Transfer pricing adjustments in Poland under CIT rules – key principles for companies

Transfer pricing adjustments in Poland are particularly important for companies operating within capital groups, especially where settlements between related parties are calculated during the year on the basis of planned, budgeted or historical data. After the end of the tax year, it often turns out that actual costs, revenues or profitability levels differ from the assumptions used to calculate remuneration.

In such cases, a practical question arises: should an annual year-end settlement adjustment be treated as a standard correction of revenues or costs, or does it constitute a transfer pricing adjustment within the meaning of Article 11e of the Polish Corporate Income Tax Act?

Recent Polish tax ruling practice confirms that annual adjustments made after the end of the year as part of transfer pricing verification, often referred to as outcome testing, may qualify as transfer pricing adjustments for Corporate Income Tax (CIT) purposes in Poland. However, the key point is that the adjustment must be aimed at aligning settlements with the arm’s length principle and must result from the transfer pricing mechanism itself, rather than from a separate service, an error or a change in the scope of services.

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What are transfer pricing adjustments under Polish CIT rules?

A transfer pricing adjustment within the meaning of Article 11e of the Polish Corporate Income Tax Act involves changing the amount of revenues or tax-deductible costs in order to bring settlements between related parties into line with market conditions.

However, not every adjustment of settlements between related parties will qualify as a transfer pricing adjustment. The classification depends primarily on the purpose and economic nature of the adjustment. It is important to determine whether the adjustment:

• relates to a controlled transaction,
• refers to the terms agreed between related parties,
• serves to maintain the arm’s length principle,
• results from subsequent knowledge of actual costs, revenues or other material circumstances,
• forms part of the adopted transfer pricing calculation method.

In practice, this often applies to models in which the remuneration of a related party is determined during the year on the basis of planned costs, followed by a year-end verification of the actual profitability level.

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Annual year-end adjustments and outcome testing

In many capital groups, transfer prices are determined in two stages. The first stage involves setting the price or remuneration during the year, usually on the basis of planned, budgeted or historical data. The second stage takes place after the end of the year and consists of verifying whether the taxpayer’s actual profitability ratio falls within the arm’s length range resulting from a benchmarking analysis.

This final verification is commonly referred to as outcome testing. If, after the end of the year, the actual margin differs from the market level, the taxpayer may make an adjustment to the settlements with the related party, provided that the statutory conditions applicable to transfer pricing adjustments are met.

For example, a company providing support services to group entities may calculate its remuneration during the year as planned costs plus an arm’s length mark-up. After the year-end closing, the actual costs recorded in accounting and controlling systems are known. If the actual mark-up on operating costs does not fall within the adopted market range, the company makes an annual adjustment to bring the result into line with the arm’s length principle.

In such a model, the adjustment does not necessarily have to refer to specific invoices issued in individual months. It may relate to the entire tax year if the profitability review is also performed on an aggregated annual basis.

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When can an annual adjustment qualify as a transfer pricing adjustment?

An annual settlement adjustment may be recognised as a transfer pricing adjustment if it meets the conditions set out in the Polish Corporate Income Tax Act. In practice, four areas are particularly important.

1. Transaction terms during the year should be arm’s length

The taxpayer should be able to demonstrate that the terms applied in controlled transactions during the tax year were terms that would have been agreed by unrelated parties. This means that an adjustment under Article 11e is not intended to correct settlements that were non-arm’s length from the outset.

Its purpose is to adjust settlements that were originally determined in a rational manner and in accordance with the arm’s length principle, but which require adjustment after the end of the period due to actual financial data or a change in material circumstances.

In practice, it is therefore important to have an up-to-date transfer pricing policy, benchmarking analysis and documents confirming the remuneration calculation method. In this area, proper preparation and updating of transfer pricing documentation in Poland is particularly important.

2. The adjustment should result from actual costs, revenues or a change in material circumstances

Article 11e of the Polish Corporate Income Tax Act provides that an adjustment may be made if there has been a change in material circumstances affecting the terms agreed during the year, or if the actual costs incurred or revenues earned, which constitute the basis for calculating the transfer price, are known.

In models based on planned costs, the second of these conditions is particularly relevant. If the taxpayer does not have final cost data during the year and calculates remuneration on the basis of historical or budgeted data, it may become necessary after the year-end to recalculate settlements on the basis of actual costs.

This does not automatically mean that an error has occurred. It is a natural element of a settlement model in which final profitability can only be assessed after the financial year has been closed and complete financial data is available.

3. The adjustment should align profitability with the market level

Transfer pricing adjustments should not be equated with any financial equalisation between group companies. Their purpose is to bring the transfer price, financial result or profitability ratio to a level that would be accepted between unrelated parties.

In practice, this means that the adjustment must be linked to the appropriate transfer pricing verification method. In the case of support services, the transactional net margin method is often applied, with a profit mark-up analysed against a cost base. If, after the end of the year, the actual mark-up does not fall within the adopted arm’s length range, the adjustment may serve to align the result with the level indicated by the benchmarking analysis.

It is important that the adjustment mechanism is consistent with the adopted transfer pricing policy and the arrangements between the parties. An adjustment made solely to arbitrarily shift income between entities, without support from a functional analysis and comparable data, may be challenged by the Polish tax authorities.

4. The adjustment should not document a separate service

Polish tax ruling practice also places significant emphasis on the fact that an annual profitability adjustment should not be connected with any additional service provided by either party. It is not payment for a new service, nor does it modify the scope of services performed during the year.

The adjustment concerns the economic equalisation of the result for a specific period. It does not refer to a particular invoice, month or invoice item. If profitability is verified on an aggregate annual basis, the adjustment may also be annual and aggregate in nature.

This distinction is important in practice because it helps differentiate a transfer pricing adjustment from a standard price correction for a specific service or supply.

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Conditions under Article 11e of the Polish CIT Act – what should companies consider?

From the taxpayer’s perspective, it is crucial not only to determine whether a given adjustment qualifies as a transfer pricing adjustment, but also whether it meets the conditions required for tax settlement purposes.

Under Article 11e of the Polish Corporate Income Tax Act, a taxpayer may make a transfer pricing adjustment by changing the amount of revenues or tax-deductible costs, provided that the conditions applicable to the specific type of adjustment are met. The scope of these conditions depends on the direction of the adjustment and on whether the adjustment affects revenues or tax-deductible costs.

In practice, companies should verify in particular whether:

• the controlled transactions carried out during the tax year were based on arm’s length terms, i.e. terms that would have been agreed by unrelated parties;
• there was a change in material circumstances affecting the terms agreed during the year, or the actual costs incurred or revenues earned, which form the basis for calculating the transfer price, are known;
• the adjustment is necessary to ensure that settlements are consistent with the terms that would have been agreed by unrelated parties;
• the taxpayer holds a statement from the related party or an accounting document confirming that the related party made a transfer pricing adjustment in the same amount, if this condition applies to the given type of adjustment;
• there is a legal basis for the exchange of tax information with the country in which the related party has its place of residence, registered office or management, if this condition applies to the given type of adjustment.

This means that the required conditions will not always be identical in every case. Adjustments increasing revenues or decreasing costs should be assessed differently from adjustments decreasing revenues or increasing tax-deductible costs. Therefore, before recognising an adjustment for CIT purposes in Poland, it is necessary to determine its direction and its impact on the tax result.

In more complex group models, the support of tax advisors may be helpful, especially where the adjustment concerns cross-border transactions, several related parties or different service streams. getsix® supports businesses in the field of tax advisory in Poland, including the analysis of CIT consequences for intra-group settlements.

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How should annual transfer pricing adjustments be documented?

The safe settlement of a transfer pricing adjustment requires appropriate documentation. Issuing an accounting note or another settlement document alone is not sufficient if the taxpayer cannot demonstrate the economic rationale for the adjustment.

In practice, companies should ensure that the documentation includes:

• a description of the settlement model applied during the year,
• an indication of whether remuneration was calculated on the basis of planned, budgeted or historical costs,
• an analysis of actual costs and revenues after the year-end,
• a calculation of the actual profitability level,
• a comparison of the result with the arm’s length range resulting from the benchmarking analysis,
• justification for the need to make the adjustment,
• a statement from the related party or an accounting document confirming that the related party made a transfer pricing adjustment in the same amount, if this condition applies to the given type of adjustment,
• consistency between the recognition of the adjustment, transfer pricing documentation and Transfer Pricing Reporting (TPR) information.

It is also good practice to describe the adjustment mechanism in the transfer pricing policy or in the agreement between related parties. If the parties assume from the outset that profitability will be verified after the end of the year on the basis of actual data, it is easier to demonstrate that the adjustment forms part of the agreed settlement model rather than being an ad hoc action.

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Does the adjustment have to refer to specific invoices?

In practice, companies often wonder whether an annual transfer pricing adjustment should be allocated to specific invoices from a given year. In the case of profitability adjustments made after the end of the year, this is not always the right approach.

If the taxpayer does not analyse margins at the level of individual months or invoices, but verifies profitability on an aggregated annual basis, assigning the adjustment to specific invoices may be purely technical. It would not reflect the actual economics of the transaction if the adjustment results from the annual level of costs and revenues.

Therefore, in models based on annual outcome testing, the adjustment may relate to the entire tax year. However, it is important that this approach is consistent with the adopted transfer pricing methodology and properly documented.

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Transfer pricing adjustment vs current correction of revenues or costs

One of the most important consequences of classifying an adjustment as a transfer pricing adjustment is the way it is recognised for tax purposes. Adjustments under Article 11e of the Polish Corporate Income Tax Act are subject to specific rules and should not automatically be treated as ordinary current corrections of revenues or costs.

As a general rule, Polish CIT regulations provide separate rules for correcting revenues and costs where the correction does not result from an accounting error or obvious mistake. However, the legislator has excluded the application of these general rules to transfer pricing adjustments referred to in Article 11e.

For the taxpayer, this means that each adjustment must be analysed to determine whether it meets the conditions for a transfer pricing adjustment. Incorrect classification may affect the timing of recognition, the amount of taxable income and the consistency of data disclosed in transfer pricing documentation and TPR information.

In case of uncertainty regarding the CIT treatment of an adjustment, it is worth analysing the adjustment together with the transfer pricing documentation, accounting books and annual tax return. Contact us.

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Key risks for businesses

Annual transfer pricing adjustments are a common tool in capital groups, but their application requires caution. The most frequent risks concern not the possibility of making the adjustment itself, but the way it is justified and documented.

Typical risk areas include:

• no clear adjustment mechanism in the transfer pricing policy,
• outdated benchmarking analysis,
• no confirmation that the related party has made the corresponding adjustment,
• mechanical equalisation of the result without a functional analysis,
• attempting to classify a settlement as a transfer pricing adjustment when it actually concerns a separate service,
• inconsistency between accounting records, transfer pricing documentation, CIT settlement and TPR information,
• no explanation as to why the adjustment relates to the whole year rather than to specific invoices.

Particular caution should be exercised in the case of adjustments that reduce taxable income. Such adjustments may be more sensitive from the perspective of the Polish tax authorities because they affect the tax base.

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What does the tax ruling of the Director of the National Revenue Information mean in practice?

An individual tax ruling issued by the Director of the National Revenue Information (KIS) confirms an approach favourable to taxpayers: annual adjustments made after the end of the year as part of outcome testing may be recognised as transfer pricing adjustments within the meaning of Article 11e of the Polish Corporate Income Tax Act.

In the analysed case, the following factors were important:

• remuneration during the year was calculated on the basis of planned costs,
• actual costs and revenues were known after the end of the year,
• the company verified profitability on an aggregate annual basis,
• the purpose of the adjustment was to bring the margin to the market level,
• the adjustment did not result from a change in the scope of services,
• the adjustment did not document an additional service,
• the adjustment did not refer to specific invoices or months,
• the adopted mechanism formed part of the transfer pricing methodology.

In practice, the ruling strengthens the position of taxpayers applying settlement models based on planned data and making a final equalisation after the year-end closing. However, this does not mean that every annual adjustment automatically meets the conditions set out in Article 11e. Each case requires an analysis of the specific settlement model, documentation and direction of the adjustment.

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Legal and interpretative basis

• Article 11e of the Act of 15 February 1992 on Corporate Income Tax;
• Tax explanations of the Ministry of Finance of 31 March 2021 No. 2: Transfer pricing adjustment within the meaning of Article 11e of the CIT Act;
• Individual tax ruling of the Director of the National Revenue Information concerning the classification of annual adjustments made after the end of the year as a result of transfer pricing verification.

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