The draft Act of 16 July 2018 amending the Personal Income Tax Act, the Corporate Income Tax Act and certain other acts, as indicated in the general part of the justification, provides for simplification of tax regulations as well as minimisation of bureaucratic and administrative burdens. The aim of the project is to adapt transfer pricing regulations to the dynamically developing legal and economic environment. The expected changes are reflected in the 3xP philosophy, i.e. a simple, transparent and friendly tax system.

As part of this draft amending act, it is planned to repeal the provisions defining related entities (Article 11 – corporate income tax and Article 25 – personal income tax). Instead of the repealed provisions, a new wording for the definition of ‘related parties’ is proposed (respectively in art. 11a of the corporate income tax and art. 23m – of the corporate income tax).

According to the proposed wording of the regulations, the related entities are:

  1. “entities in which one entity exercises significant influence over one or more other entities, or
  2. entities significantly influenced by the entity: the same body, or a spouse, relative or relative up to the second degree of maturity of a natural person who exercises significant influence over one or more entities, or
  3. a company without legal personality and its members, or
  4. the taxpayer and his foreign permanent establishment.

The term “significant influence” used by the legislator is crucial for the correct interpretation of the definition of “related parties”. According to the wording of the justification for the amending act, this definition indicates a situation where two or more entities may be considered as affiliated entities. The definition is worded with reference to ‘a wide range of instruments that can create linkages’, by which it should be understood:

  1. share in the capital,
  2. voting rights in controlling or representing bodies, units, certificates or other rights attaching to participation in profits, or in assets.

The draft law provides for a significant extension of the scope of relations between the following entities of a family nature. So far, family ties have concerned only domestic ones. According to the proposed changes, family ties may concern both domestic and foreign entities. The explanatory memorandum to the amending act indicated that this was the case: “the mere fact of the existence of family relationships (…) is sufficient to consider them as related entities’.

Author: Beata Rawa