Loan in the transfer pricing context: transaction threshold = value of principal used

According to the CIT Act, when it comes to financial transactions, the Local File should be prepared for homogeneous controlled transactions whose value exceeds the documentation threshold of 10 million zloty in a tax year. A loan is such a transaction. 

Importantly, the transaction value in the case of a loan equals the value of the loan principal.

The advance tax ruling of the Head of the NRIS may usher in a change in the current legal interpretation. The interpretation used to assume that the obligation to prepare transfer pricing documentation in respect of a loan should be based on the value of the loan principal set in an agreement, no matter how much of the loan has actually been taken out. 

The ruling concerned the case in which the applicant was a holding company in a corporate group. Intra-group loans were granted to companies which required cash to develop their business or finance day-to-day operations. The company was the lender.

The taxpayer was not sure about its obligation to prepare transfer pricing documentation of a loan where the value of the loan principal actually used was lower (and did not exceed 10 million zloty) than the amount specified in the loan agreement. 

The taxpayer was not sure about:

The company claimed that the ‘principal amount’ meant the loan amount specified in the agreement, while the ‘principal value’ meant the amount of the principal made available in a year according to the agreement or another document. As a consequence, the company was not obliged to prepare the transfer pricing documentation of such a transaction. 

To back up its position, the company invoked the TPR Guide published by the Ministry of Finance. The company explained that the guide defined the ‘principal amount’ as the loan amount specified in the agreement, and the ‘principal value’ as the amount of the principal made available in a certain period according to the agreement or another document (e.g. loan repayment schedule, bank statements).

The Head of the National Revenue Information service agreed with the company. In explaining its decision the authority referred to the ‘actual conduct of the parties’ which was not the conclusion of the loan agreement itself, but the borrowing of capital. The Head of NRIS emphasised the enterprise’s rationale which was to borrow capital and not just to conclude a loan agreement. This related to the objective of a loan according to the Civil Code, which was to transfer ownership of a certain amount of money.

The authority ruled that the ‘principal value’ referred to in the CIT Act meant the highest amount of the principal made available in a given reporting period under the agreement or another document. In his statement of reasons, the Head of NRIS also invoked the TPR Guide. 

Following that interpretation, when it comes to multiannual agreements, the associated enterprise must check if the loan principal exceeds the documentation threshold of 10 million zloty in the first and every subsequent tax year. The ‘principal value’ in a tax year is determined on the basis of the highest value of outstanding principal in a tax year for which the documentation is prepared.

The Head of NRIS interpreted the CIT Act liberally. His ruling gives hope that revenue authorities may take a more taxpayer-friendly approach to interpreting laws in the future. This would undoubtedly be welcome, but we need to wait for this approach to become more firmly established. 

The authority's argumentation based on the TPR Guide may seem flimsy because the Guide neither interprets nor explains tax laws. It is published for information purposes only.