What rules apply to company transactions with related parties?

If you run a limited liability company, you will likely engage in various agreements with suppliers, customers and other business partners. Typically, the company’s board of directors is authorized to enter into such agreements on behalf of the company. However, if the agreement involves a related party, different rules apply. What is a related party? Related entities in the context of transfer pricing are companies that have specific relationships with each other, which can affect the terms and prices at which they conduct transactions. The most typical example is when one company controls another (e.g. by owning more than 50% of shares). Then, both companies are considered related.

As a general rule, transactions between related parties should be conducted in accordance with the arm’s-length principle. The Polish tax authorities may increase the taxable income or decrease tax loss if the pricing method applied between related parties differs from what would have been applied between unrelated parties in a similar business transaction.

Related parties are required to prepare transfer pricing documentation to demonstrate that prices were set on market terms. Here are the main obligations in this respect:

Transfer pricing documentation

Related parties are required to prepare transfer pricing documentation for each uniform transaction (separately for income and cost transactions) exceeding the threshold in an extended format covering not only the description of a transaction but also other events included in the accounting books if they were agreed to by related parties and influence the taxpayer’s taxable income or loss. In particular, companies must present the actual result achieved on a specific related-party transaction.

The thresholds applicable for transfer pricing documentation are set at:

PLN 10 million for transactions concerning tangible assets and financing.
PLN 2 million for services

Benchmarking analysis

A benchmarking analysis is a compulsory element of the documentation for each transaction described in the transfer pricing documentation. If conducting such analysis is impossible, a company is required to prepare an analysis justifying compliance of the related-party transaction with the conditions that would have been set by unrelated entities.

The purpose of a benchmarking analysis is to identify whether the tested related party transactions comply with the arm's length principle by identifying and using sources of comparable information about companies, prices and margins. Benchmarking studies involve identifying transactions that are comparable to the intercompany transactions in question. This includes looking at similar products or services, market conditions and business functions. By comparing these transactions, companies can determine a range of acceptable prices that align with the arm's length price.

Benchmark studies can be challenging due to several reasons:

The process of identifying comparable transactions or entities is usually complex and time-consuming.
The selection criteria needs to be carefully defined to ensure that the comparables are truly similar in terms of functions and risks.
There may be limited availability of reliable data on uncontrolled transactions that are comparable to the controlled transaction.

A benchmarking analysis provides a systematic approach to determining arm's length prices, supported by detailed economic analysis and market data. A reliable benchmarking analysis in invaluable tool in the context of transfer pricing.

What is TPR form?

Transfer pricing information (TPR form) is a detailed report submitted to tax authorities by related parties that engage in controlled transactions requiring transfer pricing documentation

In the transfer pricing information, the company must provide detailed data on concluded transactions, including the type and subject of the transaction and its annual value. Most importantly, the company should present the level of profitability associated with the transaction, referencing the results of the benchmarking analysis.

In the TPR form the company should also report four indicators that show its overall economic situation:

– operating margin,

– gross profit margin,

– return on assets,

– return on equity.

The ratios are calculated based on the approved financial statements.

Conclusion

Related-party transactions are a critical aspect of corporate governance and tax compliance. These transactions, which occur between a company and its affiliates, subsidiaries, or other closely associated entities, carry significant implications for transparency, integrity, and the overall financial health of the organization. Given regulatory requirements and the potential for conflicts of interest, it is imperative for companies to approach related-party transactions with meticulous attention and robust oversight.

Related-party transactions require diligent oversight and transparent disclosure to ensure that they are conducted in the best interest of the company and its shareholders. By understanding regulatory requirements, implementing robust identification and approval processes and adopting best practices, companies can enhance their governance standards, ensuring accurate financial reporting and maintaining investor confidence.