A Polish company, “Shopping Centre Lender sp.k.”, had been granted three intra group loans in FY 2013 for a maximum amount of EUR 2 million, EUR 115 million and EUR 43.5 million. The interest rate on the loans had been set at 9%. The tax authorities found that the 9% interest rate was higher than the arm’s length rate, and issued an assessment where the interest rate had been lowered to 3.667%, resulting in lower interest expenses and thus additional taxable income. “Shopping Centre Lender sp.k.” filed an appeal with the Administrative Court claiming that the procedure for estimating income – determining the arm’s length interest rate – had not been conducted correctly by the tax authority. In a judgement issued in May 2019 (no. III SA/Wa 1777/18) the Administrative Court issued a judgement in favour of the company. An appeal was then filed by the tax authorities with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Supreme Administrative Court upheld the decision of the Administrative Court and dismissed the appeal of the tax authorities. Excerpts “In the opinion of the Supreme Administrative Court, the Court of First Instance made a proper assessment of the case submitted to its review. In the justification of the contested judgment, it presented the legal basis for the decision and its explanation, and within this framework it diagnosed the infringements committed by the authority and assessed their impact on the results of the case. It did so in a clear manner which makes it possible to review the grounds on which it was based. The conclusions formulated, as well as the objections to the proceedings conducted and the content of the decision concluding them, were presented in a reliable and comprehensive manner, in mutual confrontation of the state of the case, applicable legal norms and case-law. It indicated which provisions had been violated, which allegations of the complaint it considered justified and why. In the present case, the essence of the dispute essentially boiled down to determining whether the interest rate (9% p.a.) of the three loans concluded in 2013 for a maximum amount of EUR 2 million, EUR 115 million and EUR 43.5 million (in respect of which the total balance of liabilities as at 30 September 2014 amounted to almost PLN 623 million), which were granted to the Applicant by a related entity, was in line with market conditions, i.e. whether independent, rational entities would have agreed on an interest rate of that amount under comparable conditions. More generally, however, the issue in the case oscillated around so-called transfer pricing and generally – in view of the arguments now raised by the parties – boiled down to an assessment of whether, in fact, the procedure for estimating income [art. 11 of the AOP] had been conducted correctly, as the authority argued, or, as the Appellant and the Court argued, in breach of the provisions of the Act and the Ordinance.” “Referring in turn to the individual problems diagnosed by the WSA, it should be pointed out that this Court, taking into account the disposition arising from the content of Article 11(1) of the A.p.d.o.p., rightly emphasised that its application (in order to determine the income of a given entity and the tax due) requires a prior analysis of comparability. In order to determine what conditions would be set between independent entities, it is necessary to determine what transactions concluded by independent entities are comparable to the transaction assessed from the point of view of Article 11(1) of the A.l.t.d.o.p., which requires a prior comparability analysis. Such an analysis is always conducted, as it serves the purpose of determining whether the prerequisite for estimating income (and the tax due) under Article 11(1) of the A.l.t.c. has been fulfilled. This conclusion is also confirmed by the above-mentioned § 6(1) of the Ordinance, The comparability analysis precedes the assessment, regardless of the method of assessment that would ultimately be applied. On the other hand, § 21 of the Ordinance (Chapter 5) indicates how to estimate income in the case of the specific benefits specified therein (loan or credit). One must agree with the Court of First Instance that the application of Article 11(1) of the A.P.C. requires a prior comparability analysis in respect of the loans in question. A properly conducted comparability analysis should consist of the steps listed in § 6(4) of the Ordinance and establish the relevant comparability factors (§ 21(3) of the Ordinance, which uses the term “relevant circumstances relating to a particular case”) arising from § 6(3) and § 21(3) of the Ordinance.” “The point is that it is not a matter of carrying out any comparability analysis, but rather one consisting precisely of the steps listed in § 6(4) of the Ordinance and establishing the relevant comparability factors arising from § 6(3) and § 21(3) of the Ordinance. As the Court of First Instance aptly pointed out, § 6(4) lists the consecutive stages comprising the comparability analysis, of which the first two in particular include – a general analysis of information concerning the taxpayer and its economic environment (stage one) and an analysis of the terms and conditions established or imposed between related parties, in particular on the basis of the functions they perform, the assets involved and the risks incurred, as a result of which economically relevant factors in the circumstances of the case under review should be identified (stage two). In the realities of this case, the Court of First Instance correctly held that the authority, in its decision issued pursuant to Article 11(1) of the A.p.d.o.p. – taking into account the aforementioned provisions of the Ordinance – in carrying out the comparability analysis was obliged to carry out the individual stages and identify the relevant comparability factors, and this should have been appropriately reflected in the wording of the decision. And although one has to agree with the authority that the Regulation does not indicate the necessity of drawing up the analysis in the ...

Between the end of 2008 and the end of 2012 Studialis had issued bonds subscribed by British funds, partners of a Luxembourg company, itself a majority partner of Studialis, carrying an interest rate of 10%. The Tax authorities considered that the interest rate on the bonds was higher than the limit provided for by Article 212, I of the CGI (at the time between 2.8% and 4.1%). According to the authorities only an effective loan offer contemporaneous with the transactions and taking into account the specific characteristics of the borrowing company could establish with certainty the rate it would have received from a independent credit institution, and rejected all the evidence in support of the pricing presented by the company. Decision of the Administrative Court of Appeal The Court ruled in favor of Studialis. It considered that the evidence provided by Studialis – loan offers and certificates from independent banks combined with and a comparability study on rates of bonds using “Riskcalc” – sufficiently justified the 10% interest rate on the bonds issued by Studialis. Click here for English translation Click here for other translation ...

A Polish company, “Shopping Centre Lender sp.k.”, had been granted three intra group loans in FY 2013 for EUR 2 million, EUR 115 million and EUR 43.5 million. The interest rate on the loans had been set at 9%. The tax authorities found that the 9% interest rate was higher than the arm’s length rate and carried out its own analysis on the basis of the comparative data from 66 transactions. In addition, data posted on the internet on the website of the National Bank of Poland was consulted. The summary showed that in the aforementioned period, the average interest rates applied by Polish financial institutions for loans granted to enterprises in EUR ranged from 2.4% to 3.6%. Furthermore, by letters in April 2017 the tax authorities requested information from domestic financial institutions regarding the interest rates and commission rates for loans granted to commercial companies in the period from June 2013 to September 2014. The information received showed that the interest rates applied by the banks were set as the sum of: the EURIBOR base rate (usually three months) and the bank’s margin. Between June 2013 and September 2014, interest rates varied and ranged from 0.515% to 6.50%. On the basis of the information received an assessment was issued where the interest rate on the three inter group loans had been lowered from 9% to 3.667% resulting in lower interest expenses and thus additional taxable income. Shopping Centre Lender sp.k. filed an appeal with the Administrative Court claiming that the procedure for estimating income – determining the arm’s length interest rate – had not been followed correctly by the tax authority. Judgement of the Administrative Court The Administrative Court issued a judgement in favour of Shopping Centre Lender sp.k. The Court found that the tax authorities procedure for estimating income had been in breach of the provisions of the Act and the Ordinance on transfer pricing adjustments. Click here for English Translation Click here for other translation ...