Tax loss and the option to exempt taxpayers from the obligation to prepare transfer pricing documentation

by Joanna Bielecka

16 June 2020

In his advance tax ruling of 23/04/2020, file no. 0111-KDIB1-3.4010.101.2020.1.IM, the Head of the National Revenue Information Service confirmed that whenever the criterion of no tax loss in a tax year is tested, this refers to a loss from a specific source of income which includes taxable transactions with a Polish associated enterprise.

The company applying for the ruling made transactions involving goods and services with Polish entities with which it was directly and indirectly linked by equity and personal relations. The company wanted to know whether it could be exempt from the obligation to prepare transfer pricing documentation of such transactions according to Article 11n (1) of the Corporate Income Tax (CIT Act). In the year in which the transactions were made, the company incurred a capital loss and achieved income from other sources. The applicant claimed that in such a situation an entity that did not incur any tax loss was the entity which did not incur a loss from the income source comprising taxable transactions with associated enterprises having their registered office or management board in Poland. Therefore, in the case of transactions involving goods and services, the lack of tax loss was required only in respect of operating activities, regardless of any possible loss from financing activities. The tax authority agreed with the applicant's position.

Exemption conditions

According to Article 11n(1) of the CIT Act, the obligation to prepare transfer pricing documentation does not apply to controlled transactions made only between associated enterprises having their place of residence, registered office or management board in Poland in the tax year in which each of the enterprises meets the following conditions jointly:

1. does not enjoy exemption from income tax according to Article 6 of the CIT Act (this refers mainly to public sector entities such as the State Treasury, the Social Insurance Institution, government units etc.);
2. does not enjoy tax exemption based on a permit for business in a special economic zone (SEZ) or a state aid decision (Article 17(1)(34)(34a) of the CIT Act);
3. does not incur a tax loss.

Definition of a tax loss

Article 7(2) of the CIT Act defines the term “tax loss” as follows: if the tax-deductible costs exceed the total income from a given source, the difference is a loss in respect of that source. The provision explicitly says that the loss refers to a specified source of income and not to the excess of tax-deductible costs over income in general. This standpoint was confirmed by the judgment of the Provincial Administrative Court in Wrocław of 9 January 2020 (I SA/Wr 861/19).

Thus, if the taxpayer earns a profit from one of its income sources and incurs a loss from another, and the transaction is a part of the income source which has generated the profit, then the loss incurred from the other source does not automatically disqualify the taxpayer from exemption from the requirement to prepare transfer pricing documentation. However, this condition must be met by all Polish entities participating in the transaction and the remaining requirements following from Article 11n(1) of the CIT Act must be met jointly as well.

Consequently, if a given transaction need not be documented by virtue of Article 11n(1) of the CIT Act, this does not mean that the taxpayer is exempt from all transfer pricing obligations. Although there will be no obligation to prepare the Local File, the transaction will have to be disclosed in the transfer pricing report (TP-R form).

The obligation to file the TP-R form was also addressed in the Finance Minister’s response of 10 April 2020 to parliamentary question no 507 concerning this obligation. According to the response, if an entity concludes transactions referred to in Article 11n (1) of the CIT Act, but no Local File needs to be prepared for those transactions based on other provisions (e.g. the transactions do not exceed the statutory thresholds), the entity is not required to file the TP-R form. Moreover, the question whether there is no need to prepare transfer pricing documentation based on Article 11n (1) of the CIT Act should only be considered when a relevant transaction exceeds the stipulated statutory thresholds.

Custom review

If a Polish taxpayer makes transactions with Polish associated enterprises and the transaction values exceed statutory thresholds, he may analyse whether such transactions are exempt from the documentation obligation according to Article 11n (1) of the CIT Act. One of the conditions mentioned in this provision is that none of the domestic entities involved in a controlled transaction incurs a tax loss. In this context, a tax loss means a loss from a source of income to which the transaction belongs, rather than a loss in general or a loss from another source of income.