Poland: Documentation thresholds in the context of loan agreements and cash pooling

Last updated on December 12, 2016

by Łukasz Szczygieł

Managing liquidity of associated enterprises is a common practice in corporate groups. On the one hand, cash lending among associated enterprises ensures effective management of cash surplus. On the other hand, it helps to avoid unnecessary costs of external financing. These two goals are typically achieved by two types of agreements (transactions), namely loan or cash pooling. Due to the vague Polish legal regulations it remains uncertainty on taxpayers side if and when such transactions trigger the obligation to draw up transfer pricing documentation.

Transactional thresholds

The above problem remains unsolved because there is still no clear definition of the transaction value in the case of financial services. If the value of certain transactions exceeds certain thresholds, Polish entities (including those transacting with foreign associated enterprises) are obliged to draw up a transfer pricing documentation of those transactions.

There are two thresholds for transactions on services until the end of 2016:

EUR 30,000 per year; or
EUR 100,000 if the share capital exceeds EUR 500,000.

The transactional thresholds will be variable from 1 January 2017 and will depend on the amounts of the taxable person's revenues and expenses. The lower threshold will be total EUR 50,000.

Looking at the Polish tax authorities' and administrative courts' practice it can be concluded that the main problem is to determine if a cash pooling triggers the transfer pricing documentation obligation at all. Another issue is how to calculate the transaction value in the case of a loan and/or cash pooling.

Cash pooling in Polish law

Polish law has no comprehensive regulations for cash pooling. Therefore, it is unclear if cash pooling has to be considered as a ”transaction”. A ”transaction” usually means a purchase or sale of some goods or services. In the past, Polish authorities maintained that no services were supplied in a cash pooling arrangement, except with respect to the cash pool leader that is the entity which manages the bank accounts and clears accounts of the members. As a consequence, they assumed that the transfer pricing documentation has to be prepared only if the pool leader's earnings exceeded the above-mentioned thresholds.

However, the courts resolved in 2015 and 2016 that for transfer pricing purposes a cash pooling arrangement should be treated for documentation purposes like an ordinary loan. In effect, the transfer pricing documentation of cash pooling transactions has to be drawn up in the same situations as in the case of loan agreements. Furthermore, starting from 2017, Polish regulations will require transfer pricing documentation of every cash pooling agreement whatever its type (e.g. notional cash pooling, zero-balancing cash pooling, or near-zero-balancing cash pooling). Until 2016, the documentation was required only for the arrangements which involves physical transfer of cash among the participants. Both in the past and in the future the transfer pricing documentation needs to be drawn up when the transaction value exceeds the transactional threshold.

The transaction value of a loan and a cash pooling agreement

With respect to cash pooling and loan agreements it remains unclear when their value exceeds the thresholds that triggers the documentation requirement. Practice shows that taxpayers refers the threshold to the following different reference values:

interest payments; or
the principal loan amount (or the annual cash flow in a cash pooling arrangement); or
the principal loan amount plus interest due and any other charges payable to the lender for granting the loan.

Tax authorities often approve and accept the first of the above options.

The second and the third reference values do not really fit the generally accepted definition of a transaction. Furthermore, the principal amount transferred under a loan agreement or in a cash pooling arrangement is tax-neutral. Tax is chargeable only on interest or other payments received. Notwithstanding, the last of the above mentioned reference values is becoming more accepted by the tax authorities and the administrative courts have also indirectly approved it in the most recent judgements.

Documentation of the compliance with the arm’s length principle

Despite the reference values and thresholds, the Polish transfer pricing regulations follow the arm’s length principle. In case of incompliance with the international accepted principle, the Polish tax authority is entitled to assess the income according to the arm's length principle. Without a transfer pricing documentation taxpayer lose their chance to argue that the prices are from their view point in line with the arm’s length principle.

As the Polish tax authorities' interest in the financing transactions of multinational companies grows, it is recommended to prepare a documentation for loan and cash pooling transactions by keeping the latest changes of documentation regulations (e.g. beginning 2017) in mind.