I SA/Po 25/23 - Judgment of the WSA in Poznań

Date of decision 2023-11-30

Date of receipt 2023-01-11

Tribunal Wojewódzki Sąd Administracyjny w Poznaniu

Judges Barbara Rennert /president rapporteur/

Symbol z opisem 6113 Podatek dochodowy od osób prawnych

Subject Headings Corporate income tax

Body appealed against Director of the Tax Chamber

Content of the result The contested decision was annulled

SENTENCE

Wojewódzki Sąd Administracyjny w Poznaniu, in the following composition: Presiding Judge WSA Karol Pawlicki Judges WSA Katarzyna Nikodem Judge WSA Barbara Rennert (spr.) Protokolant: st. court secretary Marta Ziewińska having examined at a hearing on 09 November 2023 a case from the complaint of E. K. against the decision of the Director of the Tax Chamber of 15 November 2022 No [...] on corporate income tax for 2011 I. annuls the contested decision; II. awards the amount of [...] against the Director of the Tax Chamber in favour of the applicant as reimbursement of the costs of the court proceedings.

JUSTIFICATION

On 21 December 2022 E. K. filed a complaint against the decision of the Director of the Tax Chamber of 15 November 2022, No. [...], upholding the decision of the Head of the [...] Customs and Fiscal Office [...] of 22 April 2022, No. [...], [...], determining the company's corporate income tax liability for 2011.

Based on the evidence gathered in the case, in the decision of 22 April 2022, the first-instance authority explained that as a result of the audit proceedings on the control of the reliability of the declared tax bases and the correctness of the calculation of corporate income tax for 2011, carried out on the basis of the decision of the Director of the UKS in [...] of 18 September 2014, the first-instance authority found that the company, engaged in wholesale trade, had understated its corporate income tax liability for 2011 by the amount of [...]PLN. After considering the company's appeal, the Director of the IAS, by a decision of 19 March 2019, revoked the contested decision in its entirety and referred the case for reconsideration by the body of first instance.

After reconsidering the case, the Head of the WUCS, by a decision of 22 April 2022, determined the applicant's corporate income tax liability for 2011 in the amount of PLN [...]. In justifying the decision, the authority explained that in connection with the initiation on 25 September 2017 of pre-trial proceedings for a fiscal offence, i.e. for an act under Article 56 § 1 in connection with Article 38 § 2 item 1 of the Act of 10 September 1999. Fiscal Penal Code (Journal of Laws 2007, 111, item 765, as amended; hereinafter: 'Fiscal Penal Code'), supervised by the District Prosecutor's Office [...], on 25 September 2017, the running of the limitation period of the corporate income tax liability for 2011 was suspended. Pursuant to Article 70c of the Tax Ordinance Act of 29 August 1997 (Journal of Laws of 2017, item 201 as amended; hereinafter: 'Tax Ordinance'), served on the applicant's general attorney on 8 November 2017, on the special attorney on 26 October 2017, the authority notified the company of the suspension of the limitation period for the tax liability for 2011. In addition, it pointed out that the circumstances indicated that the initiation of the fiscal criminal proceedings was genuine. After analysing the extensive evidence, the pre-trial investigation authority concluded that there were premises justifying the commission of a criminal fiscal offence for the company's understatement of corporate income tax for 2011. After reviewing the evidence, he questioned the party's chief accountant as a witness, and after the party filed an appeal against the first-instance decision, an order was issued to suspend the pre-trial proceedings. The Head of the Tax Office considered that the temporal succession of the above events and the state of the case as presented in the accumulated evidence indicated that criminal proceedings were justified.

Turning to the merits of the case, the Head of the Tax Office found that on 1 February 2010, between the companies of the E group. (including the applicant and E. S.A spółka komandytowa) concluded an agreement on the transfer of trade marks together with protective rights to E. S.A. sp.k., and the latter, by agreeing to it, acquired these marks together with protective rights. Following the contribution of these marks (on the same day), the applicant concluded with E. S.A. sp.k. an agreement to grant a licence for the use of the marks in return for payment to the licensor (E. S.A. sp.k.) of a monthly remuneration, defined as [...] (own brands and the 'B. ' brand) and [...]% (the '[...]' brand) of turnover (defined in accordance with Annex No [...] to the agreement) plus value added tax. In 2011, the applicant recognised as a deductible expense the expenses relating to royalties to E. S.A. sp.k. in the total net amount of PLN [...]. Referring to the 2010 and 2017 OECD Guidelines and Articles 7(1) and (2), 9(1), 11(1) to (4) and (9), 18(1), 19(1) and 27 of the Act of 15 February 1992. on corporate income tax (Journal of Laws of 2011, No. 74, item 397, as amended; hereinafter: 'u.p.d.o.p.'), as well as §§ 3, 4, 6, 12-19, 22a and 23 of the Ordinance of the Minister of Finance of 10 September 2009. on the manner and procedure for determining the income of legal persons by way of estimation and the manner and procedure for eliminating double taxation of legal persons in the case of adjustment of profits of related parties (Journal of Laws of 2009, No. 160, item 1268; hereinafter: 'the MF Regulation'), the Head of the Tax Office determined the functions performed by the parties to the transaction and calculated the remuneration due to E. S.A. sp.k. for the services of administering the legal ownership of trademarks. He pointed out that the parties to the licence agreement had based the valuation of the royalty on formal legal ownership, granting the licensor a share in the revenue generated by the applicant, despite the fact that E. S.A. sp.k. did not participate in any way in the creation of that revenue, with the result that the profits generated by the applicant were 'passed on' in the form of royalties to a related company - E. S.A. sp.k. The Head of the Tax Office explained that the valuation of the remuneration payable to the laundry owner of the trademarks did not take into account the functions performed by that entity in creating the value of the trademarks, including the creation of sales value, which function was performed exclusively by the applicant, nor the risks and assets engaged by it. Thus, the applicant overstated its deductible costs in including royalties on trademarks that it had itself created and then, in the year under review (2011) and the previous year (2010), performed functions and incurred costs related to the development, maintenance and use of the trademarks. The only function performed by E. S.A. sp.k. in 2011 was to manage the legal protection of the trade marks. The licensor's role in the protection of the trademarks was limited to their re-registration with the change of legal ownership. Therefore, the remuneration due to this company should be calculated in accordance with the function performed, the risks incurred and the assets involved, as well as the expenses incurred. E. S.A. sp.k. was attributed royalty revenues in direct proportion to the revenues generated by the applicant from the turnover of individual goods, despite the fact that E. S.A. sp.k. did not take any action that affected the volume of such sales. Such transaction terms, i.e. such remuneration, would not have been agreed upon by independent parties. E. S.A. bore the cost of the royalties on the trademarks it had created or acquired and which it continued to control through relationships after the transfer to the subsidiary. No independent entity would have agreed such terms with another entity, i.e. it would not have handed over trademarks it used free of charge to another entity to pay hitherto unpaid royalties in an amount disproportionate to that entity's role in maintaining the trademarks. The terms and conditions agreed between the related parties do not comply with market principles, as they do not take into account the proportionate distribution of the benefits of the trademarks to the participation in the functions performed and the costs of their production. The Head of the Tax Office stated that the analysis of comparability of the inter-[carried out on the basis of the provisions of the MF Regulation and the established facts and evidence gathered shows that E. S.A. sp.k. performed administrative and legal functions for the applicant consisting in the protection of trade marks, for which it is entitled to remuneration appropriate to its function. E. S.A. sp.k. in 2011 performed the functions of managing the legal protection of trade marks, i.e. it was assumed that it provided the applicant with services for the protection of intangible goods for the purposes of assessing the remuneration.

Analysing the issue of the correctness of the recognition over time of bonuses received by the applicant from suppliers, the authority found that the taxpayer's position was not supported by relevant evidence, as the party did not submit a breakdown of all documents, including a breakdown of all corrective invoices justifying the adjustment of deductible costs for 2011. Moreover, it did not prove in any way that there was actually an accounting error with regard to the calculation of the bonuses, and the indicated methods of calculating the bonuses in no way confirm this, especially as the taxpayer itself changed the method of accounting for the bonuses, and this change took place in 2015 and not in 2011.

After considering the appeal, the Director of the IAS upheld the decision of the authority of first instance. Regarding the issue of the statute of limitations on the tax liability, he pointed out that the statutory limitation period for the company's tax liability expired on 31 December 2017, but the NWC-US on 25 September 2017 opened a pre-trial investigation for the tax offence of compromising corporate income tax for 2011. By letter dated 17 October 2017. (served on the applicant's attorneys - general on 8 November 2017 and special on 26 October 2017), the Head of the Tax Office notified E.S.A. that the limitation period for the tax liability for 2011 had been suspended since 25 September 2017 due to the initiation of the aforementioned pre-trial proceedings. During these proceedings, on 18 October 2017, the chief accountant of E. S.A. Subsequently, on 8 November 2017, due to the filing of an appeal against the decision of 28 September 2017 and thus the lack of a final decision in the case, the pre-trial proceedings were suspended on the basis of Article 144a of the Code of Criminal Procedure. Taking into account the described circumstances, the authority concluded that in the case the conditions for the suspension of the tax liability deadline on account of the premise set out in Article 70 § 6 point 1 were met. There are also no grounds for considering that Article 70 § 6 point 1 of the Tax Ordinance was applied instrumentally. The temporal succession of the described events does not give rise to any suspicion that the initiation of the penal and fiscal proceedings was intended only to stop the running of the limitation period of the tax liability. It did not occur "just before" the expiry of this time limit, as the initiation of the pre-trial proceedings took place more than three months before its expiry. Moreover, the pre-trial proceedings had already been initiated before the first-instance authority issued its decision, approximately one month after receiving the materials from the control proceedings. The tax authority had grounds for assuming that there was a connection between the suspicion of an offence and the non-performance of the tax liability to a significant extent (depletion by the amount of [...]PLN), for which the evidence proceedings were conducted. The initiation of the criminal and fiscal proceedings was therefore a consequence of the party's violations of tax law and was not an action of the tax authorities aimed at interrupting the running of the limitation period. It is significant that in the course of the pre-trial proceedings, a procedural step involving the questioning of an important witness (the chief accountant of E. S.A.) was carried out, and the suspension of the proceedings was a direct consequence of the failure of the first-instance authority's decision to become final. In addition, the Appellate Body pointed out that the aforementioned criminal fiscal proceedings are being conducted under the supervision of the District Prosecutor's Office [...], i.e. a pre-trial body that is not a tax authority or a public administration body. In the appellate authority's opinion, also the mere fact of suspension of the penal-fiscal proceedings pursuant to Article 114a of the Code of Criminal Procedure cannot testify to the instrumental application of Article 70 § 6(1) of the Tax Ordinance. Thus, the disputed tax liability was not barred by the statute of limitations, which entitled the appellate authority to continue ruling.

Turning to the analysis o the evidence gathered in the case, the Appeals Body found that in January 2010. E. S.A., on the basis of an assessment by independent experts, valued the trademarks ('E.', '[...]' and others related to these brands) at PLN [...] and contributed them as a contribution in kind (in-kind contribution) to E. S.A. sp.k. 83 together with protective rights for a total value of PLN [...]. E. S.A. sp.k. granted the applicant a licence to use them in return for monthly remuneration. The net value of the transaction in 2011 was PLN [...]. The disputed trademarks together with protective rights in December 2013 were sold to E. S.A.

In the opinion of the Director of the IAS, there is no doubt that the company and the other entities are related entities within the meaning of Article 11(1) of the u.p.d.o.p. Indeed, E. S.A. directly holds [...]% of the shares in E. S.A. sp.k. and indirectly (through K. S.A. and E. [...] sp. z o.o.) - [...]% of shares. When analysing the tax documentation of the granting of the licence to use the trademarks, the authority noted that the benefits of the transaction set out therein did not in any way take into account the fact that it was the applicant that developed the trademarks, which it then transferred to E. S.A. sp.k., so that it did not actually achieve these benefits, but incurred licence fees that were not paid until 2010. It is apparent from the evidence on the record that E. S.A. sp.k. mainly performed the technical act of filing an application with the relevant office in order to obtain the right of protection for the marks and, by doing so, became the private owner of the marks, but the building up of their economic value was influenced solely by the actions of the applicant. E. S.A. sp.k. was only the legal and not the economic owner of the trade marks, performing technical activities and not activities related to the development of the brand on the market. As a result, the profits made by the applicant were 'transferred' in the form of licence fees to the associated company. By paying monthly licence fees, the applicant created high monthly tax costs. The IAS Director pointed out that the valuation of the remuneration payable to the legal owner of the trademarks did not take into account the functions performed by this entity in building the value of the trademarks, including the function of creating sales value, nor the risks and assets involved by the applicant. The only function performed by the applicant in 2011 was to manage the protection of the trade marks. A non-affiliated entity, in order to obtain such royalties from another entity, would have had to previously incur the costs of manufacturing or acquiring the trademarks and finance them itself without the involvement of the licensee, so the prerequisites referred to in Article 11(4) in conjunction with Article 11(1) of the u.p.d.o.p. existed. - as a result of capital ties between the aforementioned companies, conditions were established or imposed that differed from the conditions that would have been established between independent entities and, as a result, the applicant showed income lower than that which should have been expected. This made it necessary to determine the remuneration payable to the licensor for the functions it actually performed in 2011. The Appellate Body noted that an analysis of the comparability of the terms and conditions agreed between the related parties and an examination of the compatibility of those terms and conditions with the terms and conditions that would have been agreed by independent parties led to the conclusion that the licensor performed administrative and legal functions for the applicant, consisting of the legal protection of the trademarks, and that the applicant performed the essential functions related to the trademarks, incurring costs related to the development, maintenance and use of the trademarks. In determining the remuneration for the functions actually performed by E. S.A. sp.k. functions in 2011, the authority applied a net transaction margin. It selected comparable entities using the T. database . For the comparative analysis, the most similar activities for the compared services were selected, classified in the PKD concerning legal protection services, office and administrative services having the characteristics of supporting activities consisting of ordinary routine activities, which corresponds to the function performed by E. S.A. sp.k. in the transaction. In calculating the remuneration due to the licensor in the amount of PLN [...], the costs of the company's operating activities were assumed without depreciation of trademarks, as making depreciation write-offs on this account was unrelated to the aforementioned functions. The value of the due to E. S.A. sp.k. remuneration for its functions for 2011 in the area of trademark licensing amounts to PLN [...] (with a margin set at [...]%), while in fact E. S.A. incurred and recognised as a deductible cost licence fees in the amount of PLN [...]PLN.

On the issue of bonuses, the Appellate Body also stated that in order to document the correctness of their recognition over time according to the new method of their calculation, the applicant did not submit a detailed calculation of the amount of PLN [...]by the value of which, according to it, the tax deductible costs for 2011 should be increased. The claim was also not supported by relevant evidence - the party failed to submit a list of all documents, including a list of all invoices justifying the adjustment of deductible costs for 2011 on the above account. The submission of a set of such documents was a necessary condition for taking into account the party's argument regarding the overstatement of the 2011 deductible costs by the amount indicated by it. However, the applicant did not prove in any way that there was actually such an accounting error, and the indicated methods of calculating the bonuses in no way confirm this, especially as the party itself changed the method of accounting for the bonuses, and this change did not occur in 2011, but at a later date. The authority also disagreed with the qualification of the circumstance raised by the party as a "calculation error" or "other obvious mistake". Moreover, it disagreed that the Head of the Tax Office "identified an overstatement of deductible expenses" in 2016. Indeed, the reduction of the amount of deductible expenses was made independently by the applicant (on her initiative) by filing a legally effective correction to her CIT-8 return. The authority had no grounds to question such an action, especially as the accounting for expenses is a taxpayer's entitlement and not an obligation. In the 2016 decision, the authority did not confirm that the reason for the correction was an accounting error or other obvious mistake. Given the failure to submit all source documents and the failure to meet the prerequisites necessary to conclude that the event was the result of an accounting error or other obvious mistake, the Director disagreed with the position that the first-instance authority did not maintain the 'symmetry of action' and violated the principle of trust in Article 121 of the Tax Ordinance. However, he was justified in not including the amount of PLN [...]in the applicant's deductible costs.

In concluding his reasoning, the Director of the IAS noted that, although the first-instance authority relied in part on the OECD Guidelines issued after the year in question, the principal arguments relied on in the contested decision already stemmed from the OECD Guidelines issued in 2010. Moreover, it is undisputed that, regardless of the content of the OECD Guidelines published in 2010 or in 2017, the taxpayer was obliged to structure its economic relations with related parties in accordance with the arm's length principle. This principle is reflected in the provisions on which the contested ruling is based. The value of the remuneration payable to E. S.A. sp.k. in 2011 was determined on the basis of Article 11 par. 1-4 of the u.p.d.o.p. and the provisions of the regulation of the Ministry of Finance, using the OECD Guidelines, which are of a more detailed nature and do not contradict the above-mentioned provisions.

In its complaint against the above-described decision, requesting that it be annulled in its entirety together with the preceding decision of the body of first instance and that the proceedings be discontinued, and that the applicant be awarded the costs of the proceedings in accordance with the prescribed norms, the company alleged that the decision violated:

1. Article 70 § 1 in conjunction with Article 70 § 6(1) in conjunction with Article 14k § 3 of the Tax Ordinance in conjunction with Article 17 § 1(11) of the Code of Criminal Procedure. by failing to apply it and assuming that in the case the tax liability was not time-barred due to the suspension of the limitation period as a result of the commencement of criminal fiscal proceedings, while with a correct interpretation of this provision, i.e. presented in the resolution of the Supreme Administrative Court of 24 May 2021, I FPS 1/21, it would have been applied, causing the statute of limitations to run on the tax liability, as the fiscal penal proceedings should not have been initiated and, as they had already been initiated, they should have been discontinued due to the existence of a negative procedural prerequisite in the form of protection stemming from individual interpretations obtained by the company, and thus the effect of suspending the course of the statute of limitations on the tax liability should not have occurred;

2. Article 70 § 1 in conjunction with Art. 2. Article 70 § 1 in conjunction with Article 70 § 6 (1) of the Tax Ordinance Act by its incorrect interpretation consisting in the assumption that in the case there was a suspension of the limitation period of a tax liability as a result of commencement of criminal tax proceedings, while the correct interpretation of this provision leads to the conclusion that this effect is produced only by commencement of criminal proceedings which are substantively justified; as a result of this incorrect interpretation, it was assumed that there was an effective suspension of the limitation period, while this effect did not occur and thus the tax liability was time-barred, as a consequence of which the proceedings should be discontinued;

3. Article 11(1)-(3) u.p.d.o.p. by their incorrect interpretation leading to the assumption that on the basis of the indicated provisions it was possible to recharacterise legal transactions, in particular:

- questioning the market characterisation of the transactions carried out in the period 2010 - 2011, disregarding the methods of estimating income set out in that provision and the procedures set out in the implementing regulation,

- disregarding the transactions of transfer in kind of trademarks to E. S.A. sp.k. and calling into question the right to derive full benefits from their licence by the company owning these signs;

4. Article 11c(4) u.p.d.o.p. in the 2019 wording in conjunction with Article 44(1) of the Act of 23 October 2018 amending the Personal Income Tax Act, the Corporate Income Tax Act, the Tax Ordinance Act and certain other acts (Dz. U. of 2018, item 21`93; hereinafter: the "Amendment Act") by applying it and recharacterising trademark licensing transactions, despite the fact that, pursuant to the Amendment Act, this provision is not applicable to the period under review;

5. Article 11 u.p.d.o.p. in conjunction with Paragraph 4(3) of the Regulation of the Minister of Finance by the improper and unauthorised use by the authority of OECD recommendations which were used in a factually incorrect manner and could not have been known to the company at the time of concluding the transactions (unauthorised and erroneous application of the principles of dynamic interpretation to these guidelines and actually retroactive application of guidelines published after the date of concluding the questioned transactions);

6. Article 11(1)-(3) u.p.d.o.p. in conjunction with § 3, § 7, § 8, § 10, § 11, § 19 and § 23 of the MF Regulation by incorrectly conducting the procedure for estimating the company's income and incorrectly conducting an analysis of the comparability of the transactions involving the licence granted to the company;

7. Article 15 par. 4i u.p.d.o.p. by refusing to include the amount of PLN [...] in tax deductible costs for 2011 on account of an adjustment of unconditional bonuses granted to the company in 2011, which adjustment was the result of an accounting error/other obvious mistake in the original calculation of bonuses

8. Article 120 of the Tax Ordinance in conjunction with Article 31(1) of the Act of 28 September 1991 on fiscal control (Journal of Laws of 2016, item 720; hereinafter: 'u.k.s.') in conjunction with Article 202(1)(1) of the Act of 16 November 2016. Provisions introducing the Act on the National Fiscal Administration (Journal of Laws of 2016, item 1948, as amended; hereinafter: "P.w.KAS") by acting without a legal basis, consisting in disregarding the tax consequences of valid and effective legal transactions in the form of transfer of ownership of the right of protection to trademarks and granting of a licence to use such trademarks, despite the fact that the regulations in force during the controlled period did not provide a basis for such action by the authority;

9. Article 122 in conjunction with Article 187 § 1 and Article 191 of the Tax Ordinance in conjunction with Article 31 (1) of Ustawa o zwalczaniu nieuczciwej konkurencji (the Act on Combating Tax Discrimination) in conjunction with Article 202 (1)(1) P.w.KAS (the Act on Combating Tax Discrimination) by selective treatment of evidence and making findings in contradiction with the evidence gathered, in particular with regard to:

- adopting a flawed assessment of the market nature of the legal acts under examination, in particular by the unauthorised finding that the acts were irrational and lacked business justification,

- the finding that the royalties did not reflect transactions which would have been entered into by unrelated parties,

- in so far as the authority took the view that the applicant had not proved the amount by which, in its view, the deductible costs should be increased in respect of the adjustment of unconditional bonuses and the circumstances of the adjustment of the bonuses relevant to the timing of the adjustment;

10. Articles 187 § 1, 191, 194 § 1 of the Tax Ordinance Act in conjunction with Article 31 Paragraph 1 of the Tax Code Act in conjunction with Article 202 Paragraph 1 Point 1 of the Civil Code Act by disregarding the legal consequences resulting from valid and effective agreements in the form of a notarial deed which constitute official documents and by disregarding the valid legal acts existing in connection therewith in a situation where the disregarding of the content resulting therefrom requires counter-evidence which has not been provided by the authority;

11. Article 121(1) of the Tax Ordinance in conjunction with Article 31(1) of the Tax Code in conjunction with Article 202(1)(1) of the P.w.KAS by exceeding the principle of conducting proceedings in a manner inspiring confidence in tax authorities, in particular with regard to:

- attempting to impute a tax liability to the Company in disregard of relevant facts and evidence and in relying on a legal basis that does not regulate such action;

- questioning the Company's right to account for unconditional bonuses in 2011 in a situation where bonus adjustments made in subsequent years (2012-2016) did not raise any doubts and were taken into account by the authority, which, in relation to 2013-2014, resulted in the establishment of an overpayment and its credit to, inter alia, the Company's tax arrears resulting from the adjustments in 2015-2016.

In his response to the complaint, requesting that it be dismissed, the Head of the Tax Office reiterated his previous position in the case.

At the hearing on 15 June 2023, the applicant indicated that the allegation contained in paragraph 2 of the complaint insofar as it concerns the negative procedural prerequisite in the form of protection arising from individual interpretations obtained by the company does not relate to this case and was included in the complaint by mistake.

The Court has considered the following:

The application deserves to be upheld.

The essence of the dispute in the present case boils down to the assessment of the reasonableness and correctness of the application, with respect to the party's settlements for the period covered by the proceedings, of the provisions of Article 15(1) in conjunction with Article 11(1) and (4) of the u.p.d.o.p. and the regulation of the Minister of Finance and, consequently, the recognition that the applicant overstated, in its corporate income tax settlement for 2011, the costs of obtaining revenue in connection with the indication in the costs of licence fees incurred for the benefit of a related entity and relating to trade marks previously produced by it. This is because the authorities questioned the legitimacy of the inclusion in deductible costs of royalty expenses incurred for the benefit of a related party. The authorities stated that the applicant's royalty expenses did not reflect the transactions that unrelated parties would have entered into with each other, as they did not take into account the functions that the party performed in relation to the trademarks. The authorities held that the legal relationship linking the related parties was a contract for the provision of trademark administration services and assessed the amount of the expenses in this respect to be deductible. Disagreeing with this position, the applicant first of all pointed out that the authorities, while not questioning the validity and effectiveness of the performance by it and E. S.A. sp.k. legal actions, in fact applied the mechanism of the so-called recharacterisation, which was introduced into the legal system on 1 January 2019.

However, having regard to the allegations raised in the complaint, it is first necessary to address the most far-reaching one, i.e. the allegation that the tax liability is time-barred.

Pursuant to Article 70 § 1 of the Tax Ordinance, a tax liability becomes time-barred after a period of 5 years, counting from the end of the calendar year in which the deadline for payment of the tax expired. The running of the statute of limitations for a tax liability does not begin, and the running of the statute of limitations that has begun is suspended, with the date on which proceedings for a tax offence or a tax misdemeanour of which the taxpayer has been notified are commenced, if the suspicion that a tax offence or misdemeanour has been committed is linked to the non-performance of that liability (Article 70 § 6(1) of the Tax Ordinance). The tax authority with jurisdiction over a tax liability, the non-performance of which is connected with the suspicion of the commission of a fiscal offence or a fiscal misdemeanour, shall notify the taxpayer of the non-start or suspension of the limitation period of the tax liability in the case referred to in Article 70 § 6 item 1, at the latest on the expiry of the limitation period referred to in Article 70 § 1, and of the commencement or continuation of the limitation period after the expiry of the suspension period (Article 70c of the Tax Ordinance).

Bearing the above in mind, it should be emphasised that in the present case it is undisputed that the statute of limitations on the corporate income tax liability, in the absence of circumstances causing the suspension or interruption of the limitation period, would have occurred for 2011 at the end of 2017. However, which is also an undisputed circumstance, the tax authority, prior to the expiry of the limitation period, notified the party's attorneys general by letters of 17 October 2017 that on 25 September 2017, as a result of the premise set out in the provision of Article 70 § 6(1) of the Tax Ordinance, the running of the limitation period of the corporate income tax liability for 2011 was suspended in connection with the initiation of pre-trial proceedings No. [...] for the tax offence of compromising corporate income tax for 2011. The service on the general attorney on 8 November 2017 and on the special attorney on 26 October 2017 removes all doubts as to the state of the applicant's knowledge of the proceedings pending against it in the light of the theses contained in the decision of T. K. of 17 July 2012 ref. P 30/11 and in the resolution of the Supreme Administrative Court issued in the case I FPS 1/18 (all decisions of administrative courts cited herein available in the database: CBOSA), and moreover, it fulfilled the guarantee functions referred to in the resolution of the NSA adopted in the case I FPS 3/18.

When analysing the circumstances of the case under review, as well as the date and subject matter of the fiscal penal proceedings initiated against the applicant, in the Court's assessment, the argumentation that it was instrumental in nature and only served to suspend the running of the limitation period of the tax liability is also unfounded. It should be noted that the instrumentality of the tax authority's action cannot be automatically determined by the relationship, alleged in the complaint, between the time of the commencement of the pre-trial proceedings (25 September 2017) and the limitation period for the 2011 liability. (31 December 2017). In order to suspend the running of the limitation period for the tax liability, the fiscal criminal proceedings can be initiated until the expiry of the limitation period. The decisive element should be whether there were actual grounds for initiating such proceedings. This is determined primarily by the seriousness and nature of the tax irregularities committed, which result from the findings of the tax proceedings conducted. However, in the audited case on 18 August 2017. The Second Desk of Customs and Fiscal Control and Proceedings of the [...] Customs and Fiscal Office [...] forwarded to the Investigation Desk certified photocopies of the files of the control proceedings with the information that, as a result of it, it was found that the taxpayer had overstated the tax deductible costs in connection with the reporting of trademark royalties in the costs. Prior to the decision of the first-instance authority, i.e. while the tax proceedings were pending, the authority had, on 25 September 2017, initiated preliminary proceedings, of which the applicant's attorneys had been notified. In addition, in conducting these proceedings, the authority took procedural actions, consisting, inter alia, in questioning a witness, i.e. on 18 October 2017, the company's chief accountant. It should also be noted that the pre-trial proceedings are conducted under the supervision of the District Prosecutor's Office [...], which did not question the legitimacy of its initiation and conduct. The amount of depletion to which the preparatory proceedings relate, i.e. PLN [...], is also important. This, in turn, excludes the situation, in which a criminal fiscal case is artificially initiated and conducted in conditions of abuse of the criminal procedure, just to obtain the effect of extending the time for recovery of tax dues. As a rule, the prosecutor, as part of his supervision, controls the activities of the pre-trial body and draws legal consequences for the deficiencies detected in this respect. This is done through the prosecutor's influence on the supervised body in such a way that it correctly fulfils the statutory objectives of these proceedings.

With regard to the issue of suspension of fiscal criminal proceedings, it should be emphasised that, pursuant to Article 114a of the Fiscal Penal Code, proceedings in cases of fiscal offences and fiscal offences may also be suspended if their conduct is significantly impeded due to a tax inspection, customs and fiscal control or pending proceedings before tax authorities, customs authorities or administrative courts. The suspended proceedings shall be resumed if the reasons justifying their suspension have ceased to exist. In the context of the premise of "substantial obstruction of the conduct of criminal fiscal proceedings", the literature points out that if it is considered that the issuance of a tax assessment decision is necessary to make relevant findings in the indicated scope, then "substantial obstruction of the conduct of criminal fiscal proceedings", ultimately leading to the suspension of proceedings, will be the case in almost all cases of criminal fiscal offences in which a public law receivable has been depleted. On the other hand, the assumption that a tax decision constitutes only a means of evidence, which may (and even should) be carried out in order to prove the amount of the depleted public and legal receivables, supports the admissibility (although not always the advisability) of conducting both proceedings in parallel (i.e. penal-fiscal and tax proceedings). However, the view should be shared that an administrative decision issued in the framework of tax proceedings, although not formally limiting the jurisdictional independence of the criminal court, is evidence of key importance for the issue of the determination of the amount of the depleted public-law receivable. At the same time, it is emphasised that the relevant tax proceedings indicated in the content of the provision under analysis (as well as the subsequent administrative court proceedings) and the fiscal penal proceedings relate to the same factual situation. Bearing in mind the criteria for the assessment of evidence indicated by Article 7 of the Code of Criminal Procedure, attention is drawn to the inadmissibility of a situation in which a trial authority considers a final tax decision, functioning in legal circulation, to be unreliable evidence and replaces the content contained therein with its own findings. Consequently, this means that on the basis of the regulations in force, the absence of a tax assessment decision, caused by parallel tax proceedings, may significantly impede the conduct of a given fiscal penal proceeding (cf. A. Bulat in: Kodeks karny skarbowy. Commentary , 2nd ed. by I. Zgoliński, available in the LEX Legal Information System). In the opinion of the Court, therefore, the mere fact that the fiscal penal proceedings have been suspended until the tax case has been resolved cannot testify to the instrumental initiation of these proceedings. Suspension of criminal fiscal proceedings is always a sovereign decision of the authority conducting these proceedings and cannot - in principle - be interpreted as having been taken with the intention of not achieving the objectives of these proceedings. All the more so since in the present case, in the absence of the conclusion of the appeal proceedings, the authority was awaiting the issuance of the assessment decision.

Thus, proceeding to the assessment of the merits of the allegations of infringement of procedural provisions, the Court notes that the type and scope of the facts relevant to the resolution of the case are determined by the provisions of substantive law. The scope of tax proceedings and obligations of tax authorities under Articles 122 and 187 § 1 of the Tax Ordinance is limited by the provisions of substantive law, in this case, first and foremost, Article 15 Section 1 of the Tax Act and Article 11 Sections 1 and 4 of the Tax Act. For these reasons, first of all, it is necessary to refer to the statutory prerequisites conditioning the inclusion of expenses as tax deductible costs and the prerequisites allowing for the determination of income and loss without taking into account the conditions arising from connections between related entities.

Pursuant to Article 15(1) of the A.p.d.o.p., tax deductible costs are costs incurred with a view to achieving revenue from a source of revenue or with a view to preserving or securing a source of revenue, with the exception of the costs listed in Article 16(1). It is assumed in the case law and doctrine that a taxpayer is entitled to include in tax deductible costs any such cost which jointly fulfils the following conditions:

- was incurred by the taxpayer,

- is definite,

- is connected with the business activity conducted by the taxpayer,

- was incurred for the purpose of obtaining (including increasing), preserving or securing revenue,

- was properly documented,

- is not included in the catalogue of expenses under Article 16(1) of the A.l.t.

In the judicature, it is noted that the criterion of the purpose of the incurred cost must be adopted as the directional criterion for the interpretation of Article 15(1) u.p.d.o.p.. It is related to the taxpayer's intention determined to achieve revenue or to preserve or secure its source, and thus in the impact (direct or indirect) of the incurred expense on the generation or increase of revenue or in the impact on preserving or securing its source. In this context, it is also important that the assessment of the taxpayer's behaviour, qualifying a specific expense as a tax cost, is made from the perspective of its relation to the conducted business activity and the knowledge of whether a given expense may objectively contribute to the achievement of the desired objective - the achievement of revenue or the preservation or safeguarding of its source - which, however, obviously does not mean that this objective must always be achieved (cf. the judgment of the WSA in Bydgoszcz of 22 October 2019, I SA/Bd 501/19). It is also emphasised that the term "for the purpose" used in Article 15(1) of the A.p.d.o.p. means that the expense remains in such a connection with revenue or the preservation or safeguarding of its source that incurring it has or may have an impact on the creation or increase of revenue, i.e. whether, from the point of view of objective premises, it is rational to incur an expense aimed at achieving revenue or preserving or safeguarding a source of revenue. The rationality of a specific action must therefore be assessed. In addition, it is important to assess whether, in fact, the incurred cost will be directly or indirectly related to the conducted business activity. It is also pointed out that when interpreting the provision in question, the dynamics of economic processes and phenomena should also be taken into account. Therefore, it is important that, while qualifying a given expense as a tax cost, one should also take into account the issue of the logical sequence of events determining specific and concrete actions of the taxpayer. Therefore, the rationality of a specific action to achieve revenue should be assessed, and the fact that the taxpayer did not achieve the expected economic effect does not disqualify the incurred expense as a tax deductible cost. Indeed, it should be noted that in the process of economic activities, an entrepreneur strives not only to maximise revenue, but also to minimise losses (cf. the judgment of the WSA in Gliwice of 25 February 2019, case ref. no. I SA/Gl 1331/18, and the case law cited therein).

In turn, according to Article 11(1) of the u.p.d.o.p., in the wording in force during the tax period under review, if:

1) a taxpayer of income tax having its seat (management) or domicile on the territory of the country, hereinafter referred to as a 'domestic entity', participates directly or indirectly in the management or control of an enterprise located abroad or holds a share in the capital of that enterprise, or

(2) a natural or legal person resident (domiciled) abroad, hereinafter referred to as "foreign entity", participates directly or indirectly in the management or control of, or holds a participation in the capital of, a domestic entity, or

3) the same legal or natural persons participate at the same time, directly or indirectly, in the management or control of, or hold a participation in the capital of, a domestic entity and a foreign entity, and if, as a result of such relations, conditions are established or imposed that differ from those that would have been established between independent entities and, as a consequence, the entity has no income or has income that is lower than would have been expected had those relations not existed, the income of the entity and the tax due shall be determined without taking into account the conditions arising from those relations.

Pursuant to Article 11(2) of the u.p.d.o.p., the income referred to in paragraph 1 is determined by estimation using the following methods:

1) comparable uncontrolled price;

2) resale price;

(3) reasonable margin ("cost-plus").

If it is not possible to apply the methods listed in paragraph 2, the transaction profit methods shall be applied (Article 11(3)). In the event that the competent tax authority issues, pursuant to the provisions of the Tax Ordinance, a decision on recognition of the correctness of the choice and application of the method of determining the transaction price between related parties, the method indicated therein shall be applied within the scope specified in that decision (Article 11(3a)). However, pursuant to Article 11(4) of the u.p.d.o.p., the provisions of paragraphs 1 to 3a apply mutatis mutandis when:

1) a domestic entity participates directly or indirectly in the management or control of another domestic entity or holds a share in the capital of another domestic entity, or

(2) the same legal or natural persons simultaneously participate directly or indirectly in the management or control of, or hold a participation in the capital of, national entities.

The court emphasises that it follows from the provisions cited that the mere fact of links between entities is not a sufficient premise for estimating income. It is incumbent on the tax authorities to demonstrate that the entities apply prices that deviate from the market in their mutual transactions. This is because the principle is that these entities, despite the existence of links, should apply market prices. This is also the purpose and essence of the application of the aforementioned provisions.

For the sake of order, it should be added that as of 1 January 2019, the aforementioned provisions were repealed, and pursuant to Article 11c(1) of the u.p.d.o.p., which has been in force since that date, related entities are obliged to determine transfer prices on terms that unrelated entities would determine between themselves. Pursuant to Article 11c(2) of the u.p.d.o.p., if, as a result of the existing links, conditions are established or imposed that differ from the conditions that unrelated entities would establish between themselves and, as a result, the taxpayer shows a lower income (a higher loss) than that which would be expected if the said links did not exist, the tax authority determines the income (loss) of the taxpayer without taking into account the conditions resulting from those links. Pursuant to Article 11c, section 3 of the u.p.d.o.p., when determining the amount of the taxpayer's income (loss) in the situation referred to in section 2, the tax authority takes into account the actual course and circumstances of the conclusion and execution of the controlled transaction and the conduct of the parties to that transaction. In turn, Article 11c(4) of the aforementioned Act stipulates that in the event that the tax authority considers that in comparable circumstances unrelated parties guided by economic rationality would not have entered into a given controlled transaction or would have entered into a different transaction or would have performed a different activity, hereinafter referred to as the "relevant transaction", taking into account:

(1) the terms and conditions that the related parties have agreed among themselves,

2) the fact that the terms and conditions agreed between the related parties make it impossible to determine the transfer price at the level to which unrelated parties guided by economic rationality would have agreed, taking into account the options realistically available at the time of the conclusion of the transaction - the authority shall determine the income (loss) of the taxpayer without taking into account the controlled transaction and, where justified, shall determine the income (loss) of the taxpayer from the relevant transaction in relation to the controlled transaction.

At the same time, pursuant to Article 11c(5), the basis for the application of paragraph 4 may not be exclusively:

1) the difficulty of verifying the transfer price by the tax authority, or

2) the absence of comparable transactions occurring between unrelated parties in comparable circumstances.

Bearing in mind the cited provisions and in view of the presentation by the authorities of a critical assessment of the legal relations established by the above-mentioned entities, similar to the characterisation of an abuse of rights in order to obtain a tax advantage, the Court notes that tax optimisation using legal instruments may be one of the elements of planning one's activity. However, the literature on the subject as well as the jurisprudence of the administrative courts draws attention to the need to distinguish and indicate the boundaries between a permitted form of tax avoidance and tax evasion. In doing so, it is emphasised that it is the circumstances of the particular case that determine whether we are dealing with the taxpayer's use of the possibility to reduce taxation in a manner consistent with the legislator's intentions or with tax evasion. The problem of permissible or impermissible (in the light of tax law provisions) tax optimisation in the form of conclusion of civil law agreements aimed at reducing tax liabilities is widely discussed in the literature on the subject, decisions of administrative courts or even judgments of T. K.. Also, the possibility for taxpayers to carry out various types of restructuring activities, which may constitute the performance of the so-called tax optimisation, is not prohibited by law (see the judgment of the WSA in Kraków of 7 March 2018, I SA/Kr 45/18 and the literature and jurisprudence cited therein).

However, questioning the optimisation scheme applied by the taxpayer must have a clear legal basis, and the tax authorities may not apply other provisions (for example, Article 199a § 1 and 2 of the Tax Ordinance) as a solution equivalent to a circumvention clause (as pointed out by the NSA in its judgment of 8 May 2019, II FSK 2711/18).

In view of the dates of the legal transactions performed in the case, it should be pointed out that neither the abuse of rights clause nor the anti-avoidance clause were in force at that time. By judgment of 11 May 2004 in case K 4/03 (Journal of Laws of 2004 No. 122, item 1288), T. K. declared the provision of Article 24b § 1 of the Tax Ordinance introducing an abuse of right clause to be inconsistent with the Constitution of the Republic of Poland. Again, such a clause was introduced into the domestic legal system by Article 1(6) of the Act of 13 May 2016 amending the Tax Ordinance Act and certain other acts (Journal of Laws 2016, item 846). The provisions of Art. 119a et seq. of the Tax Ordinance, which introduced the anti-avoidance clause, are effective as of 15 July 2016 and, pursuant to Article 7 of the above-mentioned amending act, apply to a tax benefit obtained after the effective date of the amendment, i.e. after 15 July 2016.

This provision clearly indicates that the provisions on the anti-avoidance clause apply to acts performed after the date of entry into force of this Act. The temporal scope of the application of the Act has been explicitly linked to the performance of the act. A specific moment, the date of the act, can be established for each act. The anti-avoidance clause will apply to any act constituting tax avoidance performed under the Act. It will be relevant when (before or after the entry into force of this Act) the moment of the act occurs. The case law indicates that the moment of preparation of the act is of no relevance for the application of the Act. In the same way, it is irrelevant whether the action constituting tax avoidance was preceded by other actions and how many of these preceding actions there were (cf. the judgment of the WSA in Wrocław of 29 November 2018, I SA/Wr 843/18).

None of the described anti-avoidance clauses were in force in the period until 15 July 2016, so the tax authorities could not effectively apply such a clause in the present case with regard to corporate income tax.

Initially, in the jurisprudential practice of the tax authorities, such a clause was reconstructed on the basis of the interpretation of Article 199a of the Tax Ordinance, which, as already noted above, lacked legitimate grounds. It should be noted that when introducing the anti-avoidance clause (Article 119a et seq. of the Tax Ordinance), Article 199a of the Tax Ordinance was not repealed, which confirms that it is not possible to replace the abuse of right clause by the application of Article 199a § 2 of the Tax Ordinance. The above is not doubted in the literature, where it is clearly stated that Article 199a of the Tax Ordinance does not introduce an abuse of tax law clause. Therefore, this provision does not entitle the tax authorities to disregard, in terms of tax law, the consequences of valid and effective legal actions that have been undertaken in order to evade taxation. It only contains directives for the interpretation of civil law actions in order to know the real will of the parties to the legal action (cf. S. Babiarz, B. Dauter, R. Hauser, A. Kabat, M. Niezgódka-Medek, J. Rudowski, Ordynacja podatkowa. Commentary., 11th ed., Wolters Kluwer, W. 2019, 1163).

The general clause against tax avoidance is contained in the already referred to Article 119a § 1 of the Tax Ordinance, according to which, an act performed primarily to achieve a tax benefit, contradictory in the given circumstances to the object and purpose of the provision of the tax act, does not result in achieving a tax benefit if the manner of action was artificial (tax avoidance).

The jurisprudence of the administrative courts notes that the mechanism of the operation of the general clause consists in determining the effects of the taxpayer's actions on the basis of such a state of affairs that could have existed if the appropriate action (devoid of artificiality) had been performed, and not on the basis of the actual course of events resulting in taxation. Thus, the authority is binding on the legal consequences of a state of affairs considered appropriate for a given economic purpose (which did not occur), while at the same time taking as a basis for adjudication a state of affairs that does not exist, but is objectively appropriate to the taxpayer's situation. Thus, the general clause is a provision creating the competence for the tax authority to make a binding determination of the legal consequences of the taxpayer's action in isolation from the factual features shaping the tax-legal state of affairs. Thus, in cases covered by Article 119a of the Tax Ordinance, we are dealing with two dispositions of tax law norms: one, which would be appropriate for the model of action adopted by the taxpayer, and the other, which is assumed to be correct due to the features of tax avoidance by the taxpayer. Thus, the problem lies not in the fact that the taxpayer's exact intentions are not known, but in the fact that these intentions - once reconstructed - are treated as impermissible (so the NSA in the aforementioned judgment of 8 May 2019, II FSK 2711/18).

In the light of the factual circumstances of the case under review, the Court notes that the practice of tax authorities to apply Article 15(1) of the u.p.d.o.p. in the same manner as in the case of a tax avoidance clause has been met with a critical assessment by the judicature. In the specific factual situation, the NSA shared the view of the tax authorities that the disclosed pattern of transactions related to the transfer of rights to trademarks bears the hallmarks of an operation optimising the company's tax obligations. However, in the NSA's view, in such circumstances, the question arises as to what instruments were available to the tax authorities to counteract tax avoidance in 2011 and whether Article 15 Section 1 of the u.p.d.o.p. could be included in the category of these instruments. The NSA reminded that in the light of the said provision, the qualification of certain expenses as tax deductible costs should be assessed from the perspective of determining the tax base and not in the context of fulfilling conditions which this provision does not provide for. The cited provision should be taken into account when verifying whether the analysed cost meets the criteria resulting from its content. However, in the NSA's opinion, the scope of this regulation cannot be expanded, especially to include elements that are not provided for therein. The NSA clearly indicated that this regulation does not replace instruments allowing the tax authority to counteract tax avoidance, including questioning the cost character of the incurred expense, if the conditions set out in Article 15(1) of the u.p.d.o.p. itself are met (judgment of the NSA of 4 March 2020, II FSK 1550/19). In this judgment, the NSA further stated that it is beyond the scope of the legal possibilities of tax authorities to assess legal actions and to derive - contrary to their content - negative tax consequences for the taxpayer, if such authorisation does not directly result from a tax provision. In this context, the NSA referred to the position contained in the judgment of the NSA of 16 December 2005 (II FSK 82/05), in the light of which, the tax authorities have no grounds under tax law for questioning effectively concluded agreements, even if their purpose is to reduce the tax burden. Striving to pay the lowest possible taxes is not prohibited by law; it is, so to speak, a natural right of every taxpayer. It is up to the tax authorities and then the administrative court to assess how effectively (in accordance with the law) these aspirations are pursued by a particular entity. In conclusion, the NSA held that in the light of the above remarks and the factual circumstances of that case, the statement that, from the perspective of the content of Article 15(1) of the u.p.d.o.p., only the assessment of the transaction between the appellant company and the Cypriot company, connected with determining whether the expenses incurred on account of the concluded sub-license agreement meet the prerequisites arising from this provision, and in particular whether there is a causal link between the incurred expense and the obtained (objectively obtainable) revenue or the preservation or protection of the source of revenue, is justified. The NSA gave a positive answer to this question. Since the transaction of selling copyright to trademarks was legally effective, it means that the ownership of these rights was transferred to another entity, even if it is a company controlled by a domestic company. Therefore, if the exclusive holder of the rights to use certain property rights is another entity than the applicant company, and in order to maintain the existing domestic production, it was necessary to use the right to these marks, even in the form of a sub-licence (the acquisition of which was also not disputed) and the production and sale of goods with these marks was carried out, it is difficult not to see the connection of the incurred expense with the source of revenue, which is economic activity, and the fact that the expense was incurred in order to obtain revenue.

From the point of view of the factual circumstances of the present case, the comment of the Supreme Administrative Court contained in the justification of the judgment quoted herein is important, that the tax authorities did not use in that case the possibility provided for in the legal status of 2011 by Article 11 of the u.p.d.o.p. This regulation, concerning the possibility of correcting prices applied between related parties, in fact introduced an exception to the principle of determining income taking into account prices applied between contracting parties. Its purpose was and is to prevent the erosion of the tax base through the harmful (from the point of view of the state interest) transfer of profits between related parties.

In view of the purpose of the application of Article 11(1) and (4) of the u.p.d.o.p. understood in this way, it is necessary to relate this regulation to the facts of the audited case. It should be recalled here that, in the context of this provision, the authorities critically assessed the legal actions performed by the applicant and related entities, questioning their economic (business) sense.

The authorities stated that the actions of the capital and personal related companies were aimed at avoiding taxation on the sale of the trademarks by the previous owner of the trademarks and obtaining the possibility of making depreciation write-offs on their market value, established as a result of an appraisal by an expert. In the view of the authorities, there are no grounds to conclude that the transactions carried out by the affiliated entities - as a result of which the applicant first transferred the marks belonging to it to an entity created for that purpose and then incurred licence costs for their use - conferred an advantage in terms of not having to incur costs for the construction or promotion of its own brand. The building of the reputation of the trade marks, and thus their value, was handled by E. S.A. and not by E. S.A. sp.k. E. S.A., not being the legal owner of the trademarks, incurred expenses on advertising, marketing and promotion, which contributed to an increase in sales and, at the same time, influenced the amount of licence fees incurred. According to the authority, it was the applicant that created and promoted the trademarks and, after formally transferring their ownership to the related entity, continued to use them in its business, continuing to take care of their development and promotion. It was solely the applicant that engaged financial resources in organising the production and sale of products bearing the trademarks, or in employing the personnel necessary to carry out activities in this regard. In turn, E. S.A. sp.k., as a result of the non-market shaping of transactions carried out between related parties, without engaging financial resources in obtaining ownership of trademarks and any assets (except for formal legal ownership of the trademarks), without performing any significant functions related to the subject of the transaction - charged high fees for the party's use of the trademarks, not corresponding to the functions actually performed, the assets engaged and the risks incurred. It was the operational activities carried out by the applicant and the activities undertaken by this entity to promote and develop the trademarks - that generated revenue for the Group, which should be shared appropriately between the various related parties, depending on their contribution to its acquisition. The limited partnership did not engage assets other than trademarks, as no assets including trademarks "passed" to it. The entity did not involve human capital because, apart from two persons - employees of E. S.A. employed by the limited partnership on a [...] full-time basis - it did not employ any employees and did not bear risks related in particular to sales, marketing, advertising, logistics. In the opinion of the authority, the functional analysis carried out showed that the limited partnership performed simple administrative functions, related to trademarks, the indicated median value was considered appropriate as a value that represents the market level of remuneration, calculated by means of the net transaction margin ratio for this transaction.

What is important in the case, however, is the conclusion of the authorities, which considered that, in fact, the legal relationship justifying the expenses included in the deductible costs is a contract for the provision of a service consisting only in the administration of trademarks. The Court notes that this conclusion, however, contradicts the position of the authorities, which did not question the validity of the legal transactions resulting in the transfer of rights to trademarks to the company. Against the background of the facts of this case, the authorities made a questionable distinction between the legal ownership of trademarks and the economic ownership of the trademarks.

In principle, the tax authorities did not present any argumentation showing from which rules of interpretation they came to the conclusion that such a manner of application of the aforementioned 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 payable without - '[...] taking into account the conditions arising from the relationship ...', but does not allow one legal transaction (a licence agreement) to be replaced by another (an agreement to provide administration services), and legal consequences to be derived from the latter in terms of determining the amount of the tax liability.

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 it is justified, it shall determine 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 controlled case.

In applying Article 11(1) and (4) of the u.p.d.o.p. to the facts of this case, the tax authorities referred to the OECD guidelines, inter alia to the example presented there, from which, according to the authorities, it follows that the transactions carried out by E. S.A. and E. S.A. sp.k. for the purposes of assessing remuneration constitute, in fact, a contract for the provision of trademark administration services and, in such a 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 (which, after all, the Appellate Body admits), they can 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 the provisions regulating transfer pricing issues. 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 supporting the process of interpretation of the norms contained in Article 11 of the u.p.d.o.p., and now in Article 11a et seq. of that Act (cf. judgments of the Supreme Administrative Court of: 22 September 2020, II FSK 1221/18; 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 incompatibility of domestic 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 take into account the OECD Guidelines as they have been 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. In view of the above, the Court held that the tax authorities' interpretation and application of Article 11(1) and (4) of the u.p.d.o.p. in the light of the content of the 2017 OECD Guidelines was incorrect.

The court shares the view expressed in the literature according to which Article 84 and Article 217 of the Constitution of the Republic of Poland impose the obligation to impose taxes and determine the basic elements of their construction by means of a law. Shaping the legal and taxation status not by means of a law, but on the basis of the OECD Guidelines - violates this principle, and giving the provision a content consistent with the above-mentioned Guidelines cannot be reconciled with its text, while at the same time there are no prerequisites for moving to a purposive interpretation (H. Litwińczuk, op. cit., pp. 17-18).

In the Court's view, the faulty application of Article 11(1) and (4) of the u.p.d.o.p. affected the manner in which the applicant's income was estimated and the estimation method adopted by the authorities, based on the erroneous assumption that the transaction analysed by the authorities consisted in the provision of trade mark administration services on behalf of the economic owner of those trade marks. In making that assumption, the authorities applied the net transaction margin method in order to determine the market level of the remuneration payable to the company for its trade mark administration functions.

Meanwhile, the applicant provided the tax authority with the data that formed the basis for the calculation of the royalties, as well as the licence agreement. In view of the repetitive nature of such transactions on the market, the applicant used the comparable uncontrolled price method as the correct approach. The Court notes that the estimation of income by the methods indicated in Article 11(2) of the u.p.d.o.p. (comparable uncontrolled price method, reasonable margin method, selling price method) should be considered first, and only when it is not possible to apply these methods, the methods indicated in Article 11(3) of that Act (net transaction margin method, profit sharing method) will be applied.

Furthermore, the applicant reasonably pointed out that in the comparability analysis the authorities should have taken into account the fact that intangible assets of significant value (trademarks) were involved in the examined transaction, being the only significant asset analysed by the parties to the examined transaction. As a result, the authorities incorrectly conducted the comparability analysis of the transaction involving the licence for the use of trademarks granted to the applicant by the limited partnership, which prejudges the validity of the allegation of a breach of Article 11(1)-(3) of the u.p.d.o.p. in conjunction with § 3, § 7, § 8, § 10 and § 11 of the MF Regulation.

In the opinion of the Court, the basis for the decision in this case was not the provision of Article 11c(4) of the u.p.d.o.p. in the 2019 wording, hence the allegation of violation of this provision contained in the complaint does not merit consideration.

In the opinion of the Court, the evidence gathered in the case allowed it to be resolved and, in this respect, the authorities did not fail to comply with Article 122 in conjunction with Article 187 § 1 of the Tax Ordinance. On the other hand, the allegation of a breach of Article 191 of the Tax Ordinance, consisting in the authorities' faulty assessment of the market nature of the examined legal transactions, is justified. In the context of this allegation, however, it should be stipulated that the reclassification of a legal action by the authorities is not so much the result of a defective assessment of the evidence gathered, but results from the interpretation and manner of application of substantive law provisions adopted by the authorities (Article 11(1) and (4) of the u.p.d.o.p.). As aptly pointed out in the case law, in such a situation the state of facts was not so much established, but adopted by the tax authority. This is because the tax authority determines the factual state not on the basis of established circumstances, but reconstructs it, taking as a directional guideline the taxpayer's intention to achieve the intended fiscal goal (unauthorised tax benefit). Thus, the state of facts adopted by the tax authorities does not so much result from the evidence gathered in the case, but from the assumption that if the taxpayer was guided only by economic and economic rationale and not by the intention to achieve an unauthorised tax benefit, it is precisely in the way the tax authority wants him to arrange his relations (judgment of the NSA of 8 May 2019, II FSK 2711/18).

On the other hand, the consequence of the violation of substantive law is the legitimacy of the allegations of violation of Articles 120 and 121 § 1 of the Tax Ordinance by the authorities. On the other hand, due to the voluminous nature of the complaint, the Court referred to the allegations contained therein and their justification to the extent necessary to conduct a review of the appealed decisions (judgment of the Supreme Administrative Court of 26 May 2017, I FSK 1660/15).

When re-examining the case, the authority will take into account the legal assessment presented above as to the interpretation and application, in the facts of this case, of the provision of Article 11(1)-(4) of the u.p.d.o.p., including the assessment as to the nature and meaning when applying this 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 performed by the applicant and the limited partnership, including the conclusion of the licence agreement, must be the application of the provision of Article 11(1) and (4) of the u.p.d.o.p. as an instrument for controlling the amount of the agreed licence fees 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 as tax deductible costs (Article 15(1) of the u.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 u.p.d.o.p. was taken by the WSA in Poznań (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, judgment of 29 June 2023, file ref. I SA/Po 53/23, file ref. I SA/Po 964/22, file ref. I SA/Po 965/22) 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 to reclassify or recharacterise legal actions, a similar position was taken by the Supreme Administrative Court in the judgments of 9 June 2022, II FSK 2508/19 and 25 July 2023, II FSK 1352/22.

On the other hand, the allegation of a breach of Article 15(4i) of the u.p.d.o.p. by the authority's refusal to take into account the correction of unconditional bonuses, caused - according to the applicant - by an accounting error or another obvious mistake in the original calculation of the bonuses, and consequently refusal to take this correction into account in tax deductible costs for 2011, does not merit consideration. Pursuant to the aforementioned provision, if the adjustment to the deductible cost is not due to an accounting error or other obvious mistake, the adjustment is made by decreasing or increasing the deductible cost incurred in the accounting period in which the correcting invoice was received or, in the absence of an invoice, another document confirming the reasons for the adjustment.

The court shares the appellate authority's view that a change in the method of calculating bonuses, several years after the submission of the tax return relating to the year under review (i.e. in 2017), does not constitute an accounting error or other obvious mistake as referred to in the cited provision. Both parties to the dispute stressed the lack of a statutory definition of the above terms, i.e. 'accounting error' and 'other obvious mistake', which means that these terms should be understood according to their colloquial meaning. Thus, an accounting error made when recognising the amount of a deductible expense is an incorrect mathematical representation of data and may result from an error made by both the issuer of the invoice and the taxpayer posting that invoice. In contrast, another obvious mistake will be an obvious but non-accounting error.

As the applicant itself admits, in 2011 it calculated unconditional bonuses using the result method by comparing the balance sheet and tax value of income and expenses related to bonuses received in the period covered by the calculation. The company sought to recognise bonuses for tax purposes only after the invoices documenting them had been issued, generally recognising them in the year to which they related. However, the company found that the system solutions it had in place at the time of the 2011 CIT calculation did not allow it to accurately determine what value of the accrued unconditional bonus should be included in the financial result for the period, and made system changes by developing new functionality. Calculations made on its basis led the applicant to determine the understatement of deductible costs in 2011 by the amount of PLN [...]PLN. In the Court's view, it follows from the above description that the change made by the applicant to the method of calculating unconditional bonuses cannot be treated as a correction of an accounting error. Even a less precise method of calculating bonuses does not constitute a simple calculation error as referred to in the above-mentioned provision. Nor can the change to a - according to the applicant - more precise method be regarded as the correction of another obvious mistake. If, as the applicant points out, the change in the method of calculating bonuses (made after many years) has improved the tools for calculating the value of the unconditional bonus, this cannot mean that the method previously used was 'another obvious mistake'. Indeed, it is not excluded that the applicant will further refine the method currently used (already the 'corrected' one) in the future and will then also treat the current method as obviously mistaken. This, in the Court's view, makes it impossible to treat the change in the method of calculating the value of unconditional bonuses as entitling the method previously used for this calculation to be regarded as another manifest error.

In view of the above, the Court, pursuant to Article 145 § 1(1)(a) and (c) of the Act of 30 August 2002. Law on Proceedings before Administrative Courts (Journal of Laws of 2023, item 1634, as amended, hereinafter: 'P.p.s.a.') annulled the contested decision, ruling on the costs of the proceedings pursuant to Article 200 and Article 205 § 2 in conjunction with § 2(8) in conjunction with § 14(1)(1)(a) of the Regulation of the Minister of Justice of 22 October 2015 on fees for legal counsels' activities (Journal of Laws of 2023, item 1935)