Related parties
The obligations connected with transfer pricing concern above all transactions carried out by related parties. It is therefore important to determine correctly which entities fall within that term. Establishing the relationships between parties may be regarded as the first step in verifying whether a transfer pricing documentation obligation arises.
Identifying relationships: challenges and criteria
Identifying relationships may prove difficult, particularly where the structure of the group concerned is extensive. It is necessary to consider not only the direct relations between entities but also to analyse whether indirect relationships may exist.
Definitions of related parties under Polish law
Since 1 January 2019 the definition of related parties, in accordance with Article 11a of the CIT Act / Article 23m of the PIT Act, covers:
- entities of which one exercises significant influence over at least one other entity, or
- entities over which significant influence is exercised by: the same other entity, or
- the spouse, a relative by blood or a relative by affinity up to the second degree of a natural person exercising significant influence over at least one entity, or
Significant influence means:
holding, directly or indirectly, 25% of:
- the shares in the capital,
- the voting rights in the supervisory, decision-making or management bodies,
- the shares or rights to participate in the profits or assets, or an expectancy thereof, including participation units and investment certificates,
the actual ability of a natural person to influence the taking of key business decisions by a legal person or by an organisational unit without legal personality (for example decisions involving the designation by that natural person of the members of the taxpayer's management or supervisory bodies, decisions to withdraw from part of the business, to launch a new product on the market or to take over a certain area of activity from a related party),
family relationships, including cross-border cases: being married or being related by blood or by affinity up to the second degree.
Holding a share or a right indirectly means a situation in which one entity holds a share or a right in another entity through a further entity or through several entities, the size of the indirectly held share or right corresponding to:
1) the size of the share or right linking any two of the entities taken into account in determining the indirect holding, where all the sizes of the shares or rights linking those entities are equal,
2) the lowest size of the share or right linking the entities between which the size of the indirectly held share or right is being determined, where the sizes of the shares or rights linking those entities differ,
3) the sum of the sizes of the indirectly held shares or rights, where the entities between which the size of the indirectly held share or right is being determined are linked by more than one indirectly held share or right.
- a company without legal personality and its partners, or
- a taxpayer and its foreign permanent establishment and, in the case of a tax capital group, a capital company belonging to that group and its foreign permanent establishment, or
- so-called artificial ownership structures. These concern entities between which there are relations that are not established or maintained for justified economic reasons, including relations intended to manipulate the ownership structure (including fronting) or to create circular ownership structures, that is, situations in which, as a result of indirect relationships, an entity is related to itself, for example entity A holds shares in B, entity B in entity C, and entity C in entity A. As stated in the explanatory memorandum to the amending act, entities capable of breaking the chain of relationships include foreign trusts and private law foundations. In structures involving such entities the beneficiary of the trust or private law foundation is not related to the operating company held under the trust or foundation, which in effect makes the beneficiary an unrelated party in relation to the operating company.
The legal position in 2017
Under the rules in force, related parties should be divided into those related by capital, by personal links or by family ties.
Capital relationships
Among capital relationships a distinction can be made between direct and indirect relationships, which occur both in domestic and in international settings.
Holding a share in the capital of another entity means a situation in which one entity holds, directly (a direct relationship) or indirectly (an indirect relationship), at least 25% of the share in the capital of another entity.
In determining the size of an indirect share, the rule applied is that if one entity holds a given share in the capital of a second entity and that second entity holds the same share in the capital of a further entity, the first entity holds an indirect share in the capital of that further entity in the same amount; where those values differ, the lower value is taken as the size of the indirect share.
Example Entity A holds a 35% share in entity B and entity B holds a 15% share in entity C, so entity A holds a 15% share in entity C indirectly.
Personal relationships
Within personal relationships a distinction can be made between:
- personal links arising from the fact that a natural person performs ownership, management or supervisory functions in two different entities at the same time; in addition, for domestic entities the catalogue of personal links is extended to cover links arising from family relations;
- links arising from an employment relationship, which occur in the case of transactions between a taxpayer and an entity (a company) owned by an employee of the taxpayer or in which such an employee performs management or supervisory functions.
The assessment of the nature of the relationship should take into account the relation between the taxpayers (or the persons performing management, control or supervisory functions in them) which may result in one taxpayer being in a position of dominance over the other, and thus having a real influence on the terms of the transactions concluded with that taxpayer, or situations in which the common interest of both taxpayers arising from their joint financial position is so material that it may make them willing to conclude a transaction on terms they would not have agreed had they not been in such a relation.
Powiązania rodzinne
Family relationships exist between persons related by blood or by affinity. Article 11(6) of the CIT Act and Article 25(6) of the PIT Act state that "the term family relationships (...) means marriage and kinship or affinity up to the second degree". In order to understand this provision correctly, it is necessary to explain how kinship or affinity in the second degree is defined in law. The income tax acts do not address this question, which is why reference must be made to Article 61(7)(1) and (2) and Article 61(8)(1) and (2) of the Family and Guardianship Code 1.
Relatives by blood are persons descended from a common ancestor, so that the decisive factor here is the tie of blood. Kinship is calculated in lines, direct and collateral, and in degrees. Relatives in the direct line are persons one of whom is descended from the other. Within the direct line, an ascending and a descending line can be distinguished. The ascending line comprises parents, grandparents and great-grandparents (ascendants), while the descending line comprises children, grandchildren and great-grandchildren (descendants). Relatives in the collateral line are persons who have at least one common ancestor and are not relatives in the direct line, that is, neither is descended from the other.
The degree of kinship is determined on the basis of the number of births through which the kinship arose, that is, it is calculated by the number of births from the common ancestor. A son, for example, is a relative of the first degree in the direct line of his parents, and a granddaughter is a relative of the second degree in the direct line of her grandparents. Kinship in the collateral line within the same generation is always described by an even number, so siblings are relatives of the second degree in the collateral line, an aunt and a nephew are relatives of the second degree in the collateral line, and cousins are relatives of the fourth degree in the collateral line.
Affinity is the relation linking a husband or wife with the relatives of the other spouse. It is important here that it continues even after the marriage has ended. The lines and degrees of affinity are established in the same way as the lines and degrees of kinship. A brother-in-law, for example, is for the husband a relative by affinity of the second degree in the collateral line, and a father-in-law a relative by affinity of the first degree in the direct line.
The explanations above matter when determining whether persons in family relations are required to prepare tax documentation where they carry out joint transactions whose value exceeds the thresholds set out in the CIT and PIT Acts. Kinship and affinity are recognised by the tax rules only up to the second degree, which is why cousins doing business together and carrying out transactions, for example, will not be regarded as related parties. The same applies to a grandfather and his grandchildren, or an uncle and his nephew.
1 Family and Guardianship Code of 25 February 1964 (Journal of Laws No. 9, item 59, as amended) Article 617 [Kinship] § 1. Relatives in the direct line are persons one of whom is descended from the other. Relatives in the collateral line are persons who are descended from a common ancestor and are not relatives in the direct line. § 2. The degree of kinship is determined by the number of births through which the kinship arose. Article 618 [Affinity] § 1. Marriage gives rise to affinity between a spouse and the relatives of the other spouse. It continues even after the marriage has ended. § 2. The line and degree of affinity are determined by the line and degree of kinship.
The legal position in 2016
Holding a share in the capital of another entity means a situation in which one entity holds, directly (a direct relationship) or indirectly (an indirect relationship), at least 5% of the share in the capital of another entity.