Changes in significant terms and conditions of transactions with related parties versus tax consequences

Emil Wilczyński, Tax Assistant
The current economic crisis has had a significant impact on some businesses both on the Polish and world market. Undoubtedly, the aggravation of this crisis will strongly affect the operations of international capital groups, which will consequently affect the transactions between related parties as there will be a problem with financial liquidity.

Capital groups will have to look for new financing alternatives which were not used before, e.g. cash pooling or inter-group loans. Entities will often try to change the method of settlements in mutual transactions, and this will entail specific tax consequences.

Will changes in transaction conditions in the context of e.g. margin reduction in mutual transactions between related parties bear the risk of penal and fiscal liability? Will such changes be justified and possible under the existing regulations?

The important thing is that, in view of Polish regulations, the prices used in related party transactions must be justified by the market. Margin changes in mutual transactions during the year, either due to a factor independent of the entity involved in the transaction or if one party fails to achieve the assumed profitability level, will still have to be reviewed for tax purposes. The current global economic crisis caused by the coronavirus is undoubtedly an unprecedented and exceptional situation. In view of the above, the pandemic may provide some justification for the changes in the allocation of profits in the chains of added values of capital groups. Undoubtedly, entities severely affected by the crisis will certainly take all measures to improve their situation, protecting themselves from collapse, which in many cases will be against pre-established transfer pricing policy assumptions and mutual settlement conditions in the current transactions. On the other hand, in less obvious situations, a change in the previous terms and conditions of transfer pricing policies will require solid justification. In view of the existing tax law, lowering the margin to a level not corresponding to market conditions may lead to an additional tax obligation and to the risk of penalties under the law. Therefore, special precautions must be taken in this respect, including the analysis of specific cases, the business models used and previous assumptions reached in the mutual relations.  


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