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A company and its foreign permanent establishment are associated enterprises


by Marcin Jeliński

3 April 2018


The obligation of companies operating through their foreign permanent establishments to prepare transfer pricing documentation follows directly from the relevant provisions of the CIT Act. Those provisions apply to taxpayers that have their registered office or management outside Poland and carry on business through a Polish permanent establishment.


The obligation also covers transactions between those taxpayers and their foreign permanent establishment situated in Poland whenever  those transactions are attributed to that establishment (Article 9a(5a)). In 2015 the legislator introduced the same requirements for Polish enterprises operating through permanent establishments abroad (Article 9a(5b) CIT Act).

How to identify the documentation obligation

The obligation to prepare transfer pricing documentation must be each time determined based on the amount of revenues and expenses (in the meaning of the accounting regulations), generated by the taxpayer in the previous tax year and calculated on the basis of the books of account. The prior-year revenues and expenses are the basis for calculating an individual threshold. If the annual value of the transactions or other dealings of one type effected between the parent company and its permanent establishment exceeds the above threshold, they must be documented according to general principles.

Example 1:

The accounting revenues earned by a Polish company in 2016 exceeded the equivalent of EUR 4 million. In 2017, the Polish company allocated to its foreign permanent establishment the costs of renting the building machinery used by the permanent establishment to perform a contract abroad.

If the value of a transaction attributable to the permanent establishment exceeded in 2017 the equivalent of EUR 60,000 (50,000 + 2 x 5,000), such a transaction must be documented. Considering the turnover value, only a local file will have to be prepared and no benchmarking study will have to be performed in this case.

Consolidated values and determining of thresholds

The manner of determining individual value thresholds triggering the obligation to document transactions performed by the Polish branch of a foreign company has been addressed in advance tax rulings regarding transactions between a branch and a subsidiary of a parent. The Head of the National Tax Information Service confirmed in his advance tax ruling dated 1 December 2017 that a Polish branch of a German company is an organisationally distinct unit within the German company's corporate structure and is thus not a separate taxpayer (0111-KDIB1-3.4010.330.2017.1.PC). Therefore, the threshold defined in Article 9a CIT Act regarding the value of transactions or other dealings performed between the branch and the subsidiary and affecting the amount of the taxpayer's income (loss) should be calculated taking into account the total revenue or costs of the branch and the parent (i.e. the consolidated revenues or costs).

How to determine the internal price

The parent company and its permanent establishment should settle their accounts on the same terms and conditions that would be agreed between independent entities. Transactions with the permanent establishment should be agreed as if the permanent establishment were an independent and autonomous business partner. The transfer of goods between the parent and the permanent establishment may not be charged exclusively at the purchase or production cost incurred by the parent (even if those costs were increased by transport or other handling costs). The purpose of the transaction between independent enterprises is to earn a profit that reflects the functions performed, the assets employed and the costs incurred by the transaction parties. As it is necessary to assume the fictitious independence of the permanent establishment, a transaction, such as the transfer of goods, must involve the addition of an appropriate level of profit (e.g. in the form of a mark-up on the costs incurred by the parent).

In relations between the parent and the permanent establishment, the setting of an internal sales price for the goods enables the proper allocation of profits to the foreign establishment. Tax authorities may examine the agreed internal price by analysing the methods of allocation of revenues and costs and checking the correctness of the amount of profits attributed to a permanent establishment. We recommend that taxpayers establish the pricing method for transactions with their permanent establishment early in advance and  appropriately document those transactions in order to minimise the risk that the income attributed to the permanent establishment will be challenged by tax authorities.

How to correctly allocate costs

The taxable permanent establishment accounting for the income attributed to it may be requested to submit source documents that substantiate the costs allocated to it by the parent.

In its ruling of 15/01/2013, the Provincial Administrative Court in Gdańsk specified how the costs attributed to the permanent establishment should be documented (case file: I SA/Gd 1335/12). The inspection authorities stated that debit notes issued by the parent might not be treated as evidence confirming the allocation of indirect costs incurred abroad to the permanent establishment (management and administrative costs allocated pro-rata to the sales revenues generated by the branch and the parent company). Debit notes do not show any specific costs, but rather a sum of various expenses incurred by the parent.

The point at issue was the charging of costs between a foreign company and its Polish branch, but it may refer to any similar situation involving the settlement of accounts with a permanent establishment.  In the justification of its ruling, the court confirmed that according to Article 7 of the double taxation treaty between Poland and Germany, in determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the Contracting State in which the permanent establishment is situated or elsewhere. However, it must be stressed that if the branch (permanent establishment) wants to include certain expenses in its tax-deductible costs, such expenses must always meet the conditions specified in Article 15(1) CIT Act, namely, they must be correctly and exhaustively documented and be related with the branch's (permanent establishment's) revenues.

Example 2:

An employee of a foreign company is in charge of administrative and IT support, including that rendered to the Polish permanent establishment. In such a case, it is fully reasonable to attribute a relevant portion of personnel expenses to the permanent establishment. Administrative expenses may be allocated based on the approximate time worked by that employee (e.g. the time worked for the permanent establishment, calculated as a percentage of the employee's total working time), and IT support expenses – e.g. based on the share of the number of computer workstations in the permanent establishment in the total number of computer workstations in the company.

Example 3:

The parent company incurs costs of the operational inspections and maintenance of the construction machinery used by its permanent establishment in Poland. The costs incurred by the parent company should be allocated to the permanent establishment based on a relevant invoice (issued by the foreign O&M service provider to the parent) held by the permanent establishment.

What should transfer pricing documentation refer to?

The manner of documentation was addressed in the advance tax ruling issued by the Director of the Tax Chamber in Warsaw on 29/10/2015 (case file: IPPB5/4510-667/15-4/IŚ). A company applying for the tax ruling explained that it performed at the same time two independent projects through two independent permanent establishments in Poland. Each of the permanent establishments had its own allocated human resources, materials, tools and other assets necessary to perform the respective projects. The revenues and expenses were allocated to the permanent establishments using two different methods:


  • the profit split method (project 1);
  • he cost plus method (project 2) .

In the company's opinion, transfer pricing documentation had to be prepared for each of its permanent establishments separately. 

The authority issuing the tax ruling did not agree with this standpoint and cited Article 9a CIT Act, according to which transfer pricing documentation must be prepared for transactions (dealings). In the opinion of the ruling authority, the transfer pricing documentation to be maintained by the company should refer to transactions (dealings) because every transaction must be individually analysed, taking due account of all facts and circumstances, especially the risks assumed and the functions performed as part of the transaction.

The presented advance tax ruling does not reflect the complexity of business transactions that may be effected between a parent company and its permanent establishment. The standpoint of the tax authority presented in the tax ruling seems to be fully adequate in the case (as presented in the first example) where the transaction involves only the transfer of merchandise. But the creation of a foreign permanent establishment often implies various dealings with the parent which are necessary to properly perform a contract (project) abroad on the one hand, and are the basis for the proper calculation of the permanent establishment's profit on the other. To meet both conditions, the transaction parties must often organise the supply of goods and products, provide financing, engage sub-contractors and account for an appropriate portion of administrative and other overhead costs. Documentation describing each of such transactions or dealings separately may fail to reflect their complexity. A reasonable solution would be to present the documentation of all transactions with the permanent establishment using an appropriate pricing method.


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Marcin Jeliński

Tax adviser (Poland), Licensed appraiser

Associate Partner

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