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How to interpret the group of associated enterprises for Master File purposes?


31 October 2018

Taxpayers whose revenues or costs as per the Polish accounting laws exceeded the equivalent of EUR 20 million in the year preceding the tax year must prepare the so-called Master File.


There are considerable doubts surrounding the transposition of the OECD Guidelines into Polish law because the Polish requirements go beyond the international recommendations as regards certain issues. The Guidelines and the Polish laws also differ as to what kind of enterprises must prepare the Master File. Moreover, there are inconsistencies regarding the Master File between the Corporate Income Tax Act (“CIT Act”) and the Personal Income Tax Act (“PIT Act”).


Group of associated enterprises under the PIT Act

According to the PIT Act, the Master File must be prepared by taxpayers which, together with their associated entities, form a corporate group in the meaning of the Accounting Act.


Through direct reference to the Accounting Act, the PIT Act imposes the obligation to prepare transfer pricing (TP) documentation on corporate groups, i.e. groups consisting of a parent entity and its subsidiaries. This means that according to the PIT Act only companies preparing consolidated financial statements must prepare such documentation.


Group of associated enterprises under the CIT Act

The CIT Act includes neither a legal definition of “a group of associated enterprises” nor refers – contrary to the PIT Act – to the definition provided in the Accounting Act. So what entities should be covered by TP documentation?


When construed literally, the CIT Act says that the Master File must be prepared for groups consisting of entities not included in the consolidated financial statements. The crucial criteria are equity links as well as family, personal or functional relationships between entities according to the CIT Act.


The CIT Act's provision on the obligation to prepare TP documentation is inconsistent with the corresponding provision of the PIT Act, which suggests a legislative error. The legislators seemed to admit this by amending the CIT Act; the amending bill dated 6 July 2015 says that the term “group of associated enterprises” should be defined by reference to the Accounting Act's provisions on “corporate group”. In addition, the legislators introduced into the CIT Act and the PIT Act the obligation to prepare TP documentation based on the same statute, i.e. the Act of 9 October 2015 amending the Personal Income Tax Act, the Corporate Income Tax act and some other acts (Journal of Laws of 2015 Item 1932). Thus, when determining the TP documentation obligations, no grounds exist to distinguish between taxpayers (PIT or CIT) because the relevant provisions of both statues now have the same legal and factual basis. 


Tax authorities versus administrative courts

According to the taxpayer-unfriendly interpretation of the CIT Act by the National Tax Information Service, the group of associated enterprises in the meaning of the CIT Act is to be broadly defined as the group of associated enterprises as per Article 11 CIT Act (advance tax ruling of 29 December 2017, file no. 0111-KDIB1-3.4010.468.2017.1.IZ). Thus, TP documentation should cover entities that are associated in the meaning of Article 11 CIT Act. The advance tax ruling of 4 December 2017 (file no. 0111-KDIB1-3.4010.284.2017.1.IZ) provides another example of tax authorities' unfavourable approach. In the ruling, the Head of the National Tax Information Service found that an entity's independence in terms of the capital held, functions performed or business carried on was not decisive in determining the group of entities obliged to prepare the Master File. Consequently, according to the ruling, the group of associated enterprises to be covered by the Master File should be interpreted broadly, i.e. it should include all entities related by capital, personnel or functions.


But taxpayers may hope that administrative courts will take a more favourable stance on the obligation to prepare the Master File. That administrative courts are more taxpayer-friendly as shown by the ruling issued on 25 May 2018 by the Provincial Administrative Court (PAC) in Wrocław (file no. I SA/Wr 166/18), which says that the National Tax Information Service is wrong to construe “the group of associated enterprises” in their tax rulings taking into account only the applicable tax laws. In the justification of its ruling, the PAC notes that the information to be covered by the Master File also includes the description of the group members' financial standing and the group's consolidated financial statements, that is, information typical of a corporate group in the meaning of the Accounting Act. Thus, the interpretation adopted by the Head of the National Tax Information Service ignores the fact that there is no real chance of fulfilling the obligation imposed under the current provision [of the CIT Act].


Tax authorities appear to have changed their approach most recently, though. In his decision of 30 July 2018, the Head of the National Tax Administration challenged the correctness of the aforementioned tax advance ruling of 29 December 2017 (file no. of the amended ruling: DPP13.8221.97.2018) and pointed to the corresponding provision of the PIT Act. He justified his decision by saying that “if we adopted an interpretation according to which 'the group of associated enterprises' means associated entities as per Article 11(1) and (4) CIT Act, we would expose taxpayers to obligations which they could not fulfil for objective reasons”.


A change in transfer pricing laws

A change in transfer pricing lawsThe rules concerning the Master Files are going to be streamlined as proclaimed by the Minister of Finance. According to the bill of 15 July 2018, the obligation to prepare the Master File will rest with associated entities belonging to corporate groups which prepare consolidated financial statements and generate consolidated revenues exceeding PLN 200 million or its foreign currency equivalent. As of now, the bill has been submitted for further parliamentary work, so we can currently neither assess it in detail nor describe the future legal status.


To document or not to document?

As already mentioned, there is an inconsistency between the current versions of the PIT Act and CIT Act regarding the Master File rules. In our opinion, Article 9a(2d) CIT Act contains a legislative error. At the same time, since the documentation of parliamentary processes, namely, the justification for the bill, is not a generally applicable source of law and the literal interpretation prevails over other interpretations under tax law, we recommend caution and verification of your obligations with respect to the Master File. In order to avoid any dispute with tax authorities, we recommend applying for an advance tax ruling. You will save on costs of preparing the TP documentation if according to the tax ruling no Master File needs to be prepared.


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Dominika Tyczka-Szyda

Tax adviser (Poland)


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