The concept of a controlled transaction includes all economic activities, the actual content of which is identified based on the actual behavior of the parties. Due to definition, each time-related parties are uncertain about the obligation to prepare transfer pricing documentation for a specific transaction.
Due to the Ministry of Finance published General Interpretation No. DCT1.8203.4.2020 of 29 December 2021 on the definition of a controlled transaction in connection with the interpretation of Article 11a CIT and Article 23m PIT Article 11a paragraph. 1 point 6 of the CIT Act and Article 23m of paragraph 1 point 6 of the PIT Act.
According to the legal definition, a controlled transaction means acts of an economic nature identified based on the actual behavior of the parties, including the attribution of income to a foreign permanent establishment, the terms of which have been established or imposed as a result of the relationship.
It should be remembered that an action that may constitute a controlled transaction should be verified in an individualized manner by the entity while taking into account the specificity of the transaction. It is allowed that a controlled transaction does not have to be reported by both parties to the transaction, but only by the one for which it is an economic activity
To know an activity as a controlled transaction, a total of 3 conditions must be met.
- occurrence of activities of an economic nature
- identifying activities based on the actual behavior of the parties
- conditions being set or imposed as a result of relationships
The overriding premise was considered to be the existence of activities of an economic nature, i.e.
- profit-making activities,
- within an organized structure,
- activities of an independent nature.
The basic feature of economic activity is its profit-making purpose. On the other hand, an intention that has not made a profit (or has suffered a financial loss) does not automatically imply an act of a non-economic nature. In connection with the above, the benefit of a profitable character is also fulfilled when the actions taken are aimed at a profit but generate losses. An example is the sale of goods at a lower price as a result of exchange rate fluctuations.
Within structure of the structure, the activities carried out, which can be incidental or continuously natural and can also be stretched over time. An example of a single action is the sale of an organized part of an enterprise.
Acts of an economic nature should be identified based on the actual conduct of the parties to whom the acts or omissions belong. Attention is paid to the fact that the behaviors are real, and not apparent or artificial. In assessing the reality of the conduct of the parties, an account must be taken, in particular, of the existence of legitimate economic reasons for the conduct of the act in question. The actual content of the actions taken should be analyzed based on the actual behavior of the parties and the functions performed by them, and not with the provisions resulting from written contracts or agreements from the perspective of each participant in the transaction.
The existence of links does not determine the existence of a controlled transaction. The definition of a controlled transaction stipulates that in the course of economic activities, they must be established or imposed as a result of links. As a result of the above, in practice, there may be situations when the activities will be economic and will be carried out between related parties, but will not constitute a controlled transaction.
If the actual actions of the parties are determined by law, such actions do not constitute a controlled transaction. Activities of an economic nature shaped by legal regulations are not a sufficient reason to consider that the conditions were set or imposed as a result of links.
Bearing in mind the above, the obligation to prepare transfer pricing documentation will not arise from the conclusion of a preliminary agreement constituting an obligation or payment of the company’s profit in the form of a dividend. These examples do not constitute an economic activity.
When determining whether turnover is a controlled transaction, the transaction should be considered from the perspective of more than one party on a case-by-case basis, taking into account the assumption that to determine whether we are dealing with actions established or imposed as a result of relationships, it is irrelevant whether the transaction is carried out by the arm’s length principle.
Author: Marta Kiryczuk – Tax Consultant