Safe harbour

Low value-added services – waiving the determination of the taxpayer’s income / loss in the amount of the mark-up on service costs

In order to qualify as low value-added services, services must meet the following conditions:

1)     They are in the catalog in Annex 6

2)     They are services supporting the economic activity of the recipient

3)     They do not constitute the main activity of a group of related entities

4)     The value of these services provided by the service provider to unrelated entities does not exceed 2% of the value of these services provided to related and unrelated entities

5)     They are not subject to further resale by the customer, with the exception of resale of services purchased on their own behalf, but to another related entity (re-invoicing)

The use of safe harbor solutions for low value-added services is possible when the following conditions are cumulatively met:

1)     The mark-up on costs was determined using the cost plus method or the net transaction margin and amounts to:

a)     Not more than 5% of the costs – in the case of purchase of services

b)     Not less than 5% of the cost – in the case of providing services

2)     The service provider is not an entity with a place of residence, seat or management board in the territory of the country applying harmful tax competition

3)     The Service Recipient has a calculation including the following information:

a)     Type and amount of costs included in the calculation

b)     How to apply and justify the selection of allocation keys for all related entities using the services

Loans – waiver of determining the taxpayer’s income / loss in terms of the loan interest rate

The safe harbor solutions introduced with the amendment to the regulations in the field of financial transactions entail the tax authority’s waiver of determining the taxpayer’s income / loss in terms of determining the amount of remuneration for financial transactions (loans, credits, bond issue), assuming that the provisions of the Act are met jointly conditions.

1)   the interest rate on the loan as at the contract date is determined on the basis of:

– the type of the underlying interest rate, and

– margin,

announced in an announcement by the Minister of Finance;

2)   there is no provision for payment of fees other than interest related to granting or servicing the loan, including commission or bonuses;

3)   the loan was granted for a period not longer than 5 years;

4)   during the financial year, the total level of liabilities or receivables of a related entity in respect of capital loans with related entities, calculated separately for loans granted and taken, is not more than PLN 20,000,000 or the equivalent of this amount ¹ ;

5)   the lender is not an entity with a place of residence, seat or management board in the territory or in a country applying harmful tax competition.

¹ Amounts of loans granted in a currency other than PLN, for the purposes of determining whether they exceed the limit of PLN 20,000,000, are converted into PLN according to the average exchange rate announced by the National Bank of Poland on the last business day preceding the day of granting / taking a loan, understood as the date of payment of the loan amount or leaving it at the borrower’s disposal

For taxpayers, this means that they may refrain from preparing a comparative analysis / description of compliance, provided that the interest rate on such a loan as at the date of conclusion of the contract is calculated based on the base interest rate and the margin specified in the announcement of the Minister of Finance.

According to the Notice of the Minister of Finance of 22/12/2020 on the announcement of the type of the base interest rate and margin for the purposes of transfer pricing in the field of personal income tax and corporate income tax, is determined from 01/01/2021:

1)     type of base interest rate for loans:

a)   in PLN – WIBOR 3M,

b)   in US dollars – LIBOR USD 3M,

c)   in euro – EURIBOR 3M,

d)   in Swiss francs – LIBOR CHF 3M,

e)   in British pounds – three-month LIBOR GBP;

2)     margin:

a)   for the borrower, it is a maximum of 2.3 percentage points,

b)   for the lender, it is at least 2.0 percentage points,

(c)   is the sum of the absolute value of the underlying interest rate and the value specified in point (a); a or b, where the value of the underlying interest rate specified in paragraph 1 is less than zero.

One of the most important changes introduced by the amendment to the Regulation of the Minister of Finance of September 10, 2009 on the method and procedure for determining the income of legal persons by way of estimating and the method and procedure for eliminating double taxation of legal persons in the case of the adjustment of profits of related entities (Journal of Laws No. 160 item 1268) ¹ was the addition of a provision regulating issues related to services with low added value. The indicated amendment was intended to include in the Polish legal regulations relating to transfer pricing, the arrangements that were presented in the Communication of the European Commission of 25 January 2011 on the work of the Joint EU Transfer Pricing Forum on the verification of the market conditions of such services.

Pursuant to the provision added in §22a, in a situation where a related entity presents a description of a transaction for low-value-added services to the tax authorities or fiscal control authorities, these authorities are required to conduct an examination of the conditions established by these entities for a given type of transaction, guided by the submitted description. . As part of the above-mentioned examination, the authorities verify whether independent, rational entities would conclude such a transaction on the terms agreed by related entities.

This provision defines low value-added services as routine services that support the main activity of the recipient, whether generally or easily accessible, without generating significant added value for both the provider and the recipient. In addition, Annex 1 to the Regulation specifies an exemplary catalog of low value-added services, including, for example, IT services, services related to human resource management, marketing services, legal services, accounting and administrative, technical or quality control services.

In order to take advantage of the solutions proposed by the legislator as regards the priority of describing low value-added services, the taxpayer had the opportunity to submit an appropriate description to the relevant authorities, which should include in particular:

1. indication of the type of service provided together with the justification for qualifying the service as a low-value service;
2. confirmation that the service has been performed and a detailed explanation of the reasonableness of the service acquisition and benefits obtained;
3. description and justification of the way the services are provided;
4. a list of expenses incurred by related entities, related to the services provided, along with their description and analysis;
5. list of shareholder expenses;
6. description of the cost sharing key;
7. catalog of on-demand services with their description;
8. an indication of the method of calculation of the remuneration due for the services provided and its amount, together with the justification for the method used and the manner of its application;
9. documentation that can be presented.

It is worth noting that the provisions of the Regulation also stipulated that after the taxpayer presented the description of the transaction to the tax authorities or tax inspection authorities, they retained the right to request additional explanations and documents from the taxpayer.

Under §22a, the legislator also introduced a definition of shareholder expenditure in its subsequent sections. He pointed out that the expenses related to the services provided with low added value include the costs directly and indirectly related to the service provided, excluding the shareholder’s expenses. Pursuant to the provisions of §22a, a shareholder’s expenses shall be understood as expenses incurred by an entity holding shares / stocks in a second related entity, bringing benefits only to the entity holding shares / stocks in a second related entity.

Also for the shareholder’s expenses, the legislator provided for an exemplary catalog of such expenses (constituting Annex 2 to the Regulation), in which it presents, for example, costs of activities related to the shareholder’s legal structure, costs in the scope of reporting of this entity, costs of acquiring funds for the acquisition of shares, costs of activities management and monitoring controls related to the management and protection of investments in shares, costs of initial registration of an entity on the stock exchange or costs related to investor relations of an entity holding shares / stocks in another related entity.  

Of course, the way in which costs incurred by related entities are divided in connection with the provision of low value-added services should be analyzed based on the conditions that would be established by unrelated entities. Thus, the overriding principle in the case of related party transactions for low value-added services is the arm’s length principle.

The introduced changes should be considered beneficial for the taxpayer, because the detailed description of services prepared by him that meets the above-mentioned requirements allows him to properly prepare for the inspection in the above-mentioned scope. Moreover, thanks to the precise description provided by the taxpayer, the authorities could better prepare for the inspection and carry it out more efficiently.

It should be pointed out that the elements mentioned by the legislator, which should be included in the indicated description of these services, could pose an additional challenge for taxpayers, which could have caused difficulties in its proper preparation. In addition, the legislator did not specify in the provisions of the Regulation or tax laws whether the taxpayer should pay attention to value thresholds when preparing a description of a transaction with a low added value. Doubts may arise as to whether there is an obligation to prepare such a document. It has not been specified whether the prerequisite for the preparation of the description is exceeding the thresholds indicated in the provisions in Art. 9a of the CIT Act and art. 25a of the PIT Act, or the very fact of the existence of a transaction with low added value.

It should also be noted that when comparing the provisions of the Regulation with the findings of the European Commission, the Polish legislator did not refer to the margin range constituting a mark-up on the costs generated by low-value-added services, which should be considered by the authorities as market-based. In line with the Commission’s Communication, we read in the comments on the margin that where a margin should be used, it will usually be small. Typically agreed margins are in the range from 3 to 10%, and most often oscillate around 5%. Nevertheless, it should be pointed out that such a statement depends on the facts and circumstances that may justify a different margin.

¹ Identical changes were introduced to the Ordinance of the Minister of Finance of September 10, 2009 on the method and procedure for determining the income of natural persons by way of estimation and the method and procedure for eliminating double taxation of natural persons in the case of the adjustment of profits of related entities (Journal of Laws No. 160 , item 1267).