APA: costs may be deducted only until the end of the year

by Michał Sojka

3 December 2019 

The Polish President signed the Act on Resolving Double-Taxation Disputes and Concluding Advanced Pricing Agreements (DMR Act) on 5 November 2019.

The Act transposes the solutions set out in Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the European Union into the Polish legal system. The Act, apart from the exceptions provided for therein, enters into force within 14 days of its promulgation.

Unfortunately, contrary to our earlier information and the communications from the Ministry of Finance, the act does not contain provisions allowing taxpayers to sign advance pricing agreements (APA) in a simplified procedure.

Where it all started

Provisions limiting the tax deductibility of expenses for certain intangible services purchased from associated enterprises (in the meaning of transfer pricing regulations) or from enterprises established in a country practicing harmful tax competition became effective on 1 January 2018.

According to those provisions, taxpayers may include expenses for intangible services of up to PLN 3 million per year in their tax-deductible costs without any limits. Intangible services that exceed that threshold may be included in tax-deductible costs in the part not exceeding 5% of “tax-EBIDTA” (the ratio corresponding to the surplus of total revenues from all revenue sources less interest income over total tax-deductible costs less depreciation/amortisation and interest included in tax-deductible costs in the tax year).

Which services are subject to the limit

According to Article 15e(1) of the CIT Act, the limit applies to the following services:

• advisory services, market research, advertising, management and control, data processing, insurance, guarantee and surety services and similar;
• all kinds of fees and amounts due for the use or the right to use rights or assets specified in the act. i.e. copyrights or related property rights, licences, rights specified in the Industrial Property Act (e.g. trademarks, patents, industrial designs) and value equivalents of disclosed industrial, commercial, scientific or organisational knowledge (know-how);
• transfer of the risk of debtor's insolvency in terms of debt receivables on account of loans other than loans granted by banks and credit unions, including under derivatives agreements and similar.

Article 15e of the CIT Act

According to Article 15e (15) of the CIT Act (in the new wording introduced by Article 109(10)(b) of the DRM Act), the limit set for tax-deductibility of expenses for services, fees and amounts due to associated entities (over PLN 3 million and 5% of tax-EBITDA) does not apply to expenses for fees paid to an associated entity insofar as such fees are correct under an APA decision or a tax agreement referred to in Article 20zb(2) of the Tax Act.

In the APA decision – an administrative decision issued on the taxpayer's application – the Head of the National Tax Administration approves the transfer prices applied in a transaction between a domestic and a foreign entity.  The APA decision may refer to transactions that are pending or planned at the time of filing the application. The APA is valid for maximum of 5 years and may be extended after this period provided that the trading conditions between the entities have not changed significantly.

The application for an APA must include detailed information about the applying taxpayer and its associated enterprises participating in the transaction. The applicant must provide, among other things:

• details of the applicant and its associated enterprises taking part in the controlled transaction;
• details of the controlled transaction to be covered by the APA decision;
• the validity period of the previous APA;
• information whether the application is for a unilateral, bilateral or multilateral APA;
• with regard to bilateral and multilateral APAs – information about applications (if any) filed with a competent foreign authority by foreign associated entities, including the names of those entities, the country where the application was filed and the application date, if known.

Benefits arising from an APA

An APA brings two benefits. The first benefit is the tax security as regards transfer pricing (exemption from the documentation obligation, no risk that tax authorities will assess extra income and additional tax liability or impose fiscal criminal sanctions for telling untruth in the statement confirming the arm’s length nature of transactions if the terms of such transactions are challenged by tax authorities). The second important benefit is the earlier mentioned tax-deductibility of expenses incurred for any of the services referred to in Article 15e of the CIT Act which the taxpayer purchased from its associated enterprises.

Noteworthy, according to transitional provisions of the DRM Act, for applications filed by 31 December 2019 the limit as per Article 15e of the CIT Act will not apply also to the tax year preceding the year in which the application was filed.

Taxpayers who apply for an APA before the end of 2019 and obtain the APA decision will save the costs of intangible services for both 2019 and 2018.

APAs are beneficial in many ways. This instrument can be useful in particular to taxpayers operating within corporate groups and incurring expenses for intragroup purchases of intangible assets subject to the limit stipulated in Article 15e of the CIT Act.

Therefore, we encourage you to consider applying for an APA as there is little time left till the application deadline.