This is to let you know that Head of Revenue Administration (“Higher Authority”) issued a ruling with ref. no DPP13.8221.71.2019.CPXJ on 4 January 2024, amending an earlier ruling by Director of National Revenue Information (“Lower Authority”) dated 22 August 2019 (ref. 0111-KDIB1-2.4010.260.2019.1.MS). The Lower Authority’s ruling concerned the availability of exemption under Article 11n(1) of the CIT Act (“Article 11n(1) Exemption”) from the requirement to prepare a local transfer pricing file in a situation where one of the parties to the transaction has a tax loss from a source of income that is beyond the scope of the controlled transaction. The change is in favour of the taxpayer that requested the ruling.
The case ruled upon involved a Polish company (“Company”) that entered into transactions with a Polish-based related party. The Company wanted to know if it is allowed to use Article 11n(1) Exemption where one of the parties to such a transaction has a tax loss from a source of income that is beyond the scope of the transaction
The Company argued that it is entitled to Article 11n(1) Exemption and that the words “has not incurred a tax loss” should be understood narrowly as referring to the specific source of income with which its transaction was concerned.
Lower Authority disagreed, saying that the law does not specify which source of income should not produce a tax loss on the part of the taxpayer for Article 11n(1) Exemption to apply, hence the condition is that there must not be a tax loss from any source of income whatsoever.
Higher Authority acted of its own motion to revise Lower Authority’s ruling on 4 January 2022. Higher Authority made a point of noting that, as defined in the CIT Act, a tax loss is where tax-deductible costs are higher from gross income from a source of income. The CIT Act defines two sources of income:
- income from capital gains,
- income from other sources of income.
As such the law does not allow tax-deductible costs to be shifted between the two different sources of income so that a taxpayer may incur a tax loss from each source of income separately. Higher Authority held in the case before it that, providing all the other conditions under CIT Act are satisfied, the taxpayer was entitled to Article 11n(1) Exemption.
This change reaffirms the line of authority according to which Article 11n(1) Exemption applies also where any of the domestic entities that are parties to a controlled transaction incurs a tax loss which is not derived from a source of income with which the transaction is concerned.
If this issue pertains to your business and you are interested in our assistance, please contact us.
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