This is to alert you to the publication of the draft public tax ruling on the definition of a controlled transaction (draft dated 31 March 2021). The ruling, authored by the Minister of Finance, Funds and Regional Policy, would seek to explain how to understand the concept of a controlled transaction, given various construal controversies which are particularly applicable to capital transactions and share deals.
The draft refers to the statutory definition in Article 11a(1)(6) of the Corporate Income Tax Act of 15 February 1992 and Article 23m(1)(6) of the Personal Income Tax Act of 25 July 1991 (together, the „Tax Acts”). As defined in the Tax Acts, controlled transactions are business operations that are identified on the basis of actual conduct of the parties, including the attribution of income to a foreign permanent establishment, and whose terms have been determined or imposed due to associations. As such, controlled transactions are events which:
- involve business operations,
- have been determined or imposed due to associations,
- are identified on the basis of actual conduct of the parties.
See below for key guidance the draft proposes in relation to each limb of the above test.
- To understand the meaning of the term „business operations” one must refer to the term „business activity”.
- A „business activity” is carried out:
- for gain (it is profit-oriented and based on commercial considerations),
- as an organised structure (continuity, frequency, recurrence vs. non-recurrence),
- independently (autonomously).
- Business operations do not require any business activities to be carried out and are not consequential on any business activities. Still, a business operation does require the existence of the above characteristics (attributes) that define business activities.
- Whether or not a controlled transaction is involved should be crucially determined by analysing the specific conduct/action, including in light of the purpose of transfer pricing regulations.
Actual conduct of parties
- „Actual conduct of the parties” means what the parties actually do rather than their conduct merely as described in their contract.
- The determination of whether any conduct is actual should be based on the existence of valid commercial reasons for the actions involved.
Terms determined or imposed due to associations
- The mere fact that business operations are carried out by related parties is not sufficient to conclude that these are controlled transactions. It is also necessary for their terms to have been determined or imposed due to associations between the parties.
- In relation to a specific transaction, its terms may be imposed by an associated enterprise which is not a direct party to the transaction.
- If business operations, as identified on the basis of the actual conduct of the parties, are determined (controlled) by law, such as where they arise from a contract or other act between the parties, whether juridical or not, which is required by law, then the terms of these actions (e.g. at the level of the company-shareholder relationship) cannot be said to have been determined or imposed due to associations (the parties objectively have no control on whether or not to take them).
Examples of events which, according to the draft ruling, are not controlled transactions
The draft ruling lists examples of transactions which are not controlled transactions, such as payment of dividend, distribution of profit by a partnership to its partners, additional equity contributions (dopłaty).
WTS&SAJA was involved in the related public consultations, raising the need to make sure the ruling precisely explains that tax-neutral events are not controlled transactions. We also said it was necessary to expand the list of transactions that are not controlled transactions. We will keep you up-to-date about any further work on this ruling.
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