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Taking up Capital Shares and the Obligation to Prepare Transfer Pricing Documentation

An individual tax ruling of the Head of the National Revenue Information confirms the Ministry’s position on the obligation to prepare tax documentation in situation when a taxpayer takes up shares issued upon creating a subsidiary in exchange for a cash contribution and when subsequent increases in the share capital of the company are performed.

Pursuant to the Tax Ordinance Act of 29 August 1997, on 29 December 2017 the Head of the NRI issued a document that also served the purpose of an individual tax ruling in which the Ministry’s position on the obligation to prepare tax documentation set out in Article 9a of the CIT Act was confirmed. The obligation arises when a taxpayer takes up shares issued upon creating a subsidiary in exchange for a cash contribution and when subsequent increases in the share capital of the company are performed. The document also confirmed the obligation to recognize the events in the simplified CIT/TP statement, mentioned in article 25, paragraph 5 of the CIT Act.

The authority maintains that, with the exception of two criteria (the threshold of revenue and costs, exceeding which results in the obligation to prepare tax documentation, and the value of a transaction /subparagraph 1d/), the provisions of Article 9, Paragraph 1, Subparagraph 1 of the CIT Act do not provide for any other conditions that would exempt taxpayers from the above-mentioned duties, e.g. limiting the application of the rules to the transactions that could give rise to a tax liability or change its amount in any way.

The NRI also sustained the claim that as the definition of the term ‘transaction’ is absent from the provisions of CIT Act, it is necessary to rely upon the semantics of the Polish language (dictionary definitions). The position was validated by the jurisprudence of administrative courts. For example, in its judgment of 17 December 2014, case file II FSK 2849/12, the Supreme Administrative Court ruled that by using the terms ‘transaction’ and ‘transactions’ the legislators had employed standard and informal language. Quoting the dictionary definition of the term, the Court indicated that the informal meaning of the word ‘transaction’ is essentially equivalent to entering into a sale or purchase agreement, concluding a commercial contract of acquisition or sale, an agreement or an arrangement reached after negotiations. The Court deemed that in the context of Article 9a, Paragraph 1, Subparagraph 2, the term ‘transaction’ is synonymous with ‘a contract’.

Consequently, and in line with the judgement of SAC dated 8 March 2016 (case file no. II FSK 4000/13), “(…) in light of Article 9a, Paragraph 1 of the CIT Act, the term transaction shall also encompass making a contribution in kind to a company in the form of shares, purchasing (acquiring) shares or taking up shares in an increased share capital in exchange for a cash contribution.(…)”.

Therefore, if a company has taken up shares issued upon the creation of a subsidiary in exchange for a cash contribution, as well as in case of subsequent increases in the share capital, it becomes liable to prepare tax documentation, as provided by Article 9a, Paragraph 1 of the Corporate Income Tax Act.

The Head of NRI indicated that pursuant to Article 27, Paragraph 5 of the CIT Act, taxpayers who are required to prepare tax documentation as a result of their revenues or costs within the meaning of the Accountancy Act, exceeding the equivalent of EUR10m in a tax year are also obliged to have their tax returns accompanied by a simplified statement of transactions with related entities or other events performed between them.

As a result, companies will have to recognize these transactions in the simplified CIT/TP statement, which includes taking up shares in other entities in part F.3, among transactions and other events occurring between related entities.

Hubert Hajdukiewicz
Tax Specialist

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