The verdict was issued on the grounds of an interpretation case in which the tax authority questioned the amount of revenues indicating their underestimation and therefore considered the prices applied by entities as deviating from market conditions. Therefore, the essence of the dispute in the present case was essentially to determine whether the price of services and products calculated by the company is consistent with market conditions.

In the context of the present case, it should be considered crucial to determine whether, in the factual circumstances established in the course of the tax proceedings, the provision allowing the authority to determine the Company’s income and the tax due without taking into account the conditions resulting from existing capital ties is applicable.

Let us recall that the tax authority is entitled to determine the income of the taxpayer and the tax due, without taking into account the conditions resulting from the existing links, if: first of all, the taxpayer is affiliated by capital with another entity, secondly, due to the existence of such affiliations, the taxpayer provides services on more favourable conditions, deviating from the conditions generally applicable at the time and place of performance and thirdly, as a result of such affiliations and performance of services on more favourable conditions, the taxpayer does not show income or shows income lower than that which would be expected if the conditions of such services did not deviate from those resulting from such affiliations. Therefore, it is only when these three conditions are met that the authority can implement a procedure for determining income by estimation.

In the Court’s opinion, the tax authority did not refer the disputed transactions at all to similar transactions concluded, among others, by unrelated entities. The authority did not examine whether the disputed transactions were economically rational for the taxpayer, either because of a direct or indirect advantage, and justified its decision by claiming that the calculation of prices for the Company was the responsibility of its affiliated company, which took its own historical values as a point of reference, without establishing the base of costs actually incurred and there was no comparative analysis on the basis of which the market level of remuneration was established. In addition, the authority unlawfully equated the fact that the applicant made a loss and the data resulting from the general financial indicators relating to all of the applicant’s activities (as well as those of the companies used for the comparative analysis) with the fact that the applicant applied prices which differed from market prices in relation to the contested transactions. Moreover, the economic rationality of the transaction must be assessed in the light of the benefit which a particular entity may derive from the transaction and not in relation to the general financial ratios of the compared entities covering the whole of their activities for a given year. Also, the fact that the applicant suffered a loss in particular years, including the disputed period, does not, in itself, prove the lack of economic rationality of the transactions disputed by the authority.

The authority has not proved that the conditions established by the Company, under which it carried out transactions with a related party during the disputed period, were influenced by the existing links and not, as the applicant pointed out, by objective economic conditions.

Furthermore, the Authority infringed the provisions of the Regulation of the Minister of Finance of 10 September 2009 on the method and procedure for determining the income of legal persons by way of assessment and the method and procedure for eliminating double taxation of legal persons by not examining the Company’s economic strategy and economic conditions which may affect cooperation. In particular, the Authority did not take into account the fact that in the analyzed period the Company was in the “learning” phase and thus incurred higher costs.

To sum up, the authority did not prove that the conditions of cooperation concluded between the parties to the transaction deviated from those which would have been established by independent entities.

It should be concluded that the mere existence of links is not sufficient to apply the provisions allowing the tax authorities to make an assessment.


Author: Izabela Lipka – Tax consultant