In 2010, E S.A. transferred the legal ownership of a trademark to subsidiary S and subsequently entered into an agreement with S for the “licensing of the use of the trademarks”. In 2013, the same trademark was transferred back to E. S.A.
As a result of these transactions, E. S.A., between 2010 and 2013, recognised the licence fees paid to S as tax costs, and then, as a result of the re-purchase of those trademarks in 2013 – it again made depreciation write-offs on them, recognising them as tax costs.
The tax authority found that E S.A. had reported income lower than what would have been reported had the relationships not existed. E S.A. had overestimated the tax deductible costs by PLN […] for the depreciation of trademarks, which is a consequence of the overestimation for tax purposes of the initial value of the trademarks repurchased from S – 27 December 2013 – by the amount of PLN […].
The function performed by S between 2010 and 2013 was limited to re-registration of the trademarks with the change of legal ownership. In the tax authority’s view, the expenses incurred by E S.A. for the reverse acquisition of the trademarks did not reflect the transactions that unrelated parties would have entered into, as they do not take into account the functions that E S.A. performed in relation to the trademarks.
A tax assessment was issued where – for tax purposes – the transaction had instead been treated as a service contract, where S had provided protection and registration services to E S.A.
A complaint was filed by E S.A.
Judgement of the Court
The Court found that there was no legal basis for re-characterisation in Poland for the years in question and that the issue should instead be resolved by applying the Polish anti-avoidance provision. On that basis, the case was referred back for further consideration.
Excerpts
“In principle, the tax authorities did not present any argumentation showing from which rules of interpretation they came to the conclusion that such an application of the above-mentioned provisions is legally possible and justified in the present case. It should be noted in this regard that Article 11(1) in fine speaks of the determination of income and tax due without – ‘[…] taking into account the conditions arising from the relationship…’, but does not allow for the substitution of one legal act (a licence agreement) for another act (an agreement for the provision of administration services), and deriving from the latter the legal consequences for the determination of the amount of the tax liability.
There should be no doubt in this case that, in fact, the authorities made an unjustified reclassification of the legal act performed in the form of the conclusion of a valid licensing contract, when they concluded (referring to the OECD Guidelines – Annex to Chapter VI – Illustrative Examples of Recommendations on Intangible Assets, example 1, point 4) that the transactions carried out by E. and S. in fact constitute, for the purposes of assessing remuneration, a contract for the provision of trademark administration services and the market price in such a case should be determined for administration services.
As the applicant rightly argued, such a possibility exists as of 1 January 2019, since Article 11c(4) uses the expression – “[…] without taking into account the controlled transaction, and where justified, determines the income (loss) of the taxpayer from the transaction appropriate to the controlled transaction”. This is what is meant by the so-called recharacterisation, i.e. the reclassification of the transaction, which is what the tax authorities actually did in the present case.
At the same time, the Court does not share the view expressed in the jurisprudence of administrative courts, referring to the content of the justification of the draft amending act, according to which, the solutions introduced in 2019 were of a clarifying rather than normative nature (cf. the judgment of the WSA in Rzeszów of 20 October 2022, I SA/Rz 434/22). The applicant rightly argues in this regard that the new regulation is undoubtedly law-making in nature and that the provisions in force until the end of 2018 did not give the tax authorities such powers. It is necessary to agree with the view expressed in the literature that a linguistic interpretation of Article 11(1) of the A.p.d.o.p. and Article 11c of the A.p.d.o.p. proves that Article 11c of that Act is a normative novelty, as the concepts and premises it regulates cannot be derived in any way from the wording of Art. 11(1) u.p.d.o.p. (cf. H. LitwiÅ„czuk, Reclassification (non-recognition) of a transaction made between related parties in the light of transfer pricing regulations before and after 1.01.2019, “Tax Review” of 2019, no. 3).”
“It follows from the justification of the contested decisions that, in applying Article 11(1) and (4) of the TAX Act to the facts of this case, the tax authorities referred to the OECD Guidelines, inter alia, to the example provided therein (Anex to Chapter VI – Illustrative Examples of Recommendations on Intangible Assets, example 1, point 4), from which, according to the authorities, it follows that the transactions carried out by E. S.A. and S. for the purposes of assessing remuneration constitute, in fact, a contract for the provision of trademark administration services and, in that case, the market price should be determined for such services.
In this context, it should be clarified that the OECD Guidelines (as well as other documents of this organisation), in the light of the provisions of Article 87 of the Constitution of the Republic of Poland, do not constitute a source of universally binding law. Neither can they determine in a binding manner the basic structural elements of a tax, since the constitutional legislator in Article 217 of the Basic Law has subjected this sphere exclusively to statutory regulations. Since these guidelines do not constitute a source of law, they can therefore neither lead to an extension of the powers of the tax authorities nor of the obligations of taxpayers provided for in the Tax Act. The judicature and the literature indicate that they should be treated by taxpayers and tax authorities as a “set of good practices” and an instrument supporting the interpretation of transfer pricing regulations. Furthermore, it is noted that issues concerning the tax consequences of transfer pricing adjustments have appeared and have been developed in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (latest version 2017. – OECD Transfer Pricing Guidelines for Multinational Enterproses and Tax Administrations 2017, OECD Publishing, Paris, […]). The provisions contained in these guidelines are an important guideline assisting the process of interpreting the norms contained in Article 11 of the TAX Act, and now in Article 11a et seq. of that Act (cf. judgment of the Supreme Administrative Court of 22 September 2020, II FSK 1221/18; judgment of the Supreme Administrative Court of 30 January 2020, II FSK 191/19; and the case law and literature cited therein).
From the point of view of the allegations contained in the complaint, the NSA’s stipulation (the cited judgment issued in case II FSK 1221/18) that if the OECD Guidelines in the 2017 version have not been translated into Polish by any official procedure, the taxpayer cannot be required to be familiar with them is relevant in this case. On the other hand, a taxpayer may invoke them in a situation of inconsistency of Polish regulations with the OECD Guidelines on the manner and procedure of determining income by way of assessment.
With the above in mind, it should be emphasised that the applicant, when entering into the licence agreement in 2010, could not have taken into account the OECD Guidelines, as in force since 2017, substantially amended with regard to transfer pricing and published in July 2017. (supplemented by the DEMPE concept). As at the date of the licence agreement, the 2010 version of these guidelines was in force.”
“Due to the voluminous nature of the complaint, the Court referred to the allegations contained therein and their justification to the extent necessary for the review of the contested decisions (judgment of the NSA of 26 May 2017, I FSK 1660/15). The Court held that, in view of the interpretation and manner of application of the substantive law provisions adopted by the authorities, the facts, events and circumstances broadly described in the complaint, which make up the economic (business) context of the legal acts performed by the applicant and related entities, were not material for the resolution of this case.
In re-examining the case, the authority will take into account the legal assessment set out above as to the interpretation and application, in the facts of this case, of the provision of Article 11(1) to (4) of the A.p.d.o.p., including the assessment as to the nature and significance in the application of that provision of the OECD Guidelines. The consequence of the tax authority’s acceptance in this case of the validity and effectiveness of the legal transactions made by the applicant and S., including the conclusion of the licence agreement, must be the application of the provision of Article 11(1) and (4) of the ustawa o.p. as an instrument for controlling the amount of agreed royalties between related parties, and not as a provision containing an anti-avoidance clause. When re-examining the correctness of the applicant’s tax settlement in the audited period and the legitimacy of the determination of the amount of the expenses within the tax deductible costs (Article 15(1) of the A.p.d.o.p.), the authority will take into account the correct amount of the royalty expenses. As an aside to the considerations, the Court notes that the same position as regards the interpretation and manner of application of Article 11(1) and (4) of the TAX Act was taken by: the WSA in PoznaÅ„ (judgment of 26 April 2022, I SA/Po 788/21; judgment of 1 July 2022, I SA/Po 360/22; judgment of 5 August 2022, I SA/Po 1036/21, judgment of 18 November 2022, I SA/Po 407/22 ) and the WSA in Gliwice (judgment of 31 August 2022, I SA/Gl 233/22). In turn, on the grounds of tax regulations on personal income tax and as regards the legal possibility of reclassification or recharacterisation of legal actions, a similar position was taken by the Supreme Administrative Court in its judgment of 9 June 2022, II FSK 2508/19.”
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Poland vs E SA I SA_Po 53_23