This is to alert you to a taxpayer-friendly ruling by Wrocław Provincial Administrative Court (“WPAC”) dated 22 July 2020 in case no. I SA/Wr 269/20. The court held that a taxpayer is entitled to make a transfer pricing representation where it recognises deemed income from supplies or services received for no consideration.

WPAC took the side of the taxpayer (“Company”) in a dispute against the Director of National Revenue Information (“Authority”) and reversed the Authority’s ruling the Company complained against.

The facts of the case were that the Company recognised deemed income in connection with receiving a charge-free credit guarantee from its shareholder. This income was calculated on the basis of market rates for comparable services. The amounts for which the guarantee was extended exceed the reporting threshold in Article 11k(2)(2) of the CIT Act so the Company wanted to include this transaction in its local file for 2019.

The Authority held that, under those facts, the Company would not be entitled to make a TP representation because deemed income from charge-free services or supplies is not a transfer price.

The Authority’s argument is summarised below.

  • The operation is not a “transaction” because a transaction should be taken to mean a juridical act (contract) which is entered into for business purposes of the parties and which involves at least one payment (amount due).
  • Deemed income from charge-free supplies or services is not a transfer price. The fact that the Company recognises deemed income in such a situation has different consequences, whether tax or financial, than if the guarantee was extended for a charge. In the former case, the taxpayer is required by tax law to recognise taxable income as it receives an economic benefit. In the latter case, obtaining a guarantee for a charge and recognising a tax-deductible cost would lead to an economic detriment.

WPAC did not give deference to the Authority’s reasoning, relying on a purposive and systemic construal of transfer pricing regulations. According to the court, in the case at hand, the taxpayer will report a higher tax, therefore there will be no base erosion.

Accordingly, if a taxpayer receives supplies or services free of charge and recognises an arm’s length deemed income from them, the taxpayer will be entitled to make a representation that TP documentation has been prepared and the prices used are at arm’s length.

If this issue pertains to your business and you are interested in our assistance, please contact your WTS&SAJA consultant.

Doradztwo Podatkowe WTS&SAJA Sp. z o.o.

Bałtyk Building, 13th floor

ul. Roosevelta 22

60-829 Poznań

tel. (+48) 61 643 45 50

Warsaw Office

Central Tower, 22nd floor

Al. Jerozolimskie 81

02-001 Warszawa

This Newsletter 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.