On 3rd December 2021, the Provincial Administrative Court in Lublin, in the judgment of ref. I SA/Lu 431/21 on corporate income tax in the scope of determining whether the obligation to prepare transfer pricing documentation by the Branch includes a “controlled transaction” consisting in the attribution of income/loss to the Branch by its parent entity dismissed the company’s complaint against the individual interpretation of the Director of the National Tax Information, in which the irregularity of the company’s position as indicated.
The company doubted whether the provisions of Article 11a paragraph 1 point 6 in conjunction with Article 11k paragraph 2 and Article 11l paragraph 1 point 4 of the CIT Act apply to it. Referring, the company asked the following question: Does the obligation to prepare transfer pricing documentation by the Branch include a “controlled transaction” consisting in the attribution of income/loss to the Branch by its parent entity located in Germany?
The company is a branch of company A, a foreign entity registered and legal personality in Germany’s Federal Republic. In the company’s opinion, the documentation obligation (in the field of transfer pricing) incumbent on the Branch does not cover a controlled transaction consisting in the attribution of income/loss to the Branch by its parent entity.
In the opinion of the Provincial Administrative Court, this position is inherently flawed. A foreign establishment is one run in Poland by an entity with a residence, registered office, or management located abroad and one run by a Polish entity outside the Republic of Poland.
Firstly, An obligation to report transfer pricing must state whether the Branch and its parent company are related parties; in the present case, there is that dependence. According to the legal definition, associated parties are m.in taxpayer and his permanent foreign establishment. The entity is a natural person, a legal person, or an organizational unit without legal personality and a foreign establishment.
If the company is a permanent foreign establishment of the parent company, it was for the tax authority to assess whether the parent company is a taxpayer within the meaning of the Polish Tax Act. In principle, CIT taxpayers in Poland are legal persons, while income earned by natural persons and companies without legal personality remains outside the scope of the Act. Contrary to the company’s position, this applies to domestic legal entities and foreign ones. Taxpayers also include companies without legal personality having their registered office or central administration in another state. By tax law of that other state, they are treated as legal persons are subject to tax in that state on all their income, regardless of where it is earned.
In the opinion of the Provincial Administrative Court, the position presented by the party that the legislator does not mention a foreign legal person as a CIT taxpayer is unfounded. Therefore the parent company, undoubtedly a limited liability company (legal person), cannot constitute a related entity. It is, therefore, not the case, as the party suggests, that a taxpayer in the form of a foreign entity is defined only in Article 1 paragraph 3 point 2 of the CIT. That part of the provision indicates companies’ special tax law status without legal personality having their registered office or management board in another State. They are classified as CIT payers, whereas such companies under Polish law are not, in principle, subject to the provisions of that Act. The key to classification is a company without legal personality, according to the state’s tax law requirements in which its registered office or central administration is situated, is treated as a legal person and is subject to tax income, irrespective of where it is earned. In Polish law, such a company is treated as a legal person. Therefore, there can be no doubt that the parent company and its Branch in Poland are related entities.
Whether a foreign legal person (or an entity described in Article 1 paragraph 3 point 2 of the CIT is subject to tax liability in Poland is determined by further provisions of this Act and international agreements on avoiding double taxation. The division is a form of activity of a foreign entrepreneur in Poland, not a separate tax entity from it. The taxpayer of corporate income tax is a foreign entity (parent company), and it is in principle subject to tax on all income in that country. However, suppose the parent company conducts business through a permanent establishment located there in another country (in Poland), then, according to the agreement. In that case, the enterprise’s profits may be taxed in the other country, but only to the extent that they can be attributed to that permanent establishment.
Therefore, the principle of limited tax liability applies, translating into taxation of only the part of income obtained by the Branch in Poland. However, contrary to its position, the parent company remains a taxpayer, but it is not a branch. The identification data allocated to the establishment is, in principle, linked to the fact that it is a payer of personal income tax. However, it does not give rise to the conclusion, such as in the complaint, that an applicant is a taxable person within the meaning of the CIT Act.
The attribution of income to a permanent foreign establishment, the terms of which have been established or imposed due to the relationship, constitutes a controlled transaction, while the value of the assigned revenues or expenses is in the art of that transaction. If so, the Branch in Poland and the parent company (which is a taxpayer in Poland and is subject to limited tax liability here) as related entities, are obliged to prepare local transfer pricing documentation for a controlled transaction consisting in assigning income to a permanent foreign establishment located in the territory of Polish.
The exclusion of this obligation is limited only by Article 11n paragraph 9 of the CIT (the responsibility to prepare local transfer pricing documentation does not apply to controlled transactions consisting in the attribution of income to a permanent foreign establishment located in the territory of the Republic of Poland by taxpayers if they do not have in the part of the Republic of Poland registered office or management board, are subject to tax liability only on income that they earn on the territory of the Republic of Poland). If the provisions of relevant international agreements to which the Republic of Poland is a party provide that such income may be taxed only in a country other than Poland.
The Provincial Administrative Court approved the position that the complaints are unfounded. The individual interpretation issued at the company’s request by the tax administration appropriately is consistent with the applicable tax ruling of substantive law.
Author: Marta Kiryczuk – Tax Consultant