Dominika Tyczka

Tax adviser (Poland)
Associate Partner
Phone: +48 71 733 97 92

Groups of companies widely use loans among its members as a way of financing day-to-day operations or investments. 

In the context of transfer pricing laws a loan agreement prompts a lot of differences in interpretation. The biggest question used to be how to calculate the transaction value to see if it triggers the documentation obligation. Tax authorities often took the view unfavourable to the taxpayer by claiming that in calculating the documentation threshold for loans taxpayers should take into account not only the amount of interest paid/received in a tax year, but also the amount of the principal

In his new general advance tax ruling of 28 March 2018 the Minister of Finance focused on another aspect and clarified the taxpayers' concerns by stating clearly that the transfer pricing documentation of a loan has to be prepared and updated throughout the loan agreement term. The Minister's ruling damps the ardour of taxpayers who hoped for a favourable approach of the tax authorities in view of recent advance tax rulings. They have created a viewpoint in which transfer pricing documentation of loans should be prepared only when the loan agreement is signed.

Documentation obligations of loans – the unknown

Pursuant to the regulations applicable since 1 January 2017, the TP documentation has to be prepared for transactions with associated enterprises made in a tax year and other dealings disclosed in the books of account in a tax year if they have a material impact on the amount of income or loss of the taxpayer. Transactions or dealings materially affecting the taxpayer's income (loss) are transactions or other dealings of one type whose combined value in a tax year exceeds certain thresholds which depend on the taxpayer's revenues in the previous year. 

As the above conditions are worded rather generally, especially the imprecise phrase "transactions made", taxpayers may find them difficult to interpret. Identification of the date of transaction is decisive for the assessment of the taxpayer's documentation obligations. To this end it is necessary to determine if a loan is a one-off transaction made at the time of signing the loan agreement or if it covers the period from the signing until the end of the loan term. The taxpayer should also look into the impact of the cash flow from the loan agreement on the amount of his income/loss.

Further doubts are caused by the fact that transfer pricing documentation of transactions or dealings lasting more than a tax year (that is, most financial transactions) should be regularly revised and updated, at least once every tax year.

Unfavourable standpoint of the Ministry of Finance as of 28/03/2018

In his general advance tax ruling (no. DCT.8201.6.2018) the Minister of Finance has stated clearly that financial transactions, i.e. loans and borrowings, guarantees, sureties being transactions continued in consecutive tax years should be regularly revised and updated, at least once every tax year. 

The Minister has explained that the documentation should be updated to present the actual history of the transaction including modifications, if any, during the transaction's lifetime. The above-mentioned advance ruling explains that if any significant transaction parameters change in the course of the transaction (e.g. the repayment deadline, interest rate, another tranche), the taxpayer must update the TP documentation to include the changes. 

Doubts as to the obligation to update the documentation arise when the transaction proceeds as intended and no changes have occurred. The Minister claims that the TP documentation must be updated even if there have been no significant events and only the financial data concerning the transaction and the taxpayer have changed. This means that taxpayers must update the TP documentation throughout the loan agreement term. 

That principle applies to transactions made in the tax year commencing after 31 December 2016, as well as transactions commenced and not completed before 1 January 2017.

Previous favourable standpoint of the Head of the National Tax Information Service

In his general ruling the Minister of Finance does not share the view expressed a number of times in the taxpayer-friendly individual advance tax rulings issued by the Head of the National Tax Information Service. The authority used to confirm that a loan granted to or received from an associated enterprise should be documented only when it was granted, i.e. when the loan agreement was signed. Following that argumentation, no transfer pricing documentation had to be prepared in subsequent years, i.e. over the period when the loan was repaid and the interest payable to the lender was calculated and paid. 

The rulings of the Head of the National Tax Information Service seemed to create a consistent and favourable line of interpretation. The breakthrough came on 12 October 2017 in the form of an individual advance tax ruling (0111-KDIB1-3.4010.337.2017.1.APO) saying that renegotiation of agreement terms and conditions and extension of the loan repayment deadline did not trigger the documentation obligation, save for the year of signing of the loan agreement. Subsequent advance rulings have confirmed that approach:

  • 3 November 2017 (0111-KDIB1-3.4010.385.2017.1.IZ), 
  • 14 February 2018 (0115-KDIT2-3.4010.380.2017.1.JG), 
  • 27 March 2018 (0111-KDIB1-1.4010.194.2017.1.BS), 
  • 29 March 2018 (0111-KDIB2-1.4510.45.2018.1.JP). 

Document or not to document?

The doubts which taxpayers expressed in their applications for advance tax rulings resulted from unclear laws. The interpretation of the documentation obligation with respect to loan agreements made in the past shows how inconsistent the authorities are. The Head of the National Tax Information Service used to take a taxpayer-friendly view but ultimately the Ministry of Finance has issued a disadvantageous general ruling. Thus, the Ministry has finally cleared the doubts and explained that the transfer pricing documentation has to be revised and updated for the entire loan term regardless of whether significant transaction parameters change or not

In view of this new general ruling we recommend caution and verification of your documentation obligations with respect to financial transactions. If you are interested in discussing the TP documentation issues in more detail, please contact the Rödl & Partner experts.