The Administrative Court found that a voluntary redemption of shares was not a controlled transaction covered by arm’s length provisions. A redemption is a corporation’s repurchase of all or a portion of the shares held by a shareholder at an amount not in excess of the amount stated in the articles or calculated according to a formula stated in the articles. A redemption of shares can only take place between a company and its shareholders. Hence, terms and pricing of the transaction cannot be determined based on unrelated transactions. The purpose of the redemption of shares is not to modify the amount of income achieved by the related parties by applying a non-arm’s length price. Click here for English Translation Click here for other translation ...

By judgment of 13 March 2020, the Provincial Administrative Court upheld the complaint filed by K.O. and revoked a decision issued by the tax authorities on the determination of the amount of the tax liability resulting from a transfer of shares between K.O. and a related party in 2016. An appeal was filed by the tax authorities with the Supreme Administrative Court in which the authorities stated that Provincial Administrative Court incorrectly had concluded that the nominal value of shares taken up by a taxpayer is not subject to market mechanisms and, therefore, the authority should not question the revenue thus generated. According to the tax authorities the taxpayer effected a transaction with a related entity of which it was the owner and determined without justification a contribution in-kind disproportionately high in relation to the shares acquired in the related entity, while the authority, taking these circumstances into account, determined a comparable uncontrolled price that the taxpayer would have obtained in exchange for the transfer of shares in I. to an unrelated entity, verifying the proportion of the distribution of the value of the non-cash contribution in line with the purpose and function of the transfer pricing provisions Judgement of the Supreme Administrative Court The court dismissed the appeal of the tax authorities and upheld the decision of the Administrative Court. Excerpts “The taxable income in the case of taking up shares in a company in exchange for a contribution in kind in 2016 was the nominal value of such shares and not their market value, determined in any way. The court of first instance rightly emphasises that the nominal value cannot be verified. This view is also confirmed by the established judicature of the Supreme Administrative Court, which may be exemplified by the judgments of this Court: of 19 April 2006, ref. no. II FSK 558/05; of 8 December 2009, ref. no. II FSK 1149/08; of 22 May 2013, ref. no. II FSK 1838/11, or the judgments quoted above concerning the issue of application of provisions on transfer prices, which is already disputed in the case.” … “If a share is taken up at a price higher than its nominal value, the surplus of the share subscription price over its nominal value is transferred to the supplementary capital. There is no doubt that in a limited-liability company reserve capital may also be created (this follows from the wording of Article 233 § 1), but the wording of Article 154 § 3 determines that at the moment of covering the share the agio must be transferred to the reserve capital, and only secondarily may it be transferred (pursuant to a separate resolution of the shareholders’ meeting) to the reserve capital in whole or in part. The share premium is permissible irrespective of whether the shares are covered by a contribution in kind or by a cash contribution. There are no legal and accounting counter-indications that a certain part of the value of the in-kind contribution made to the company should be allocated not to the share capital, but to the supplementary or reserve capital.” … “The Supreme Administrative Court sitting in judgment does not share the view expressed in the appealed judgment that in the absence of legal definitions of transfer pricing concepts, one should refer to colloquial language. The institution of transfer pricing is primarily applicable to cross-border relations. It is subject to international regulations, its application results in the necessity of adjusting income of each party to the transaction, belonging to different tax jurisdictions. Reference in previous case-law, including in the judgment under appeal, to the dictionary meaning of the Polish language and equating the concept of a ‘transaction’ with an ‘agreement’ is unsupported by the interpretation of the transfer pricing provisions. That institution applies mainly to cross-border transactions within multinational enterprises. It is permissible to refer to the meaning of colloquial language in the course of an interpretation, but only if the meaning of the words used by the legislator cannot be deduced either from legal language or from legalese. In addition, given the international character of transfer pricing, the terms related to it should be understood universally.” “The parity (proportion) of the distribution of the value of the in-kind contribution to the company’s capitals is therefore neither a financial result nor a financial indicator within the meaning of the above concepts.” … “In summary, in the opinion of the Supreme Administrative Court, the subject of transactions between related parties covered by transfer pricing in 2016 could be: tangible and intangible goods, tangible and intangible services (including financial services), joint ventures, restructuring activities as described in Chapter 5a of the Regulation of the Minister of Finance of 2009. The division of the in-kind contribution made by a natural person into the capital of the company did not constitute the subject of the transaction within the meaning of the transfer pricing regulations.” Click here for English Translation Click here for other translation ...

A. Sp. z o.o. was established to carry out an investment project consisting in construction of a shopping center. In order to raise funds, the company concluded a loan agreement. The loan agreement was guaranteed by shareholders and other related parties. By virtue of the guarantees, the guarantors became solitarily liable for the Applicant’s obligations. The guarantees were granted free of charge. A. Sp. z o.o. was not obliged to pay any remuneration or provide any other mutual benefit to the guarantors. In connection with the above description, the following questions were asked: (1) Will A. Sp. z o.o. be obliged to prepare transfer pricing documentation in connection with the gratuitous service received, and if so, both for the year in which the surety is granted to the Applicant or also for subsequent tax years during the term of the security? (2) Will A. Sp. z o.o. be obliged to disclose the event related to the free-of-charge consideration received in a simplified CIT/TP report, both for the year in which the guarantee is granted and for subsequent tax years during which the guarantee is in effect. In A. Sp. z o.o.’s opinion, the company was not obliged to prepare transfer pricing documentation in connection with the gratuitous service received. And if the tax authority’s decision was contrary to the Company’s position, documentation should be prepared only for the tax year in which the guarantees was entered. The tax authorities disagreed with the company, and a complaint was filed by A. Sp. Z o.o. with the Administrative Court. In March 2019 the Administrative Court dismissed the complaint of A. Sp. z o.o. and sided with the tax authorities. An appeal was then filed by the company with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The court dismissed the appeal and upheld the decision of the Administrative Court. Guidance on the understanding of the notion of “transaction”, was published by Polish Ministry of Finance in December 2021. Click here for English Translation Click here for other translation ...

A. Sp. z o.o. was established to carry out an investment project consisting in construction of a shopping center. In order to raise funds, the company concluded a loan agreement. The loan agreement was guaranteed by shareholders and other related parties. By virtue of the guarantees, the guarantors became solitarily liable for the Applicant’s obligations. The guarantees were granted free of charge. A. Sp. z o.o. was not obliged to pay any remuneration or provide any other mutual benefit to the guarantors. In connection with the above description, the following questions were asked: (1) Will A. Sp. z o.o. be obliged to prepare transfer pricing documentation in connection with the gratuitous service received, and if so, both for the year in which the surety is granted to the Applicant or also for subsequent tax years during the term of the security? (2) Will A. Sp. z o.o. be obliged to disclose the event related to the free-of-charge consideration received in a simplified CIT/TP report, both for the year in which the guarantee is granted and for subsequent tax years during which the guarantee is in effect. In A. Sp. z o.o.’s opinion, the company was not obliged to prepare transfer pricing documentation in connection with the gratuitous service received. And if the tax authority’s decision was contrary to the Company’s position, documentation should be prepared only for the tax year in which the guarantees was entered. The tax authorities disagreed with the company, and a complaint was filed by A. Sp. Z o.o. with the Administrative Court. Judgement of the Administrative Court The court dismsissed the appeal of A. Sp. z o.o. and sided with the tax authorities. Excerpt “The essence of the dispute in this respect boils down to the understanding of the notion of transaction used in this provision to define the actions the performance of which is to result in the necessity to draw up tax documentation. The provisions of ustawa p.d.o.p. do not contain a legal definition of this notion, therefore, the basis for interpretation of its meaning must be a colloquial understanding of the word transaction. However, basing such an interpretation solely on lexical definitions is doomed to failure because both the interpreter himself, as well as the applicant, basing themselves on linguistic definitions contained in dictionaries, came to completely different conclusions from the point of view of interpretation. One of them concluded that a transaction is a legal act concluded in connection with a party’s business activity in the performance of which at least one payment is made (based on the Internet Dictionary of the Polish Language http://sjp.pl), while the applicant, relying on another dictionary https://sjp.pwn.pl), argued that the word transaction covers only an agreement for the purchase and sale of goods and services. Therefore, resolving the merits of the case based solely on dictionary concepts does not give sufficiently satisfactory results. n such a situation one should refer to a purposeful interpretation, referring to the reasons for introducing this regulation, as well as to the goal the legislator intended to achieve through its introduction. In this respect, it should be pointed out that the provisions on the obligation to prepare tax documentation in the case of civil law transactions between related entities were introduced in order to ensure transparency of such activities, in particular to ensure that such activities are conducted on market principles. The purpose of introducing such a regulation convinces the court to accept as correct a broad definition of the word transaction. Such a definition ensures transparency of actions by related entities. There are no grounds for assuming that the legislator intended to achieve this only with respect to purchase and sale agreements, leaving the entire wide range of possible legal actions between related entities outside these regulations. Such an understanding of this provision is also an implementation of the guarantee function of the tax law, allowing related entities to obtain adequate protection in the event of disclosure of their actions. Therefore, in the court’s opinion, the interpreting authority did not violate the law by stating that the applicant’s position in this respect, in which it assumes that the notion of transaction means only and exclusively sale and purchase agreements, is incorrect. In this respect, the court of first instance fully agrees with the view of the Supreme Administrative Court expressed in the judgment of 8 March 2016 in case II FSK 4000/13, which stated that on the grounds of Article 9a(1) and (2) of the Act, the term “transaction” is synonymous with the term “agreement”. (ONSAiWSA 2017/3/52). In the same judgment, this Court considered as transactions within the meaning of Article 9a(1) of the P.C.P. making a contribution-in-kind to a capital company in the form of shares or stocks, the purchase (acquisition) of shares or taking up shares in increased share capital in exchange for a cash contribution. Cash-pooling agreements were also recognised as agreements exhausting the notion of transaction indicated in Article 9(1) of the APS (e.g. judgment of the Supreme Administrative Court of 8 January 2019 II FSK 121/17) or taking up by a bank in exchange for a cash contribution of shares issued upon the establishment of a mortgage bank and subsequent increases in the share capital of a mortgage bank (judgment of the WSA in Gliwice of 25 April 2018 I SA/Gl 314/18). Thus, the court jurisprudence in this respect adopts a broad understanding of the notion of transaction, not limiting it only to a sale-purchase agreement. Taking into account all the elements indicated above, the court held that the authority did not infringe the law by assuming that the notion of transaction referred to in Article 9a(1) of the A.P.C. also includes a legal transaction such as the one described in the application, which is subject to the granting of a surety free of charge to the applicant under a loan agreement. The interpreter’s position does not violate the law either, to the extent in which he stated that the obligation to prepare tax ...