Poland vs “Fish Factory” sp. z o.o., July 2020, Administrative Court, I SA/Gd 184/20 – Wyrok

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The activity of Spółka A sp. z o.o. included salmon breeding, processing, smoking and sale and distribution of the finished products. The company operated within Group A with head quarter in the Netherlands.

By decision of 27 May 2019, the tax authorities determined that the operating expenses determined by transactions with related parties were inflated by PLN 29,613,156.00. The authorities did not accept calculations presented by the Company, as there were no reliable accounting records regarding the amount of costs incurred. Furthermore, the authorities held that the cost plus method, which should guarantee profit on the transaction in the Company, had been applied incorrect.

The dispute before the administrative Court boils down to assessing whether the court of first instance, in compliance with the provisions in force, reversed the decision of the authorities in its entirety and referred the case back for reconsideration due to the deficiencies found in the evidentiary proceedings, making it necessary to conduct the proceedings in a significant part.

“As indicated by the Supreme Administrative Court in its judgment of 20 June 2018 in case II FSK 1665/16, the regulation contained in Art. 11 of the LLD is a special regulation and its purpose is to protect the interests of the State Treasury against such activities of taxpayers which consist in applying prices deviating from market prices in controlled transactions in order to achieve a favourable tax result for themselves. Therefore, the rationale for the application of Article 11 of the ACT is not only the fact of occurrence of the relationship referred to in paragraphs 1 and 4, but the use of those relationships to change the level of taxation (tax avoidance). The regulation contained in Article 11 of the CFRA is based on the assumption that all transactions should comply with market conditions, i.e. conditions which would be agreed upon by independent entities in the same or in a similar situation. However, the mere fact of economic relations referred to in Article 11 of the CFR may not in itself give rise to negative tax consequences for related entities. However, the use of such relationships to change the level of taxation contrary to the statutory obligation is of tax significance. Using the position of affiliated entities for such purpose finds a tax sanction, which is the estimation of income. However, this sanction cannot be applied without proving that the related party position is used to shift income (profits) in order to reduce taxation. The findings in this respect should have the characteristics of a clear, logical conclusion from the evidence gathered.

“…The estimation of prices applied in transactions between taxpayers and related parties cannot be made solely by simply transferring the price or margin from a transaction between independent parties – without assessing the comparability of the terms of those transactions. The tax authority, based on comparative data, should therefore primarily demonstrate the reliability of the transactions (entities) compared, and thus also refer to the economic functions and strategies applied by operators, also in the context of assessing the importance of these factors for the possibility of comparison.”

“…in the opinion of the Court, the Director of the Chamber rightly revoked the decision of the tax authorities of 27 May 2019 due to failure to observe the obligation to analyse the possibility of applying the so-called traditional methods of estimating the income of a Party, indicated in the Regulation, and failure to justify the reasons why the Body decided that those methods could not be applied in this case. The First Instance Authority did not justify that the most appropriate pricing method in the case should be the transactional net margin method.”

 

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Poland vs Sp zoo July 2020

 

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