Capital transactions in the light of transfer pricing obligations

Identifying documentation obligations is a key step in completing the tasks imposed by the transfer pricing regulations. Under the applicable regulations, the concept of a controlled transaction should be interpreted broadly. As a consequence, a number of business activities that are seemingly not subject to transfer pricing regulations may in practice trigger documentation obligations. An example might be capital transactions of making a cash contribution to a related company or the acquisition of new shares.

Given how common capital transactions are and, moreover, their sensitivity in the context of tax inspections, it is necessary to verify each time whether any capital activities occurred during the audited year which may trigger transfer pricing obligations. It is important to establish the date when these obligations actually need to be identified. The matter gets even more complicated if the capital transactions take place at the turn of the tax year.

Capital controlled transactions

The concept of a controlled transaction includes all economic activities (including those of a commercial, capital, financial and service nature) whose actual content is identified on the basis of actual behavior of the parties. Moreover, even a transaction neutral from the point of view of income tax may be labelled as a significant controlled transaction from the perspective of transfer pricing regulations.

As a consequence, the recently established practice of tax authorities is to confirm documentation obligations apply in the case of transactions such as:

• share capital increase,
• acquisition of shares and the related cash/in-kind contribution,
• merger of companies.

In this context, it is worth emphasizing that the documentation obligations arise only from transactions between related entities within the meaning of the income regulations. For example, the acquisition of newly created shares by a shareholder holding less than 25% of the rights in the company does not constitute a controlled transaction.

Given the above, it is important to determine the value of a capital transaction which triggers transfer pricing obligations. For most capital transactions, the materiality threshold is considered to be PLN 2 million.

Importantly, in the case of a share capital increase transaction, it is irrelevant what part of the contribution will be allocated to the share capital and what part to supplementary capital – the value of the entire contribution is assessed.

Also, a dividend payment or contributions to the company by a shareholders are not a controlled transaction and thus does not involve documentation obligation. The dividend is a remuneration for the entrusted capital: the earned profit, its distribution and payment are only a consequence of business operations and not an activity as such. This position was confirmed by the Minister of Finance in the response to a Member of Parliament enquiry no. 9368 of 22 August 2020. In the case of contributions made on the basis of the regulations of the Polish Code of Commercial Companies, these transactions are not considered controlled because they do not in fact constitute activities of an economic nature. This was the position taken by the Minister of Finance in the general interpretation of 29 December 2021 on the definition of a controlled transaction (reference number: DCT1.8203.4.2020).

The timing of obligations in transfer pricing

Capital transactions are complex since they require relevant resolutions, an entry in the National Court Register and often the transfer of payments in order to be finalized. This is the source of doubts as to the date on which the documentation obligations should be identified. Capital transactions made at the turn of the year may be particularly problematic.

Regulations governing transfer pricing lack any explanation as to when the documentation obligations arise in the case of capital movements. As a result, taxpayers may have doubts for which tax year they should prepare transfer pricing documentation or report a controlled transaction in the TPR form. Given the above, in practice taxpayers often rely on the provisions of the Commercial Companies Code and assume that, for example, an increase in the share capital takes place upon entry in the register.

Meanwhile, the individual interpretation of the Director of the National Tax Chamber of 18 November 2021 (0111-KDIB2-1.4010.351.2021.2.AR) reads: “for tax purposes, the date of the transaction itself (payment to increase the share capital / take up shares) is important – not the moment when the share capital increase becomes legally effective by making an appropriate entry in the National Court Register”.

The above leads to assuming that for capital transactions, transfer pricing obligations should be recognized in the financial year when the cash flows related to the controlled transaction took place. However, if the specificity of a capital transaction does not assume making payments, e.g. a merger of companies, then it is assumed that an entry in the National Court Register is binding. Nevertheless, please note that the above-mentioned interpretation is the only opinion expressed by tax authorities. Thus, until a binding position in this matter is taken, the date when transfer pricing obligations emerge may be determined differently during a control.