On 22 December 2021, the Finance Ministry announced public consultations on their draft “Transfer Pricing Guidance No. 5 of 21 December 2021: Local file requirements for so-called indirect tax haven transactions under Article 11o(1a) and 11o(1b) of the CIT Act and Article 23za(1a) and 23za(1b) of the PIT Act” (“Draft”).

The Draft applies to the regulations laid down in Article 11o(1a) and 11o(1b) of the CIT Act and Article 23za(1a) and 23za(1b) of the PIT Act, in force since 1 January 2021. These regulations provide as follows:

  • Local file must be prepared by entities engaging in transactions whose value exceeds PLN 500,000 if the beneficial owner resides or has its seat or management in a tax haven.
  • The beneficial owner is presumed to reside or have its seat or management in a tax haven, if the other party to your transaction engages in “settlements” during the given financial year with an entity that has its seat or management in a tax haven.
  • Due diligence must be exercised to verify whether the above is the case.

The Draft offers the following guidance:

As regards when and how the local file requirement applies

  • You should determine if the triggers for the local file requirement have occurred, i.e. if you have engaged in a controlled or non-controlled transaction (purchase of goods or services) which gives rise to a liability worth more than PLN 500,000 and the beneficial owner of the payment (your liability) arising from the transaction resides or has its seat or management in a tax haven.
  • Beneficial owner should be defined as per Article 4a(29) of the CIT Act, i.e. as an entity which:
    • receives the payment for its own benefit, and in particular has the autonomous power to decide about its application and incurs the economic risk of losing it in whole or in part; and
    • is not an intermediary, representative, trustee or some other entity legally or constructively obliged to forward the payment in whole or in part to any other entity; and
    • carries on genuine business activities in the country of its seat, if the payment is related to business.
  • The value of the transaction is to be quantified on the basis of invoices or, where none have been issued, on the basis of contracts or other documents or, if that is impossible, on the basis of payments.
  • Whether or not a transaction is homogeneous should be resolved by reference to relations with one counterparty which meet the requirements of homogeneity as laid down in the law and in the public tax ruling of 9 December 2021 (ref. DCT2.8203.2.2021).
  • The triggers for the documentation requirement should be verified in accordance with the following protocol:
    • You should check if the other party beneficially owns the payment and receives it for its own benefit, i.e. whether it carries on genuine business activities in the country of its seat and is not an intermediary, representative, trustee or some other entity obliged to forward the payment to any other entity.
    • To do that, you can rely on or use available information from Central Register of Beneficial Owners (CRBR), available commercial registers, internal counterparty screening procedures (such as KYC, AML, WHT), or any other sources of information about the partners/shareholders, registered address, seat, business place or personal or financial connections of your counterparty.
    • If you are unable to collect sufficient information to confirm the counterparty is the beneficial owner, then the presumption applies as per Article 11o(1b) of the CIT Act or 23za(1b) of the PIT Act.

As regards the beneficial owner presumption

  • The presumption applies if your counterparty makes settlements for purchase transactions with a tax haven entity and their value is at least PLN 500,000.
  • The value of the settlements with a tax haven entity should include cash payments, payments in kind (e.g. transfer of other asset or provision of services) as well as setoff/netting arrangements.

As regards your due diligence

  • What you should specifically do to comply with the due diligence requirements depends on the circumstances.
  • You should generally rely on data available to you (e.g. those you obtained using your internal procedures) and resort to measures you can be reasonably required to use given the circumstances of the transaction. You are not required to make excessive efforts.
  • Compliance with the due diligence verification duty will be sufficiently ensured if you obtain a statement from the other party that it is the beneficial owner for the purposes of the transaction. You can have an agreement with the other party requiring them to make such a statement.
  • The beneficial owner statement:
    • may refer to all your transactions with the other party;
    • may be made in any form allowing for identification of the specific person making it and of your counterparty;
    • may be obtained or confirmed during or after the year;
    • should be signed by your counterparty’s legitimate representative;
    • should be updated if the counterparty’s circumstances change.
  • If there are doubts as to the truth of the statement, you have to engage in further beneficial owner testing using available means.
  • If information was available to you based on which you knew or ought to have known that the statement you received is untrue, you are presumed to have breached the due diligence verification duty.
  • You have to prepare a local file for your purchase transactions if you know or, using due diligence verification, should and could have known that payments arising from the transactions are beneficially owned by a tax haven entity.
  • In dealings with related parties, in addition to obtaining a statement, due diligence requires a verification of information obtained from the related party, such as a master file, a CbC-R report, financial statements with auditor’s opinion and report.
  • If, using a due diligence verification, you find that the other party does not make settlements with a tax haven entity, you do not prepare a local file for transactions with the party.

The Draft is not concerned with direct tax haven transactions (Article 11o(1) CIT Act, Article 23za(1) PIT Act). These transactions have to be documented if they are above PLN 100,000, regardless of their type.

The tax consultations process is scheduled to last until 31 January 2022. If you are interested in our assistance, please contact us.

This blog post is provided for general information purposes to keep you up-to-date with changes in tax law, tax rulings by authorities, case law of courts and interesting commentaries. Doradztwo Podatkowe WTS&SAJA shall not be held legally liable for any acts or omissions resulting from reliance on such information.