Poland clarifies treatment of dividends under transfer pricing rules

By Dr. Monika Laskowska, Center of Tax Analyses and Studies, Warsaw School of Economics

Poland’s Minister of Finance on 6 August issued guidance on whether a dividend payment among associated companies falls within the scope of the definition of a “controlled transaction” for transfer pricing purposes.

Uncertainty was raised with the introduction in Poland’s transfer pricing regulations of a new definition of controlled transactions. The new definition has effect from the beginning of 2019.

The transfer pricing definition is overly broad and is not well aligned with the common and internationally excepted understanding of controlled transactions.

For example, the allocation of profit to a permanent establishment is considered as a controlled transaction under the Poland transfer pricing rules, with all the ramifications of that classification.

The new definition raised more questions to transfer pricing practice than it answered, including the question of whether a mere dividend payment among associated companies should be considered a “controlled transaction” that triggers transfer pricing documentation requirements.

Clarification of “controlled transaction”

As a step toward clarification, the Ministry of Finance has now provided Parliament Interpellation 9368.

According to the legal definition, controlled transactions are “actions of economic nature identified on the basis of the real behavior of the parties, including the allocation of income to a permanent establishment which conditions are made or imposed as a result of association.”

The Ministry of Finance made the interpretation of the concept of “actions of economic nature.”

And so, the economic nature should be associated with earning activity (or activity with the purpose of earning a profit).

The Ministry of Finance differentiated the notion of economic activity with actions of an economic nature at the level of the organization and permanent execution.

In other words, economic activity is broader and includes activities of economic nature (with a profit-seeking purpose).

Thus, according to this clarification, dividend payments shouldn’t be considered a controlled transaction. Dividends are remuneration for capital and their allocation and payment are the results of economic activity, not activity of economic nature.

Since the payment of dividends is not covered by the controlled transaction definition, they do not trigger transfer pricing documentation requirements.

Other difficulties

Poland’s definition of “controlled transaction” creates other difficulties.

Poland is one of few countries that considers the allocation of profits to a permanent establishment a controlled transaction between associated companies for transfer pricing purposes.

Poland is one of few countries that considers the allocation of profits to a permanent establishment a controlled transaction between associated companies for transfer pricing purposes.

According to international standards, the allocation of profit between a head office and its permanent establishment does not create associated companies within the meaning of art. 9 OECD model convention. It is a commonly recognized standard that transfer pricing rules can be useful only for allocation purposes.

Additionally, the wording of “identified on the basis of real behavior of parties” narrows the scope of controlled transactions, creating further distortions.

Literal interpretation suggests that controlled transactions are only based on real behavior, which means that all other transactions (made or imposed by associated companies) are outside of scope of the transfer pricing rules. This is an obvious legislative error.