Brokerage services in the light of transfer prices regulations

Correctly classifying a brokerage transaction has certainly not been intuitive for taxpayers. Making such transactions between related entities adds complexity to the matter. The challenge for the taxpayer is both determining the value of such a transaction and establishing the appropriate documentation threshold for it under transfer pricing regulations. This may result in the taxpayer’s failure to meet its obligations on the preparation of transfer pricing documentation as well as the reporting of transactions in the TP-R form.

Subject matter of the application for interpretation

The transaction of a brokerage service regarding the trading of stock goods and financial instruments became the subject of an individual interpretation of 3 January 2023 (ref. 0111-KDWB. 4010.96.20222.1.HK). As part of it, the Director of KIS presented the position of the tax authority in the scope of qualifying and determining the value of transactions of providing brokerage services.

In the analyzed case, the company is an entity belonging to a large capital group dealing mainly in the generation of electric power and heat and providing, among others, the services of their transmission and distribution for customers. The subject of the company’s operations and legal regulations on the energy market mean that the company acquires (and then discontinues) the right to CO2 emissions (having the nature of a financial instrument) in connection with the energy generation. In addition, the company makes a transaction of buying and selling stock goods. The transactions of purchasing and selling goods and financial instruments are made through a brokerage house – a related entity for the company.

The brokerage house providing brokerage services does not become the owner of financial goods and instruments being the subject of trading. Therefore, as a result of the transaction on the stock exchange, the ownership is transferred directly between the Company and the buyer or an external seller.

Brokerage services just like commission services

In the individual interpretation at hand, the Director of KIS decided that the transfer of the value of goods – which are the subject matter of the brokerage service – between the company and the related entity should not be qualified as a controlled transaction within the meaning of the CIT Act. The authority confirmed it is legitimate to classify brokerage services transactions in an analogous manner to the commission services; thus, transaction value should be established on the basis of the provisions of the Civil Code governing a commission agreement

In connection with the above, regardless of the value of goods constituting the subject of trading, the value of the transaction should be the remuneration due to the brokerage house for providing brokerage services, i.e. the value of fees and commissions.

Recharge as a complement to the main transaction 

The second important matter addressed in the interpretation is the approach of tax authorities to recharge transactions made in connection with another transaction between related entities and the legitimacy of aggregating the value of recharges with the value of the main transaction.

In the authority’s opinion, the recharge transaction described by the company is closely related to the transaction of providing brokerage services without which these recharges would not have been made. This means that the transactions should be aggregated for the purposes of meeting transfer pricing obligations. Thus, the value of the controlled transaction subject to possible obligations in the field of transfer prices will be the sum of the value of remuneration for the provision of brokerage services and the value of recharges related to the provision of these services.

Not meeting all conditions to fit the definition of a controlled transaction

It should be emphasized that as part of providing brokerage services the condition of determining or imposing transaction conditions as a result of existing connections is not met; as a consequence, this transaction is not a controlled transaction at all. The Director of KIS confirmed that in stock exchange transactions presented by the Company there is no determination or imposition of transaction conditions as a result of connections – this is because the brokerage house operates in strictly defined regulatory and market frameworks.

As in the case of commission agreements, the entity providing brokerage services must transfer the benefits obtained in connection with the service to the ordering party. This means that the trade in goods and financial instruments does not affect the economic situation of the brokerage house.

Summary

Based on the individual interpretation described, we can see the interpretation line for brokering and commission services is being established.

We assess the interpretation line as favorable for taxpayers. The presented approach simplifies the process of meeting documentation and reporting obligations – it is easier to determine the value of transactions from the taxpayer’s perspective.