Poland vs K.O., February 2022, Supreme Administrative Court, Case No II FSK 1544/20

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By judgment of 13 March 2020, the Provincial Administrative Court upheld the complaint filed by K.O. and revoked a decision issued by the tax authorities on the determination of the amount of the tax liability resulting from a transfer of shares between K.O. and a related party in 2016.

An appeal was filed by the tax authorities with the Supreme Administrative Court in which the authorities stated that Provincial Administrative Court incorrectly had concluded that the nominal value of shares taken up by a taxpayer is not subject to market mechanisms and, therefore, the authority should not question the revenue thus generated.

According to the tax authorities the taxpayer effected a transaction with a related entity of which it was the owner and determined without justification a contribution in-kind disproportionately high in relation to the shares acquired in the related entity, while the authority, taking these circumstances into account, determined a comparable uncontrolled price that the taxpayer would have obtained in exchange for the transfer of shares in I. to an unrelated entity, verifying the proportion of the distribution of the value of the non-cash contribution in line with the purpose and function of the transfer pricing provisions

Judgement of the Supreme Administrative Court

The court dismissed the appeal of the tax authorities and upheld the decision of the Administrative Court.

“The taxable income in the case of taking up shares in a company in exchange for a contribution in kind in 2016 was the nominal value of such shares and not their market value, determined in any way. The court of first instance rightly emphasises that the nominal value cannot be verified. This view is also confirmed by the established judicature of the Supreme Administrative Court, which may be exemplified by the judgments of this Court: of 19 April 2006, ref. no. II FSK 558/05; of 8 December 2009, ref. no. II FSK 1149/08; of 22 May 2013, ref. no. II FSK 1838/11, or the judgments quoted above concerning the issue of application of provisions on transfer prices, which is already disputed in the case.”

“If a share is taken up at a price higher than its nominal value, the surplus of the share subscription price over its nominal value is transferred to the supplementary capital. There is no doubt that in a limited-liability company reserve capital may also be created (this follows from the wording of Article 233 § 1), but the wording of Article 154 § 3 determines that at the moment of covering the share the agio must be transferred to the reserve capital, and only secondarily may it be transferred (pursuant to a separate resolution of the shareholders’ meeting) to the reserve capital in whole or in part. The share premium is permissible irrespective of whether the shares are covered by a contribution in kind or by a cash contribution. There are no legal and accounting counter-indications that a certain part of the value of the in-kind contribution made to the company should be allocated not to the share capital, but to the supplementary or reserve capital.”

“The Supreme Administrative Court sitting in judgment does not share the view expressed in the appealed judgment that in the absence of legal definitions of transfer pricing concepts, one should refer to colloquial language. The institution of transfer pricing is primarily applicable to cross-border relations. It is subject to international regulations, its application results in the necessity of adjusting income of each party to the transaction, belonging to different tax jurisdictions. Reference in previous case-law, including in the judgment under appeal, to the dictionary meaning of the Polish language and equating the concept of a ‘transaction’ with an ‘agreement’ is unsupported by the interpretation of the transfer pricing provisions. That institution applies mainly to cross-border transactions within multinational enterprises. It is permissible to refer to the meaning of colloquial language in the course of an interpretation, but only if the meaning of the words used by the legislator cannot be deduced either from legal language or from legalese. In addition, given the international character of transfer pricing, the terms related to it should be understood universally.”

“The parity (proportion) of the distribution of the value of the in-kind contribution to the company’s capitals is therefore neither a financial result nor a financial indicator within the meaning of the above concepts.”

“In summary, in the opinion of the Supreme Administrative Court, the subject of transactions between related parties covered by transfer pricing in 2016 could be: tangible and intangible goods, tangible and intangible services (including financial services), joint ventures, restructuring activities as described in Chapter 5a of the Regulation of the Minister of Finance of 2009. The division of the in-kind contribution made by a natural person into the capital of the company did not constitute the subject of the transaction within the meaning of the transfer pricing regulations.”

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II FSK 1544_20 - Wyrok NSA z 2022-02-11

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