Establishment a permanent establishment and transfer pricing obligations

Conducting business in another country may lead to the establishment of a permanent establishment (PE), which carries with it a number of tax obligations, including transfer pricing obligations.

Transfer pricing regulations treat a company and its permanent establishment as related parties. In addition, the legislature includes, among other transactions, the attribution of income (loss) to a permanent establishment in the catalog of controlled transactions.

The issue of establishing a permanent establishment and the attribution of taxable income in Poland is already of great interest to the tax authorities. It can be expected that in the future this issue will intensify tax audits to identify PE.

Attribution of profit to permanent establishment

Attribution of profit to permanent establishment is based on the assumption that the permanent establishment is a separate and independent entity transacting with the parent company, which should be treated as a completely separate entity.

Accordingly, a permanent establishment should be treated as if it carried out business activities (i.a. incurring obligations and fulfilling contractual obligations) in its own name and on its own responsibility and earned revenue and incurred costs.

Transfer pricing obligations

From the perspective of transfer pricing regulations, the attribution of income (loss) to permanent establishment requires the preparation of transfer pricing documentation with a transfer pricing analysis and the reporting of the transaction in TP-R, if the documentation threshold is exceeded.

The value of a controlled transaction that involves the attribution of income to permanent establishment should be determined on the basis of the value of attributed revenues or costs (separately for the the cost and revenue sides) reported in the annual return on the amount of income earned (loss incurred). The value of revenues or costs should be compared with the documentation threshold set for so-called “other transactions”, i.e. the threshold of PLN 2 million. This approach has been confirmed by tax authorities in recent individual interpretations[1] .

The allocation of income to permanent establishment is subject to documentation requirements whenever the amount of allocated revenues or costs exceeds the statutory documentation thresholds.

Therefore, allocated revenues, as well as costs incurred in connection with the permanent establishment’s operations, should be allocated to the PE on an arm’s length basis. According to the tax authorities expressed in tax interpretations, the allocation of revenues and costs should be based on the ability to determine the extent to which revenues and costs are actually related to the activities of the permanent establishment[2]. Therefore, the allocation of revenues and costs between the parent company and permanent establishment requires a functional analysis of both parties, which will enable the proper allocation of revenues and costs related to the activities of the permanent establishment.

From 2022, the legislator introduced exemptions from documentation obligations for transactions concluded with a permanent establishment. The catalog of exemptions includes transactions concluded between (i) foreign permanent establishments of related parties with a registered office in a European Union member state other than Poland or an EEA country, or (ii) a permanent establishment established in Poland and a related party with a registered office in Poland. In order to apply the exemption, it is necessary to meet a number of conditions specified in the provisions of the CIT / PIT Act.

Apart from documentation obligations, the permanent establishment is also required to fulfill its reporting obligations, i.e., to file the TP-R form. The new version of the TP-R guide (issue IV of December 2023) provides instructions on how to fill out the TP-R form for permanent establishment (question No. 17), including, among other things, information on the permanent establishment’s PKD code and Tax Identification Number for a permanent establishment located in Poland. However, the latest guide does not provide information on how to fill in the field with the value of the transaction – whether to indicate the value of revenues or costs (if both categories exceed the documentation threshold) and not provide guidance on choosing the appropriate transaction code. Therefore, filing out the TP-R form should be guided by the principle of caution to avoid negative consequences from the tax authorities.

What does this mean for taxpayers?

If the value of revenues or costs allocated to the permanent establishment exceeds the documentation threshold, it will be necessary to prepare transfer pricing documentation with a transfer pricing analysis and report such transaction in the TP-R form. It should also be borne in mind that allocated revenues, as well as costs incurred in connection with the permanent establishment’s operations, should be allocated to the PE on arm’s length basis. Attribution of profit to the permanent establishment in accordance with the arm’s length principle may prove problematic for taxpayers. It may be helpful to develop a methodology for allocating revenues and costs between a parent company and its foreign permanent establishment.

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[1] Individual interpretation dated April 14, 2022 (ref. 0111-KDIB2-1.4010.29.2022.1.AR) and individual interpretation dated June 30, 2022 (ref. 0111-KDIB1-2.4010.162.2022.2.BD).

[2] Individual interpretation dated September 16, 2021. (Ref. 0111-KDIB1-2.4010.265.2021.2.AK) and individual interpretation dated May 12, 2023 (Ref. 0111-KDIB1-2.4010.114.2023.1.AW).