Poland vs K. sp. z o.o., January 2020, Supreme Administrative Court, Case No II FSK 191/19 – Wyrok

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K. sp. z o.o. is a Polish company belonging to an international group. The main activity of K is local sale of goods purchased from a intra group supplier.

K is best characterized as a limited risk distributor and as such should achieve an certain predetermined level of profitability as a result of its activities. In order to achieve the determined level of profitability, the group had established that, if the operating margin actually achieved by the distributor during a given period is less or more than the assumed level of profit, it will be adjusted. The year-end adjustment will not be directly related to the prices of goods purchased from the intra-group supplier and will be made after the end of each financial year.

The Administrative Court decided that the year-end adjustment is not sufficiently linked to obtaining, maintaining or securing the company’s income. Hence the adjustment cannot be recognized as a deductible cost within the meaning of Article 15 Section 1 of the CIT Act.

The decision of the Administrative Court was appealed to the Supreme Administrative Court by K.

The Supreme Administrative Court upheld the result reached by the Administrative Court according to which year-end adjustments (for the years in question) was not recognised as tax deductible costs.

“Although the assessment presented was lacking in the grounds of the judgment under appeal, the manner in which the case was decided by dismissing the application is correct.”

Excerpts from the reasoning of the Supreme Administrative Court

The legal problem examined in this case relates to the use by the applicant company of a mechanism applied in economic practice, in group settlements, referred to as a ‘compensating adjustment’. Generally speaking, that mechanism consists in an upward (true-up) or downward (true down) adjustment of the price between the supplier and the distributor, depending on whether the latter obtains income from sales to third parties which exceeds or is less than the margin fixed in the agreement between those entities. In the present case, the essence of the dispute concerns the tax consequences, in terms of corporation tax, of offsetting the net operating margin downwards (true down), under an agreement concluded by the applicant with the controlling company (the supplier). That means that the applicant (distributor) transfers funds to the supplier at an amount corresponding to the excess of the margin set in the contract concluded previously by those entities. There is no doubt that those entities (supplier and distributor) constitute related companies within the meaning of the transfer pricing rules.

However, in the case in question, the disputed problem does not concern the assessment of whether the settlements between the supplier and the distributor comply with the arm’s of lengh rules established in the interpretation of Article 11 of the CFR in force on the date of issue of the interpretation of Article 11 of the CFR, to what extent determining whether the downward adjustment of the operating margin described in the application may be recognised as a deductible cost within the meaning of Article 15(1) of the CFR.

According to this provision, in the wording referring to the realities of the case, deductible expenses are costs incurred in order to obtain revenue from a source of revenue or to preserve or secure a source of revenue, except for the costs listed in Article 16(1). Since the definition of a legal deductible expense is of a general nature, each cost (including expenditure) incurred by a taxpayer should be subject to individual assessment, with a view to examining the existence of a causal link between its incurrence and the generation of revenue (a real chance of generating revenue) or preserving or securing the source of revenue. Exceptions – both positive and negative – may of course be provided for by the legislator. However, the Supreme Administrative Court, in its composition adjudicating on this case, is of the opinion that the cash transfer incurred by the appellant to the supplier does not meet the criteria set out in Article 15(1) of the Polish Code of Civil Procedure, and in the legal status in force before 1 January 2019 there was no specific provision in the Tax Act allowing for the cost settlement of transfer price adjustments.”

BE AWARE! – the result of the decision – non deductibility of downward year-end adjustments – is only applicable in Poland for years prior to 2019

“On the other hand, in the legal status in force before 2019, a typical transfer pricing arrangement concerned settlements between related companies for the direct supply of goods or services. For the sake of order, it should be recalled that until the end of 2018 the legislator, both in the Corporate Income Tax Act, the Personal Income Tax Act and the Value Added Tax Act, did not use the term “transfer prices” but used the term “transaction prices”. The term “transfer prices” was commonly used in the judicature and the literature and there is no doubt that both concepts are related to the same subject matter. The notion of “transaction price” was defined in Art. 3.10 of the Act of 29 August 1997 – Tax Ordinance (Journal of Laws of 2018, item 800 as amended). According to this regulation, the transaction price was to be understood as the price of the subject of the transaction concluded between related entities within the meaning of the tax law regulations concerning personal income tax, corporate income tax and value added tax.

“As a result, in the legal status prior to 2019, the margin adjustment, meaning in fact an adjustment of the Company’s profitability, made on the basis of the adopted transfer pricing policy, does not meet the prerequisites resulting from art. 15 section 1 of the Corporate Income Tax Act, and in particular the most important prerequisite, i.e. connection with income. The very nature of the income adjustment excludes that it is a fee for services provided by the supplier to the distributor.”

“The situation has fundamentally changed as of 1 January 2019, due to the amendment of, inter alia, the Corporate Income Tax Act as of that date. In art. 11a sec. 1 point 1, the definition of the transfer price has been established (a broader scope than the concept of a transaction price within the meaning of art. 3 point 10 of the Corporate Income Tax Act). ), and in art. 11e of the C.C.P.I.P. there are certain possibilities and rules of making transfer price adjustments. However, the considerations in this respect go beyond the limits of this case.”


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Poland vs Corp January 2020 PL

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