Documentation obligation not triggered by the redemption of shares – another favorable decision by a District Administrative Court

Redemption of shares in a company is an institution governed by the Code of Commercial Companies and Partnerships (KSH). It has been disputed between taxpayers and tax authorities from the perspective of transfer pricing obligations for several years.

In one of the latest decisions[1], the court confirmed a case-law favorable for taxpayers – it affirmed that voluntary redemption of shares is not a controlled transaction.

Consistent approach by the court

The court had no doubts that a voluntary redemption of shares without remuneration is not a controlled transaction within the meaning of transfer pricing regulations.

The decision reads that the redemption of shares (with or without remuneration) is an activity that may only take place in the relationship of the company with its partner. Therefore, it is impossible to relate the terms of such a transaction to market conditions. The redemption of shares – also the one when a partner’s consent is involved without remuneration – is explicitly addressed in Article 199 of the KSH. Consequently, the lack of remuneration is a condition imposed or established as a result of the relationship between the company and the partner.

In the case of redemption of shares without remuneration, there is no price specified and the transaction cannot be identified as a purchase or sale transaction. The redemption is based on the provisions and resolutions of the partners’ meeting.

Importantly, the court highlighted that the purpose of the redemption of shares is not an artificial (resulting from relations) modification of the amount of income achieved by related taxpayers by applying a non-arm’s length price.

In brief:

• redemption without remuneration is possible under the Code of Commercial Companies and Partnerships, so there is no arm’s length price involved in it or a potential estimate by tax authorities,
• redemption of own shares without remuneration involves no remuneration, no price and, therefore, no value.

What’s in it for the taxpayers?

This case confirms the court’s previous approach (e.g. I SA/Po 453/20 and I SA/Bd 22/22)[2]: they kept stating that the voluntary redemption of shares is not a controlled transaction. However, tax authorities saw it differently in their individual interpretations[3]. They referred to the broad definition of a controlled transaction introduced starting 2019 whereby the concept of a transaction also includes other events / transactions.

Consequently, given the broad definition of a controlled transaction, it cannot be directly ruled out that the redemption of shares may be the subject of transfer pricing documentation. For such a transaction, if the statutory threshold of PLN 2,000,000 net is exceeded, it will certainly be safer to compile documentation.

Summary

Tax authorities and courts still differ in assessing the voluntary redemption of shares as a controlled transaction.

The District Administrative Court’s position supports the opinion of other courts: the share redemption transaction (also without remuneration) is not a controlled transaction and triggers no obligation to prepare transfer pricing documentation. However, don’t ignore the broad definition of a controlled transaction and the opinion by the tax authorities.

A good solution on the part of the lawmaker would be to clarify these issues in the applicable provisions. Taxpayers are now left to keep track of the current case-law and interpretations.

[1] Decision of the District Administrative Court in Bydgoszcz of 22 March 2022 (ref. I SA/Bd 30/22), https://orzeczenia.nsa.gov.pl/doc/431FE7A505.

[2] Decision of the District Administrative Court in Poznań of 17 November 2020 (ref. I SA/Po 453/20, https://orzeczenia.nsa.gov.pl/doc/9FF10EC426) and the Decision of the District Administrative Court in Bydgoszcz of 15 March 2022 (ref. I SA/Bd 22/22, https://orzeczenia.nsa.gov.pl/doc/469E52A4CD).

[3] Individual interpretation of the Director of KIS of 30 March 2020, ref. 0111-KDIB1-1.4010.121.2020.1.ŚS, https://eureka.mf.gov.pl/informacje/podglad/410121;keyWords=0111