The Provincial Administrative Court in Bialystok issued a verdict, showing that there is an additional risk associated with unpaid services between related entities, which entrepreneurs might not necessarily expect.
It is common knowledge that an unpaid service results in income for the person who received it* and, consequently, the obligation to pay tax on the value of such a service arises for a given taxpayer at the standard tax rate.
Unpaid service most often arises between affiliated entities – this is quite logical, since in business, it is rare for anyone to give anything to a stranger for free. In practice, for example, companies belonging to one owner often use the resources of one of them or secure one another’s liabilities.
This, however, creates additional risk related to the obligation to create transfer pricing documentation (tax documentation).**
If the tax payer fails to present the tax documentation at the authority’s request in time and the authority decides that the transaction was not of market value then the 50% rate applies to the additional tax in such case***.
Even entrepreneurs who keep the transfer pricing documentation often verify which transactions it should cover only by checking the “invoiced” amount – they do not verify their actual value. As a result, unpaid services are not covered at all.
However, the January verdict of the Provincial Administrative Court in Olsztyn indicates that the market value of a given service should be taken into account. The court agreed with the tax authorities that if the only criterion was the amount agreed upon by affiliated entities, the obligation to prepare the documentation could easily be circumvented.
As a result, the following may happen:
– a company covered by the obligation to create transfer pricing documentation receives an unpaid service (e.g. from a parent company),
– the value of the service exceeds EUR 50,000.00,
– the company does not create transfer pricing documentation because it recognizes that the “transaction value” is PLN 0 since it does not pay any remuneration.
In this case, the consequence of acquiring an unpaid service will not only be the payment of income tax on its value according to the standard rate, but also the imposition of tax at the rate of 50% (unless the company presents the documentation).
The same will be the case when the service is not free of charge, but is “partly paid”, i.e. the price is lower than the market value (e.g. in the case of sales for PLN 1, but also simply with a significant price reduction).
This risk applies primarily to:
– services between companies belonging to the same group – which happens often in the case of medium-sized enterprises (often in the case of providing space or employees),
– services between family-related companies (e.g. a company belonging to one brother provides unpaid property to another brother who runs business).
* an unpaid service may be, for example, providing employees, lending (“free of charge rental”) premises or vehicles, royalty-free license for a trademark or software (however revenue is not necessarily generated in the latter cases – it depends on whether the license can be assigned a specific market value). An unpaid service may also involve the interest-free loan or guarantee/warranty (in this case, the value of the service is the market cost of such services – the market interest rate or guarantee commission) – the judgment in question concerned such a guarantee.
** This obligation arises in the case of transactions between related entities and is aimed at verifying that the prices applied in transactions between them are set on market terms.
As of 2017, this obligation applies only to companies that had a turnover of over EUR 2,000,000.00 in the previous year and transactions worth more than EUR 50,000.00.
When the authority requests submission of transfer pricing documentation, this should be done within 7 days. In practice, the documentation must be ready before such request.
*** The taxable amount is the amount the revenue was downgraded by (e.g. by the seller – through the price being too low), or inflated costs (by the buyer – through inflated price).
Author: Jan Marczyński, contact: 608,528,772, firstname.lastname@example.org