Linkage and confusion, or how to correctly identify related parties

Identifying the links between parties to a transaction is not only crucial, but also one of the first things a taxpayer should do before proceeding with transfer pricing documentation and reporting obligations. 

Given the high volatility and uncertainty of the tax laws, it is worthwhile to verify well in advance that for a given year the obligations have been correctly determined, and most importantly, that transactions with all entities have been covered by transfer pricing documentation.

Proper determination of relationships can be associated not only with obligations, but also with exemptions. For example, those entities in which the Treasury exclusively owns shares are exempt from the obligation to prepare transfer pricing documentation, among others.

Treat yours the same as a stranger’s

Income laws explicitly regulate under what conditions related parties should establish transfer prices among themselves. They must do so in the same way that the terms of the transaction would be set by entities that are not connected by any ownership, family, or such relationships that result in mutual influence.

It is quite easy to imagine a situation in which there is a need for a loan to a company in which the spouse of the spouse is the chairman, and there is an agreement on specific requirements for repayment, and the same situation where the business of a stranger would be involved. It is for this reason that the fiscal has been provided with specific tools to treat both circumstances equally, which are, for example, income or loss reestimation or recharacterization.

Affiliation has more than one name

In order to correctly determine the circle of entities that are related to each other, one should not limit oneself only to capital ties. All the more so because they do not have to arise only from relationships among immediate shareholders or direct capital ownership, but also indirectly – when one entity holds a certain share in the capital of another entity, and in turn the latter holds a share in the capital of a completely different entity. This is all the more difficult in the case of extensive capital and ownership structures. Importantly, related parties are also domestic entities (this is a peculiarity of Polish regulations)! There are exemptions from documentation obligations for these entities, but under certain conditions.

Relatedness also includes those – it would seem – easiest to identify: family relationships (i.e., marriage, kinship and affinity up to the second degree).

For the taxpayer, it may even be a bit of a challenge to identify personal and functional (management and control) ties, occurring even if the same person holds management or control functions simultaneously in both entities that are parties to a given transaction. And while legally authorized members of the board of directors, making decisions in the company, are not difficult to determine, the determination of the circle of persons having a causal effect on the company may be more problematic.

This is because it is crucial to determine an individual’s ability to exert significant influence over these entities, i.e. his or her actual ability to influence key business decisions made by these entities, such as by deciding to abandon part of the business or launch a new product.

Linkages are important not only in TP

The topic of linkages is particularly important not only in the area of transfer pricing. Awareness and knowledge of one’s business environment can be used in many areas, even taking into account the different definitions of linkages under different regulations.

For example, these areas are related to:

  • the determination of the beneficial owner and the anti-money laundering law,
  • exchange of tax information with other countries and submission of CBC notifications,
  • reporting related party transactions in financial statements under the Accounting Law,
  • the minimum tax, which will come into effect early next year with the amendment of the CIT Law,
  • relationships under the VAT Act, for example, with JPK,
  • and many, many others.

As we indicated at the outset, in each of these cases the definition of linkage should be reviewed separately, for it is not consistent by law.