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General Ruling on the Preparation of Tax Documentation by foreign Permanent Establishments

3 April 2018 saw the publication of a general ruling on transfer pricing dated 26 March 2018. The publication marked one of the latest steps in a series of rulings pertaining to regulations effective as of 1 January 2017.

The ruling in question seems to address the problems that the taxpayers have voiced with reference to determining their obligations in the event of a foreign entity conducting business activities in the form of a permanent establishment on the territory of a country.

The new regulations serve to implement the OECD conclusions into the Polish legal framework, pursuant to which only material transactions should be made subject to the obligation of preparing relevant documentation. As a result, the legislators have decided to introduce a mechanism that allows for increasing the materiality threshold of a transaction that is dependent on the revenue that a taxpayer generated in the preceding year. Understandably, taxpayers were uncertain about having a permanent establishment in Poland, i.e. conducting activities that have not been legally spun off from a foreign company. It is also worth noting that pursuant to Polish accounting principles, a permanent establishment is not required to prepare a financial statement. Consequently, the obligation to prepare documentation had to be determined on the basis of the financial statement made by the head office, i.e. a foreign company.

The grammatical interpretation of the regulation runs counter to the purpose of implementing them. In their ruling the Ministry of Finance clarified that the obligation to prepare documentation is deter-mined solely on the level of a permanent establishment by verifying the revenue and costs generated on the territory of the country. While The Ministry’s standpoint is generally seen as welcome news, the date of its publication has come as a surprise for many. Although the statements posted on the Ministry’s website suggested that the deadline for preparing documentation would be extended, and the validating ordinance was published on 15 March 2018, many taxpayers might have already begun making preparations for drawing up the relevant documentation based on the significantly more restrictive grammatical interpretation.

Summing up, based on the general ruling of 26 March 2018, a permanent establishment of a foreign company conducting business activities on the territory of the country will be required to prepare transfer pricing documentation in the event that it has independently reached the level of revenue and costs in excess of EUR2m. If the level is not reached, the permanent establishment will not be required to prepare transfer pricing documentation.

Ryszard Grzelczak
Tax adviser no. 12670

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