“S.” sp. z o.o. had filed a requested a written interpretation (binding ruling) with the tax authorities. The company had asked the following question: when calculating the income ratio to which the tax rate referred to in Article 24d(1) of the A.P.C. may be applied, can the transfer pricing regulations be applied accordingly (mutatis mutandis) by applying the profit split method – residual analysis (the method listed in § 13(3)(2) of the Ordinance). The request was dismissed by the tax authorities, stating that it could not assess the position presented in the application, as this would go beyond the framework of the individual interpretation proceedings defined by the legislator. An appeal was filed by “S” sp. z o.o. with the regional court and the court ruled in favour of the company. An appeal was then filed by the tax authorities with the the Supreme Administrative Court. Judgement of the Supreme Administrative Court. The Court dismissed the appeal of the tax authorities and upheld the decision of the regional court. According to the Supreme Administrative Court, “S.” sp. z o.o. had a right to obtain reliable information as to how – in the actual state of affairs/future event pertaining to it – the tax authority interprets the tax regulations applicable to it, which may affect the correctness of its settlement, and in the case of determining the tax base. Excerpt “According to the Supreme Administrative Court, both the actual state of affairs/future event described by the applicant in its application and the question contained in the application were in fact a question about the validity of the subsumption of the actual state of affairs/future event presented in the application under the relevant provisions of tax law. Moreover, the applicant’s request did not concern the interpretation of provisions other than those of tax law. The court of first instance correctly assessed that the analysis of the application and the applicant’s position indicates that its primary objective is to obtain an answer to the question whether, in the factual state/future event presented in the application, the income ratio to which the tax rate referred to in Article 24d(1) of the Corporate Income Tax Act of 15 February 1992 (Journal of Laws of 2020, item 1406, as amended); hereinafter: the “p.d.o.p.” may be – when calculating the income ratio to which the tax rate referred to in Article 24d(1) of the Corporate Income Tax Act of 15 February 1992 (Journal of Laws of 2020, item 1406, as amended); hereinafter: the “p.d.o.p.” – applied accordingly (mutatis mutandis) the transfer pricing regulations by applying the profit split method – split analysis, according to the method listed in § 13(3)(2) of the Regulation of the Minister of Finance of 21 December 2018 on transfer pricing for corporate income tax (Journal of Laws of 2018, item 259 as amended); hereinafter: ‘the Regulation’. Since the company, in presenting its own legal assessment of the above-mentioned factual state/future event, stated that the provisions of Article 24d(3)-(8) of the u.p.d.o.p.. do not explicitly specify the method by which income from intellectual property referred to in Article 30ca para. 2(3) of the u.p.d.o.p.. (should be: Article 24d(2)(8) of the u.p.d.o.p.. – note of the court), according to it, the most appropriate method is the residual profit split method, in which the separation of income streams (from development and design activities) would take place in two stages appropriate for this method. However, this company’s own legal assessment of the presented facts/future event should have been subject to the assessment of the interpreting authority, since both the provisions of the p.d.o.p, as well as the aforementioned implementing regulation issued pursuant to Article 11j(1)(1)(2) of the u.p.d.o.p.. constitute provisions of tax law, within the meaning of Article 3(2) of the A.p.l. This provision stipulates that whenever provisions of the tax law are referred to in the Act – it is understood as the provisions of tax acts, provisions of agreements on avoidance of double taxation ratified by the Republic of Poland and other international agreements on tax issues ratified by the Republic of Poland, as well as provisions of executive acts issued on the basis of tax acts. Undoubtedly, therefore, the company requested an individual interpretation of the provisions of tax law, i.e. the provision of Article 24d(2)(8) of the VAT Act and the provisions of the implementing act to the VAT Act, i.e. the aforementioned regulation. Moreover, what is important in the case, the applicant, when describing the facts/future event, directly classified its activity as research and development activity, and its aim was to confirm whether it is possible to adopt, mutatis mutandis, for the calculation of the income ratio to which the tax rate referred to in Article 24d(1) of the A.P.C. may be applied. – transfer pricing regulations by applying the profit split method – split analysis, according to the method listed in § 13(3)(2) of the aforementioned regulation.” Click here for English translation Click here for other translation ...

In its application for an individual interpretation, R. S.A. stated that it distributes fast moving goods in Poland, Lithuania, Latvia and Estonia. It purchases these goods from the company E. based in H. and sells them to independent wholesale distributors and retailers. At the applicant’s request, the Minister of Finance in 2015 issued a decision on a advance price agreement, recognising the correctness of the selection and application of the transactional net margin method in the applicant’s purchase of goods from a related party for further distribution in the Baltic States. In the activities covered by the decision, R. S.A. performs the functions of a distributor with limited risk and limited marketing functions and incurs the associated operating costs, which consist of both its own costs (purchase from group entities of, inter alia, advisory, legal, technical, organisational, financial and marketing/sales services) and external costs (including the costs of services purchased from other entities, also related parties, subsequently re-invoiced to the beneficiaries of those services). According to the decision, R. S.A. should have a constant profitability, determined on the basis of the operating profit ratio (operating profit related to the activities covered by the decision, shown in the income statement before financial income and expenses), with only selling and general administrative expenses included in operating expenses. To this end, an algorithm for the calculation of the transaction price in transactions for the purchase of goods was defined, which includes all types of costs referred to as operating costs, which also include the costs of intra-group services mentioned in the application, incurred in connection with the applicant’s distribution and marketing activities. R. S.A. asked whether the described costs of intragroup services, due to the fact that they are already covered by the issued decision on the prior price agreement, are subject to the restrictions under Article 15e(15) of the Corporate Income Tax Act – taking the position that these restrictions do not apply. In an individual interpretation the Director of the National Fiscal Information considered R. S.A.’s position to be incorrect. He pointed out that the prior price agreement was not concluded for the purpose of determining the amount of prices/expenses for the purchase of services from the other related parties in the group, and the decision issued in this respect involves an analysis of the conditions established only between the specified related parties, so it cannot be considered that also the services purchased from other related parties and included in the algorithm for calculating the transaction price constitute a confirmed element of the prior price agreement. Therefore, the restriction arising from Article 15e(1) of the APS will apply to the costs of intra-group services. R. S.A. challenged this interpretation before the Administrative Court. The court noted that the interpreting authority did not fully and exhaustively refer to the applicant’s position contained in the request for an interpretation, namely that the costs of intra-group services constituting the content of the interpretation question were included in the algorithm for calculating the transaction price. An appeal was then filed by the authorities with the Supreme Administrative Court. Judgement of the Supreme Administrative Court. The Court dismissed the appeal and upheld the decision of the Administrative Court. Excerpts “As aptly noted by the Provincial Administrative Court in the justification of the appealed judgment, since the operating costs inquired about by the applicant in its request for an individual interpretation of the tax law provisions were an element of the algorithm for calculation of remuneration in the transaction covered by the decision on the previous price agreement, which decision includes an analysis of the conditions established between certain related entities, it cannot be concluded that the services purchased from other related entities and included in that algorithm do not constitute a confirmed element of that agreement; the criterion that is decisive here is the subject matter criterion and not the entity criterion – provided that the profitability of the assessed entity in the distribution activity is not adversely affected as a certain percentage of the sales revenue agreed in the decision. Therefore, if it follows from the description of the facts presented in the request for interpretation that the algorithm for calculation of the transaction price includes all types of operating costs, including the aforementioned costs of intragroup services to which the question relates, then also these costs constitute an element of a confirmed prior price agreement. Therefore, the Director of the National Fiscal Information unfoundedly alleged that the Voivodship Administrative Court in Warsaw breached Article 15e(15) in conjunction with Article 15e(1) of the A.p.d.o.p. by misinterpreting and, consequently, misapplying it. The assumption that Article 15e, paragraph 15 of the A.p.d.o.p. refers to the subjective scope of validity of the decision on price agreement referred to in Article 20a of the A.p.p. corresponds to the content of Article 15e, paragraph 15 of the A.p.d.o.p., which directly indicates the correctness of calculation of remuneration for services, fees and charges in the period to which the decision refers. There is also an entity criterion, but it refers to the addressee of the decision provided for in Article 20a of the P.P.O., i.e. – in the case at hand – the applicant Company. Although the decision on the previous price agreement includes an analysis of the conditions established between certain related entities, its essence is the determination of the correctness of the algorithm for calculation of the transaction price, and this correctness is not affected by the subjective side of the service provider, if it is still a related entity. Therefore, there is no normative basis for the conclusion proposed by the interpreting authority that, in the case of the acquisition of services included in the algorithm for calculating the transaction price from other related entities, the costs of these intra-group services – the characteristics of which have not changed in a manner affecting the correctness of the algorithm – are subject to limitations in inclusion in tax deductible costs under Article 15e(1) of the APS. The allegations of ...

“Cosmetics sp. z o.o.” is a Polish distributor of cosmetics. It purchases the goods from a related foreign company. The contract concluded between “Cosmetics sp. z o.o.” and the foreign company contained a provision according to which 3% of the price of the goods purchased was to be paid (in the form of royalties) for the right to use the trademarks for the promotion, advertising and sale of the products. However, the invoices issued by the foreign company for the sale of the goods in question did not show the amount paid for the right to use the trademarks as a separate item. The invoices simply stated the price of the goods purchased. “Cosmetics sp. z o.o. requested an “individual interpretation” from the tax authorities as to whether the royalty payments included in the price of the goods were subject to withholding tax in Poland. According to Cosmetics sp. z o.o., the answer should be no, as the “royalty” element was an ancillary part of the main transaction – the purchase of the goods. The tax authority disagreed. According to the authorities, the payment of royalties for the right to use trademarks was not an ancillary element of the main transaction and its importance was not insignificant. Under the CIT Act and the relevant double tax treaty (DTT), the payment of royalties would be subject to withholding tax. Dismissing an appeal filed by Cosmetics sp. z o.o., the Administrative Court held that there were two separate transactions – one for the acquisition of goods and one for the acquisition of the right to use the trademark. Therefore, the tax authority’s interpretation was correct. Judgement of the Supreme Administrative Court. The Supreme Administrative Court upheld the decision of the Administrative Court and dismissed the appeal of “Cosmetics sp. z o.o.”. According to the court, it was clear from the agreement that the fee consisted of two transactions, one of which was a licence fee (royalty). Therefore, the claim that the tax authority was trying to separate this payment from the payment for the goods was not justified. Excerpt “The issue in dispute in the case is the taxation withholding tax on the amount paid by the Appellant to a foreign entity on account of the right to use trademarks, included in the agreement on the purchase of goods from that entity. Instead, the resolution of the above problem depends on whether the fee for the use of trademarks remains an ancillary element of the main consideration – the purchase of goods – and should then share the tax fate of that consideration, or whether it constitutes a separate element of the contract, which is subject to a separate method of taxation. The author of the cassation appeal argued that the elements comprising the subject matter of the contract and making up the price paid should be qualified together, as a single consideration. In the opinion of the Company’s attorney, a transaction transferring the right to use trademarks should not be treated as generating a licence fee, since the right is related only to the possibility of further resale of goods, and thus “the scope of the licence granted to the Applicant was significantly limited”. In support of the above argumentation, the attorney referred to the opinion of a representative of international tax doctrine, Professor Michelle Markham. Referring to the excerpt from the publication quoted on p. 6 of the cassation complaint concerning the issue analysed in the case, the panel finds that it is not relevant to the case at hand. Firstly, it is clear from the full context of the quoted sentence that these are considerations on the basis of US tax law regulations. Secondly, the quoted passage refers specifically to such contracts, the subject of which are at least two services (including one intangible service) covered by a single price, where it could be unreasonable to try to separate them for tax purposes. However, we do not face such a situation in the case, as the Company’s agreement with the Establishment clearly separates the remuneration for the right to use trademarks in the amount of 3% of the value of the purchased goods – even if the above amount is not specified on the invoices. Above all, however, the Supreme Administrative Court draws attention to the introduction in the agreement of a provision concerning the granting of a paid licence for the use of trademarks within the scope presented in the application, which is of fundamental importance in the case under consideration. Pursuant to Article 155 of the Act of 30 June 2000. – Industrial Property Law (Journal of Laws of 2019, item 2309; hereinafter: ‘p.w.p.’), the right of protection for a trademark suffers a significant limitation as a result of the exhaustion of the right to market the goods. “Pursuant to Article 155(1) p.w.p., the right of protection for a trademark does not extend to acts concerning goods with the trademark, consisting in particular in offering them for sale or further marketing of goods bearing the trademark, if the goods have been placed on the market in the territory of Poland by the authorised entity or with its consent. (…) By the act of placing the marked goods on the market, by the rightsholder or a third party acting with his consent, the rightsholder’s competence to use the trade mark in such a manner as to further distribute the goods is deemed to be exhausted. Therefore, the purchaser – as the owner of the goods – may continue to resell the goods and, in doing so, to advertise using the holder’s mark. Exhaustion, however, covers only one exclusive competence of the right holder, which is the right to put the marked goods on the market, and concerns only normal distribution processes of the marked goods, understood as a whole, which do not threaten the loss of connection with the goods.” (U. PromiÅ„ska, Industrial Property Law, 5th edition, LexisNexis 2011, p. 340). Transferring the above considerations to the grounds ...

The company is a producer of household chemicals and belongs to the R. B. (“the Group”), which is active in the manufacture and sale of consumer products in the home, health and hygiene products industry. The Company has entered into supply agreements for the goods it produces with Group companies. On the basis of the agreements, the Applicant sells goods produced by it to entities of the Group indicated by R. A. h. Companies and to R.B. [E.] B.V. The remuneration of the Polish company was determined based on a target margin – and if the profits were below or above the target margin, an invoice was issued subtracting or adding income to arrive at the target income. The tax authorities held that the quarterly “Transfer Pricing-adjustment” was not a transfer in regards of VAT. The company then filed a request for a individual interpretation (binding ruling), which was rejected by the authorities. A complaint was filed by the company to the Court of first instance, where the decision of the tax authorities was set aside. The tax authorities then filed an appeal to the Supreme Administrative Court. The tax authorities requested that the appealed decision be reversed in its entirety, that the Company’s complaint be examined and dismissed, or alternatively, in the event that the merits of the case are not sufficiently clarified, hthat the appealed decision be reversed in its entirety and the case be referred back to the Court of First Instance for re-examination. Judgement of the Supreme Administrative Court The Court decided in favour of the tax payer. “In the Company’s view, the issue requiring interpretation referred only to the question of the moment of making the correction, and not to the correctness of the adopted model for correcting income. Therefore, the Court of First Instance rightly pointed out that the prerequisites referred to in Article 165a of the Tax Code relating to the lack of possibility to institute proceedings were not exhausted in the case because the phrase “proceedings may not be instigated” used in Article 165a § 1 of the Tax Code should be referred to the C In view of this, the allegation of a violation of Article 145 § 1 (1) (c) of P.p.s.a. in conjunction with Article 165a § 1 and in conjunction with Article 14h and 14b § 1 of the Code of Civil Procedure should be deemed unjustified. ” … As already indicated above, the mechanism of “profitability” adjustment is in the case under consideration an assumption of factual nature and as such does not require the interpretation authority to confirm the correctness of its application by the Company.” ” Click here for English Translation Click here for other translation ...