Characteristics of relations
With regards to the obligation to prepare tax documentation, a key issue remains to define the notion of a related entity. The definition of related entities is contained in Article 11 paragraph 1, 4 – 6 of the Income Tax Act from legal persons and Article 25 paragraph 1, 4 6 of the Income Tax Act from individuals. Related entity, within the meaning of the aforementioned provisions, can be both a domestic entity or a foreign entity.
In terms of the relationship between a domestic and a foreign entity, the entities are considered related when they meet one of the following criteria:
- domestic entity participates directly or indirectly in the management of the enterprise situated abroad or in its control or has a share in the capital of this enterprise, or
- foreign entity participates directly or indirectly in the management of the domestic entity, or in its control or has a share in the capital of the domestic entity, or
- the same natural or legal persons simultaneously participate directly or indirectly in the management of a domestic entity and a foreign entity or in its control or participate in the capital of those entities.
In terms of the relationship between domestic entities, the entities are considered related when they meet one of the following criteria:
- domestic entity participates directly or indirectly in the management of other domestic entity, or in its control or has a share in the capital of another domestic entity, or
- the same natural or legal persons simultaneously participate directly or indirectly in the management of domestic entities or in their control or have a share in the capital of those entities.
Direct or indirect participation in the management or control of the entity should be considered as exerting real influence on strategic decision-making and control of the company, not only to fulfill formal functions, e.g. in the management or supervisory board of another entity. The provision does not limit the scope of this concept only to the powers of a formal nature.
However, having a share in the capital of another entity means a situation in which the entity has, directly or indirectly, share in the capital of another entity which is no less than 5%. In turn, while defining the size of indirect participation that the entity has in the capital of another entity, the principle which is adopted states that if one entity holds a given share in the capital of the other entity, and the other entity has the same share in still another entity, then the first entity has an indirect share in the capital of another entity in the same amount. If the values are different, the lower value is considered as the amount of indirect participation.
This principle also applies to the relations of the family nature or arising out of employment or assets between domestic entities or persons holding management, control or supervision functions in these entities or in the situation when any person combines the functions of management or control or supervision in those entities. The family relations term is understood as a marriage, kinship or affinity to the second degree.
A special documentation duty is associated with making transactions with an entity resident, with its registered office or management in the territory or in the country applying harmful tax competition. With this type of transaction, documentation obligation exists regardless of the existence of the above mentioned relations. The list of countries and territories in which harmful tax competition is applied can be found in the Regulations of the Minister of Finance dated 23 April 2015 on determining the countries and territories applying harmful tax competition in the field of income tax from legal entities and individuals.