On 10 June 2020 The Director of National Revenue Information issued an individual interpretation (ref. 0112-KDIL2-2.4011.287.2020.2.AA), the subject of which was, among other things, to determine whether voluntary redemption of shares in a capital company without remuneration is subject to the obligation to prepare transfer pricing documentation.

In the described facts the Applicant is a Polish tax resident for corporate income tax purposes. The Company conducts activities which are primarily aimed at supporting the agricultural activities carried out by the Company’s Shareholders on their individual farms. In particular, the Company carries out wholesale of vegetables produced by its Partners as part of their individual farms. The partners are Polish tax residents for personal income tax purposes. The share in the share capital of the Applicant is held by 5 entities.

Between A, B, C and E there is kinship or affinity to the second degree. In turn, the President of the Management Board of the Company is the spouse of Partner D. There are family connections between the Partners.

In 2020, three Shareholders of the Company plan to withdraw from the entity. Withdrawal from the Company shall take the form of voluntary redemption of all shares held in the Company’s share capital. The cancellation will be effected in accordance with the provisions of the Law of 15 September 2000. Commercial Companies Code.

The basis for the redemption of the shares of the existing shareholders will be a resolution of the General Meeting of Shareholders of the Company adopted on the basis of the prior consent of the redeemed shareholder, in which he expressed his consent to the redemption of the shares belonging to him without remuneration. The decision on redemption of shares and determination of the conditions for redemption shall be made without the involvement of the Company, and the sole basis for redemption shall be the aforementioned consent of the redeemed Shareholder and the redemption resolution adopted by the Meeting of Shareholders of the Company.

The Applicant had doubts whether the planned redemption of the shareholder’s shares constitutes a controlled transaction within the meaning of art. 23m section 1 point 6 of the Personal Income Tax Act to which the provisions of chapter 4b of the Personal Income Tax Act may apply – in relation to the shareholder.

According to art. 23m section 1 point 6 of the Personal Income Tax Act, a controlled transaction is understood to be identified on the basis of the actual behaviour of the parties to an economic activity, including assignment of income to a foreign establishment, the conditions of which have been established or imposed as a result of connections.

In the opinion of the tax authority, “transactions” are understood to mean all kinds of legal actions resulting in the transfer of ownership of goods that affect the income (loss) of a taxpayer within the meaning of income tax laws. Consequently, the redemption of shares, regardless of its nature (voluntary or compulsory), will fall within the concept of “transaction” and should be subject to transfer pricing documentation once the documentation thresholds indicated in the regulations are exceeded.

In conclusion, the voluntary redemption of shares held takes place between related entities within the meaning of Article 23m(1)(4) of the Personal Income Tax Act, so the voluntary redemption of shares may constitute a controlled transaction.

 

Author: Beata Rawa – Transfer Pricing Manager

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