On March 8th, 2015, the Supreme Administrative Court passed a judgment (case II FSK 4000/13) on obligation to prepare transfer pricing documentation for transactions exempt from corporate income tax.
The commented judgment concerned the case, where a state-owned company being part of a capital group filed a motion for individual tax ruling regarding the obligation to prepare of transfer pricing documentation for the following transactions:
- In-kind contribution of shares to a capital company;
- Acquisition of shares in increased share capital in exchange for in-kind contribution;
- Acquisition of shares in exchange for a cash contribution;
- Acquisition of shares in increased share capital in exchange for cash contribution.
The company stated that the execution of abovementioned activities does not trigger the obligation to prepare transfer pricing documentation because these activities do not constitute transactions within the meaning of transfer pricing regulations but they are treated as non-taxable exchange of shares and the company benefits from exemption in corporate income tax.
In the tax ruling the Minister of Finance recognized the company’s position as incorrect and the company filed an appeal against this ruling. The Voivodship Administrative Court acknowledged the appeal, however, after the subsequent cassation appeal lodged by the Director of the Tax Chamber, the Supreme Administrative Court confirmed the position presented by the Minister of Finance in the individual ruling indicating the obligation to prepare transfer pricing documentation for abovementioned activities.
According to the judgment of the Supreme Administrative Court, the obligation to prepare the documentation arises regardless whether transaction results in a tax obligation or not. What is more, the court emphasized that the exemption specified in CIT Act does not allow the company to refrain from preparing of documentation. The Supreme Administrative Court indicated, that the form “transaction” shall be understood in accordance with language rules, as each contract resulting with transfer of money, goods and other values. Therefore, the mentioned capital transactions constitute transactions in the meaning of the transfer pricing regulations.
In practice, the discussed judgment means that the taxpayers are obliged to prepare transfer pricing documentation for transactions, which have no influence on the amount of their income. On the other hand it should be emphasized, that in tax neutral transactions there are no grounds to impose the 50% sanction tax rate (calculated from the difference between the income determined by the tax authorities and declared by the taxpayer) in case of not filing the tax documentation, which taxpayer was obliged to prepare. However, in such case the penalty for tax offence may be imposed under the Fiscal Penal Code regulations.