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One APA to cover the taxpayer’s entire business?


5 February 2021

by Radosław Ozimek


If you enter into an Advance Pricing Agreement (APA) in respect of one controlled transaction, you obtain measurable benefits in respect of that one transaction only. Does this mean that a taxpayer has to obtain a separate agreement for every transaction?

The court has ruled “no”. Sometimes, an APA may cover the taxpayer’s entire business activity. This means that one APA would let a taxpayer include all expenses referred to in Article 15e of the CIT Act in tax-deductible costs, regardless of the statutory limit.

Judgment of the Provincial Administrative Court in Warsaw

By virtue of Article 15e(1) CIT Act, tax-deductibility of certain categories of expenses paid to associated enterprises is limited. An Advance Pricing Agreement permits an exception to this rule under Article 15e(15) of the said Act. Limited tax-deductibility does not apply to fees paid to associated enterprises insofar as an APA validates the correctness of such payments. The Provincial Administrative Court (PAC) in Warsaw ruled on the scope of application of that provision on 16 June 2020 (file no. III SA/Wa 1697/19). The statement of reasons behind its judgment says that to avoid the above-mentioned limitation it is enough that expenses are accounted for in the calculation algorithm of the fee covered by the agreement. If a taxpayer has an APA for transaction A and the fee for that transaction takes account of the fee for transaction B, the taxpayer’s tax-deductibility of expenses in respect of the latter transaction is unlimited.

The substance of the case and the court’s conclusions

The court pointed out the above legal interpretation in the context of a taxpayer who had an Advance Pricing Agreement on purchases of goods from an associated enterprise. The transaction was a part of the taxpayer’s core business of resale of health, beauty and hygiene products purchased from an associated enterprise from the Netherlands. The company did not perform any other important functions and incurred no significant risk. Its functional profile was specified as a limited-risk distributor. The taxpayer paid a fee for the purchased goods to the associated enterprise, calculated using the transactional net margin method. The price was calculated so that the company earned a stable, risk-free operational margin on its entire business (resale of the purchased goods). The calculation algorithm included all costs of operating activities and other operating expenses. If the costs included in the settlement of the purchase of goods differed from the actual costs, the result on that transaction was adjusted to the agreed margin through a transfer pricing adjustment.

The costs of operating activities included in the price calculation algorithm included services purchased from other associated enterprises. Those were intangible services such as consulting, management, legal, marketing and sales – in support of the sale of goods. The substance of the services suggested that their costs were subject to statutory limitation. However, the taxpayer claimed that it was entitled to unlimited deductibility because the arm’s length nature of the fee was confirmed by means of an APA. The tax authorities disagreed with the company’s interpretation and pointed out that the advance pricing agreement covered one specific transaction only – the purchases of goods. Therefore, the effects of that agreement could not be extended to transactions with other associated enterprises.

The PAC in Warsaw reversed the company-unfriendly interpretation pointing out procedural violations. However, in the statement of reasons the court explained that Article 15e(15) CIT Act did not say that an advance pricing agreement covered only a specific entity. Instead, the court held that a transaction covered by an APA should be considered in terms of its substance, regardless of the number and diversity of the parties involved in the transaction. As a consequence, the exemption from the limited tax-deductibility of expenses for intra-group services does not require having a separate APA for the purchase of such services. It is enough that the costs of such services be included in the price calculation algorithm of another transaction covered by an APA. The court believes that such a structure allows a conclusion that the arm’s length nature of the fee for the services has been confirmed already.

Extension of the taxpayer’s benefits – when

The judgment is not final yet. However, it charts a special and taxpayer-friendly direction in the interpretation of the provision on limited tax-deductibility of certain expenses. If we accept this interpretation, one Advance Pricing Agreement may cover the taxpayer’s entire business and extend all positive effects of the APA to all controlled transactions. This translates into significant savings for many enterprises.


Company A is a limited-risk manufacturer. It buys raw materials from an associated enterprise and resells finished goods to independent customers who indicate the required quantity and types of products in an order. The fee for the transaction is calculated so as to ensure a stable margin on all operations. The price calculation algorithm accounts for all operating expenses (including the costs of external services). Company A buys intra-group services and a software licence from associated enterprises and cannot include all of them in tax-deductible costs due to the statutory limitation. The taxpayer has applied for an APA for the purchase of raw materials for production and has obtained one. The court has offered an interpretation that Company A may include all its expenses for the services and licences paid to associated enterprises in its tax-deductible costs thanks to the above-mentioned APA. Company A does not have to apply for separate APAs for each transaction, participate in several proceedings and pay fees for several applications.

Please note also Article 11n(2) of the CIT Act which exempts a controlled transaction covered by an APA from the documentation obligation. In the above example, would the taxpayer be obliged to draw up a local file for the purchase of services or licences if the statutory thresholds were exceeded? The judgment described above did not deal with this issue, but either response could be argued for. However, it seems better to choose the safer option and prepare the local file.


The legal interpretation presented by the PAC in Warsaw allows the taxpayer:


  • to enter into an APA concerning a controlled transaction being the core business activity (e.g. purchase of goods, raw materials);
  • not to prepare the local file for that transaction;
  • to deduct all expenses listed in Article 15e regardless of the statutory limitation.

These bonuses are available mainly to enterprises:


  • which conduct a homogeneous line of low-risk business, e.g. limited-risk manufacturers and distributors, contract manufacturers;
  • which set the fee for the core transaction on the basis of an algorithm based on the data concerning the entirety of its core operating activities;
  • which purchase services or licences from associated enterprises to support the core activities.


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Dominika Tyczka-Szyda

Tax adviser (Poland)


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