A Polish subsidiary in a German Group had taken out a significant inter-company loan resulting in a significantly reduced income due to interest deductions. At issue was application of the Polish arm’s length provisions and the arm’s length nature of the interest rate on the loan.
The tax authorities had issued an assessment where the interest rate on the loans had been adjusted and the taxable income increased.
On that basis, a complaint was filed by the company to the Administrative Court. The administrative court rejected the complaint and ruled in favor of the tax authorities.
An appeal was then brought before the Supreme Administrative Court.
The Supreme Administrative Court rejected the appeal, although it did not share some of the conclusions and statements of the Court of first instance.
The key issue in the case was to determine is whether the provisions of Art. 11 (Containing the Polish arm’s length provisions), allowing the authority to determine the income of the Company and the tax due without taking into account the conditions arising from existing relationships, including capital applies.
Art. 11 paragraph 1 and paragraph 4. allows for the this provision to apply if three cumulative conditions are met:
1) the existence of connections between the parties referred to in art. 11 paragraph 1 points 1-3 or in para. 4 item 1 or 2 update;
2) the impact of these connections resulting in conditions that differ from those that would be agreed between independent entities;
3) the taxpayer’s failure to recognize income or income lower than would be expected if the above mentioned connections had not been there.
The Supreme Administrative Court agreed that these cumulative conditions are met.
The authority has made estimates of income on the basis of § 21 paragraph. 1 and 2 cited above. Regulation in the light of which it rules, if the taxpayer to provide an entity affiliated with the taxpayer loan ( credit ) or will receive such a loan ( credit ), regardless of their purpose and destiny, or also give or receive in any form of warranty or guarantee, the price of the market for this service are the interest or commission or other form of remuneration, which agreeing on for such a service, provided on comparable terms , entities independent ( paragraph. 1).
The arm’s length interest rate is determined on the basis of the interest, that the entity would have to pay an independent party for obtaining a loan ( loans ) for the same period in comparable circumstances.
However, according to the Supreme Administrative Court the inter group loan agreement differs from the typical loan agreements concluded by banks.
- The applicant does not conduct an economic activity identical to that of banks;
- With regard to the nature of the transaction applicant suffered much less risk of insolvency of a counter party, than borne by the bank in relation to the borrowers;
- The Company had a much greater possibility of controlling the situation of the financial and solvency of the counter party in the course of the duration of the contract than the bank in case of a contract of credit;
- The applicant does not bear the costs of verifying the ability of credit counter party and had the opportunity to immediately recover the funds provided in the framework of the agreement, which differ from the conditions defined by the parties of the contract of credit, concluded with the bank;
- The applicant does not incur other costs associated with granting and service the loan , which usually bear the banks;
- The applicant functioning in the group ‘s capital, implemented assumptions and tasks of economic different from those, which are the essence of the activities of entities operating on the market of services financial.
Since comparable transactions between unrelated entities could not be established during the period under consideration, the CUP method was not applicable to the disputed contract.
The Supreme Administrative Court states that the judgment under appeal meets the requirements provided for in art. 141 § 4 and fully enables its instance control, despite some shortcomings.
The tax authority, while re- examining the case, is not bound within the meaning of the legal assessment contained in the fragment of the justification of the Administrative Court questioned by the Supreme Administrative Court. Instead, the legal assessment contained in this judgment is binding.
Considering the, the Supreme Administrative Court dismissed complaint.
Poland II FSK 1808-17 - Wyrok