subject to transfer pricing regulations.
• The value of a consortium transaction should be determined by taking into account all flows between related entities – not just the leader’s remuneration.
• A well-drafted consortium agreement should specify the division of tasks, responsibilities, costs, and revenues, which should reflect the actual state of affairs. These provisions are key to determining the appropriate remuneration (including revenues and costs) of the participants.
• Transfer Pricing documentation (Local File) should include an arm’s length analysis of remuneration and flows.
• In case of doubt about the value and nature of the transaction, it is advisable to request an individual tax ruling.