Personal affiliations – excluding documentary exemption for Treasury-affiliated companies

Identifying the links between the parties to a transaction is one of the first and at the same time the most important steps in the process of identifying transfer pricing obligations. Correct determination of linkages is particularly important if the parties to the transaction wish to take advantage of the exemption from the obligation to prepare local transfer pricing documentation under Article 11n(5) of the CIT Law.

This exemption is provided for controlled transactions in cases where the relationships arise solely from a connection with the Treasury or local government units or their associations (hereinafter collectively referred to as the Treasury).

“Solely” – the key word

According to Polish transfer pricing regulations, entities in which the Treasury holds shares or exerts significant influence on these entities are exempt from the obligation to prepare transfer pricing documentation.

If there are also other types of ties between entities other than those arising solely from the connection with the Treasury, the possibility of benefiting from the exemption from the obligation to prepare local transfer pricing documentation provided for in Article 11n(5) of the CIT Law is excluded.

Difficulties in correctly identifying additional ties are often related to the presence of personal affiliations, usually when the same person holds management or control functions simultaneously in both entities that are parties to a given transaction .

Then it often becomes problematic to determine an individual’s ability to exert significant influence on these entities, understood as the actual ability of that individual to influence key business decisions by a legal entity or unincorporated entity.

Favorable interpretation by the Director of the KIS

Practice shows that it is not always the fact that the same individual is employed in high positions in both entities that are parties to a given transaction that determines the occurrence of a personal affiliation.

This fact is confirmed by the recently issued individual interpretation by the Director of the Tax Chamber dated June 13, 2023[1] regarding, among other things, the possibility of using the exemption from Article 11n point 5 of the CIT Law.

According to the facts presented in the interpretation, the entity that performs the function of the hospital plans to enter into a controlled transaction with the county governor’s office, a local government unit. However, the head of a hospital department simultaneously serves as a county councilor, so the issue to be resolved was whether such a personal affiliation between the hospital and the county excludes the possibility of benefiting from the exemption provided for in Article 11n(5) of the CIT Law.

According to the applicant, the head of the hospital department, within the scope of his powers, does not have the ability to influence key economic decisions in the hospital, as his tasks include only exercising permanent supervision over the activities of a specific department, while important decisions are made by the hospital director.

The director of the KIS agreed with the applicant’s position and concluded that the head of a hospital department who simultaneously serves as a councilor does not have the ability to exert significant influence on both entities that are parties to the planned transaction. Accordingly, the transaction involves solely ties arising from a relationship with the Treasury (a local government unit), so it is possible to benefit from an exemption from the obligation to prepare transfer pricing documentation for the planned transaction.

Summary

When analyzing transfer pricing obligations for transactions between Treasury affiliates, special attention should be paid to the existence of personal affiliations between them. If an individual employed by both entities is identified, an additional assessment should be made of his or her potential ability to exert significant influence on the entities. Only then should it be assessed whether the exemption from Article 11n(5) of the CIT Law is available for a given transaction. Without a thorough analysis of all types of relationships, a taxpayer should not decide whether to take advantage of the documentary exemption in question.

[1] sygn. 0111-KDIB1-2.4010.171.2023.2.ANK