Transfer pricing documentation is prepared for transactions between entities that are related either through ownership or personal ties. The threshold for capital affiliations, which leads to recognizing entities as related under transfer pricing regulations, is 25%. This applies to both direct and indirect affiliations. This article will discuss the affiliations that lead to the recognition of entities as related under transfer pricing regulations.
Capital Affiliations
The list of capital affiliations includes the ownership of at least 25% of:
Shares in the capital, or
Voting rights in controlling, governing, or managing bodies, or
Shares or rights to participate in profits, losses, or assets, including expectations, such as participation units and investment certificates.
It is important to note that the legislator allows for both direct and indirect ownership of shares and rights. Direct affiliations refer to relationships between two entities, while indirect ownership occurs through at least one other entity, meaning at least three entities are involved.
A key element in determining transfer pricing obligations is identifying whether indirectly related entities exceed the 25% significance threshold. The Corporate Income Tax Act outlines three methods for determining the level of indirect ownership, depending on the direct relationships and the number of interconnected entities.
Scenario 1 – All ownership or rights connecting entities are equal Company A and Company C are indirectly related at 50%.
Scenario 2 – Ownership or rights connecting entities are different Company A and Company C are indirectly related at 40% (the smallest ownership percentage between the entities is considered).
Scenario 3 – Entities are connected by more than one indirect ownership or right Company A and Company D are indirectly related at 40% (the lower of the indirect ownerships are summed, so the indirect ownership of Company A in Company D via Company B, which is 30%, and the indirect ownership of Company A in Company D via Company C, which is 10%, are combined).
Personal Affiliations
Personal affiliations refer to the actual ability of an individual to influence the key economic decisions of an entity, as well as being in a marriage or having kinship or affinity up to the second degree.
Persons who have the ability to influence decision-making include, for example, company board members, proxies, as well as employees such as CFOs or strategic directors. Therefore, if the same individuals sit on the boards of Companies A and B, or if both companies have the same proxies, or if key decisions in both companies are influenced by the same people, then Companies A and B are considered to be personally related.
Affiliations arising from marriage, kinship, or affinity are considered in a similar manner. If the person influencing key decisions in Company A is a spouse, relative, or in-law of a person holding an equivalent position in Company B, then Companies A and B are personally related.
Other Affiliations
It is also important to note that affiliations are not limited to capital companies. Related entities also include:
A non-legal entity and its partner,
A limited partnership or limited joint-stock partnership and its general partner,
A general partnership and its partner,
A taxpayer and their foreign establishment or a company within a tax capital group and its foreign establishment.
Additionally, if entities engage in relationships that are not established or maintained for justified economic reasons, including those designed to manipulate ownership structures or create circular ownership structures, these entities are also considered to be related.
Consequences of Affiliations
If affiliations between entities are identified, any transactions between them must comply with the arm’s length principle. Once the significance thresholds are exceeded—PLN 10 million for financial and commodity transactions and PLN 2 million for service and other transactions—transfer pricing documentation must be prepared (unless exemptions from this obligation are applicable).
If assistance is needed in identifying affiliations, please feel free to contact us.
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