The obligations related to transfer pricing relate primarily to transactions carried out by related entities. For this reason, it is important to correctly define what types of entities fall under this concept. This is because the determination of connections can be treated as the first element of verifying the existence of the transfer pricing documentation obligation.
Identification of connections may be difficult, especially when we are dealing with an extensive structure in a given group. It is necessary to bear in mind not only direct relations between entities, but also to analyze the possibility of indirect connections.
From 01/01/2019, the definition of related entities , in accordance with Art. 11a the CIT Act / art. 23m uPIT covers:
- Entities from which one entity exercises significant influence over at least one other entity, or
- Entities over which it exercises significant influence :
- the same other entity or
- a spouse, relative or second degree related to a natural person exercising significant influence over at least one entity, or
Significant impact means:
owning, directly or indirectly, 25% of:
Equity interests,
Voting rights in controlling, constitutive or management bodies,
Shares or rights to participate in profits or property or their expectations, including participation units and investment certificates,
the actual ability of a natural person to influence key economic decisions by a legal person or an organizational unit without legal personality (e.g. decisions involving the appointment by a natural person of members of the taxpayer’s management or supervisory bodies, making decisions to abandon some activities, launching a new product on the market) or taking over a certain scope of activities from a related entity),
family ties (also including cross-border cases): being married or having kinship or affinity up to the second degree.
Holding a share or right indirectly means a situation in which one entity holds
a share or right in another entity through another or more entities, and the size of the share or right held indirectly corresponds to:
1) the size of the share or the right connecting any two entities from among all entities taken into account when determining indirectly holding a share or right – where all the sizes of shares or rights connecting these entities are equal,
2) the lowest share or right linking the entities between which the share or right held indirectly is determined – if the share or right linking these entities is different,
3) the sum of the sizes of indirectly held shares or rights – where entities between which the amount of indirectly held shares or rights is determined, connects more than one indirectly held share or right
- A company without legal personality and its partners, or
- The taxpayer and its foreign establishment, and in the case of a tax capital group – a capital company that is part of it and its foreign establishment, or
- The so-called “Artificial ownership structures” – refer to entities between which there are relationships that are not established or maintained for justified economic reasons, including those aimed at manipulating the ownership structure (including company ownership) or creating circular ownership structures, i.e. in situations where as a result of indirect links, the entity is related to itself, e.g. entity A has shares in B, entity B in entity C, and entity C in entity A (as indicated in the justification to the act amending the entities that could break the chain of connections are e.g. foreign trusts and foundations of private law. In structures with these entities, the beneficiary of a trust / foundation of private law is an entity not related to an operating company operating under a trust / foundation of private law,
Legal status 2017
Related entities, in accordance with applicable law, should be divided into those related by capital, personally or family.
Capital ties
Among capital ties, we can distinguish direct and indirect ties that occur both in domestic and international relations.
Holding a share in the capital of another entity means a situation in which one entity directly (direct link) or indirectly (indirect link) holds at least 25% of the share capital of another entity.
When determining the amount of an indirect share, it is assumed that if one entity holds a specific share in the capital of another entity, and the other entity has the same share in the capital of another entity, the first entity has an indirect share in the capital of that other entity in the same amount; if these values are different, the lower value is taken as the amount of the indirect contribution.
Example
Entity A has a 35% share in entity B, Entity B has a 15% share in entity C, while entity A indirectly holds a 15% share in entity C.
Personal ties
As part of personal ties, we can distinguish:
- personal ties resulting from the fact that a natural person performs ownership, management or control functions simultaneously in two different entities, in addition, in the case of domestic entities, the catalog of personal ties is extended to include ties resulting from family relations;
- relationships resulting from the employment relationship occur in the case of transactions between a taxpayer and an entity (company), the owner of which is the taxpayer’s employee, or in which he performs management or control functions.
The assessment of the nature of the relationship should take into account the relationship between taxpayers (or persons performing management, control or supervisory functions), which may cause one taxpayer to dominate the other, and thus have a real impact on the terms of transactions concluded with that taxpayer or in a situation where the common interest of both taxpayers resulting from their joint property relationship is so significant that it may make them willing to conclude a transaction on terms that they would not have established without remaining in such a relationship.
Family ties
Family ties exist between related and related persons. Art. 11 sec. 6 of the UCIT and Art. 25 sec. 6 UPIT say that ” The concept of family ties (…) is understood as marriage and kinship or affinity up to the second degree .” In order to understand this provision correctly, it is necessary to explain how the relationship or affinity of the second degree is defined in the law. The Income Tax Acts do not address this problem, so please refer to Art. 61 7 § 1 and 2 and article. 61 8 § 1 and 2 of the Family and Guardianship Code 1 .
Relatives are people who descend from a common ancestor, so blood ties are the determining factor in this case. Relationship is calculated in lines (straight and sideline) and in degrees. Relatives in a straight line are persons, one of whom is derived from the other. At the same time, we can distinguish the ascending and descending lines. The ascendant line includes parents, grandparents and great-grandparents (ascendants), while the descending line includes children, grandchildren and great-grandchildren (descendants). Collateral relatives are persons who have at least one common ancestor and are not relatives in a straight line, i.e. they do not come from one another.
The degree of kinship is determined by the number of births as a result of which kinship arose, i.e. it is calculated according to the number of births from a common ancestor. For example, a son is a first degree relative in a straight line to his parents, and a granddaughter is a second degree relative in a straight line to his grandparents. Collateral relatedness within the same generation is always described as an even number – siblings are therefore second degree collateral relatives, aunt and nephew are second degree collateral relatives, and cousins are fourth collateral relatives.
Affinity is the relationship between a husband or wife and the relatives of the other spouse. It is important that it continues even despite the termination of the marriage. The lines and degrees of affinity are established analogously to the lines and degrees of kinship. For example, the brother-in-law for the husband is the second degree affinity in the lateral line, and the father-in-law is the first degree relative in a straight line.
The above explanations are important when determining whether persons in family relationships with each other are obliged to prepare tax documentation in the case of conducting joint transactions, the value of which exceeds the thresholds indicated in the uCIT and uPIT. Relationship and affinity are recognized by tax regulations only to the second degree, therefore, for example, cousins doing business and carrying out transactions will not be considered related entities. The same will be the case with grandfather and grandchildren or uncle and nephew.
1 Family and Guardianship Code of February 25, 1964 (Journal of Laws No. 9, item 59, as amended)
Art. 617 [Kinship]
§ 1. Relatives in a straight line are persons, one of whom comes from the other. Collateral relatives are individuals who are descended from a common ancestor and are not relatives in a straight line.
§ 2. The degree of kinship is determined according to the number of births as a result of which kinship arose.
Article. 618. [Affinity]
§ 1. The marriage results from the affinity between the spouse and relatives of the other spouse. It continues despite the termination of the marriage.
§ 2. The line and degree of affinity are determined according to the line and degree of relatedness.
Legal status 2016
Related entities, in accordance with applicable law, should be divided into those related by capital, personally or family.
Capital ties
Among capital ties, we can distinguish direct and indirect ties that occur both in domestic and international relations.
Holding a share in the capital of another entity means a situation in which one entity directly (direct link) or indirectly (indirect link) holds at least 5% of the share capital of another entity.
When determining the amount of an indirect share, it is assumed that if one entity holds a specific share in the capital of another entity, and the other entity has the same share in the capital of another entity, the first entity has an indirect share in the capital of that other entity in the same amount; if these values are different, the lower value is taken as the amount of the indirect contribution.
Example
Entity A has a 35% share in entity B, Entity B has a 15% share in entity C, while entity A indirectly holds a 15% share in entity C.
Personal ties
As part of personal ties, we can distinguish:
- personal ties resulting from the fact that a natural person performs ownership, management or control functions simultaneously in two different entities, in addition, in the case of domestic entities, the catalog of personal ties is extended to include ties resulting from family relations;
- relationships resulting from the employment relationship occur in the case of transactions between a taxpayer and an entity (company), the owner of which is the taxpayer’s employee, or in which he performs management or control functions.
The assessment of the nature of the relationship should take into account the relationship between taxpayers (or persons performing management, control or supervisory functions), which may cause one taxpayer to dominate the other, and thus have a real impact on the terms of transactions concluded with that taxpayer or in a situation where the common interest of both taxpayers resulting from their joint property relationship is so significant that it may make them willing to conclude a transaction on terms that they would not have established without remaining in such a relationship.
Family ties
Family ties exist between related and related persons. Art. 11 sec. 6 of the UCIT and Art. 25 sec. 6 UPIT say that ” The concept of family ties (…) is understood as marriage and kinship or affinity up to the second degree .” In order to understand this provision correctly, it is necessary to explain how the relationship or affinity of the second degree is defined in the law. The Income Tax Acts do not address this problem, so please refer to Art. 61 7 § 1 and 2 and article. 61 8 § 1 and 2 of the Family and Guardianship Code 1 .
Relatives are people who descend from a common ancestor, so blood ties are the determining factor in this case. Relationship is calculated in lines (straight and sideline) and in degrees. Relatives in a straight line are persons, one of whom is derived from the other. At the same time, we can distinguish the ascending and descending lines. The ascendant line includes parents, grandparents and great-grandparents (ascendants), while the descending line includes children, grandchildren and great-grandchildren (descendants). Collateral relatives are persons who have at least one common ancestor and are not relatives in a straight line, i.e. they do not come from one another.
The degree of kinship is determined by the number of births as a result of which kinship arose, i.e. it is calculated according to the number of births from a common ancestor. For example, a son is a first degree relative in a straight line to his parents, and a granddaughter is a second degree relative in a straight line to his grandparents. Collateral relatedness within the same generation is always described as an even number – siblings are therefore second degree collateral relatives, aunt and nephew are second degree collateral relatives, and cousins are fourth collateral relatives.
1 Family and Guardianship Code of February 25, 1964 (Journal of Laws No. 9, item 59, as amended)
Art. 617 [Kinship]
§ 1. Relatives in a straight line are persons, one of whom comes from the other. Collateral relatives are individuals who are descended from a common ancestor and are not relatives in a straight line.
§ 2. The degree of kinship is determined according to the number of births as a result of which kinship arose.
Article. 618. [Affinity]
§ 1. The marriage results from the affinity between the spouse and relatives of the other spouse. It continues despite the termination of the marriage.
§ 2. The line and degree of affinity are determined according to the line and degree of relatedness.