Controlled transaction
The concept of a controlled transaction
A correct understanding of the term transaction matters, because transfer pricing is always considered in the context of a specific transaction, or of a set of transactions where their subject matter and terms are identical.
The definition of a controlled transaction appeared in the Polish legal order for the first time in 2019. According to its wording, a controlled transaction "means an activity of an economic nature identified on the basis of the actual conduct of the parties, including the attribution of income to a foreign permanent establishment, the terms of which have been agreed or imposed as a result of the relationship between them" 1.
Polish tax law does not define activities of an economic nature, which is why, in order to explain that term, reference must be made to the narrower definition of business activity.
Business activity may therefore be understood as activity:
- pursued for profit (oriented towards gain, with a financial rationale);
- pursued within an organised structure (continuity, frequency, repetition as against a one-off event);
- of an independent (autonomous) character.
The features characteristic of business activity are the same as the features of an activity of an economic nature, which is why the definition of business activity is helpful in correctly determining whether a taxpayer is carrying out a controlled transaction.
In identifying the documentation obligation, the taxpayer is required to isolate the homogeneous transaction. It may comprise several transactions carried out between the taxpayer and various related parties and/or entities from a tax haven.
Homogeneous transactions are verified by comparing how similar they are. The uniform character of a transaction is most often expressed through an identical subject matter, similarity of the material risks, functions and assets, or through the use of the same transfer pricing method, as well as other material circumstances.
Notes
1 Corporate Income Tax Act of 15 February 1992, Journal of Laws 1992 No. 21 item 86, as amended, Article 11a(1)(6).