This is to let you know of a judgment given by the Provincial Administrative Court in Białystok on 29 November 2023 in case no. I SA/Bk 377/23, upholding the decision of the Director of Białystok Revenue Administration Chamber in the matter of imputing income in respect of a suretyship obtained from a related party free of charge.

The taxpayer obtained charge-free suretyships from its affiliates to secure external financing from an unrelated party.

The taxpayer claimed that even though the intercompany suretyships were provided for no consideration, there is no income involved because the Group has in place an internal policy of suretyships being provided mutually among Group entities for no charge. If the entity standing surety in favour of the taxpayer needed funding for itself, the taxpayer as well as other Group entities will be required to provide similar support to it. According to the taxpayer, such an arrangement involves „equivalent” performance, meaning no income may be imputed in respect of a charge-free supply.

The tax authority and then the court held that there is no “equivalence” unless there is an actual  assumption of liability for the other entity’s debt (not just policy). Since the mutual performances are not equal (identical) in value, one of the parties has not provided a performance that is equivalent to that of the other. Once the mutual suretyships are netted off, that difference will constitute taxable income for the purposes of Article 12(1)(2) of the Corporate Income Tax Act.

Provision of charge-free guarantees or mutual suretyships within groups are a frequent arrangement. Related parties must make sure the price of their transaction is at arm’s length. Where a suretyship is provided wholly or partly for no charge (such as where the mutually secured amounts are not equivalent), the taxpayer should assess taxable income using relevant transfer pricing methods.

Note also that where the sum guaranteed via a suretyship is above PLN 10 million, transfer pricing documentation will have to be prepared.

Charge-free intercompany suretyships are currently in focus of tax audit authorities.

If this issue pertains to your business and you are interested in our assistance, please contact us.

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