Business restructuring is an inherent element of capital group operations, and, because of their significance and impact on the taxation level of affiliated companies, they focus a great deal of attention from tax authorities. In practice, it is important to identify the transaction subject to transfer pricing requirements among restructuring transactions.
Until 31 December 2018, the definition of ‘restructuring’ including the transfer of economically-relevant functions, assets or risks between affiliated entities.
Based on the new provisions applicable as of 1 January 2019, the concept of restructuring has been defined in the regulation of the Minister of Finance of 21 December 2018 on transfer pricing for corporate income tax purposes.
‘Restructuring’ means reorganisation that:
- involves a significant change in the commercial or financial relations, including the termination of valid contracts or amending their material terms, and
- is associated with the transfer of functions, assets or risk categories between affiliated entities, if this leads to a change in the expected annual-average earnings before deducting interest and taxes (EBIT) of this taxpayer over a three-year period after the transfer by at least 20% of the expected annual-average EBIT over the same period, if the transfer would not take place.
It should be emphasized that restructuring conditions must comply with the arm’s length principle, and identifying reorganisation that satisfies the restructuring definition referred to above is associated with the obligation to develop transfer pricing documentation and conduct benchmark studies.
If a Group is planning, is in the process of or has completed restructuring, we offer:
- comprehensive support in restructuring processes;
- verifying whether the transfer of given functions, assets and/or risks constitutes restructuring within the meaning of transfer pricing regulations, and whether it followed the arm’s length principle;
- determining a market level of the remuneration for transferring given functions (assets/risks) within the restructuring process (so-called exit fee) (verifying remuneration legitimacy and amount);
- assessing the marketability of the transaction with affiliated entities in the pre- and post-restructuring model;
- developing or verifying client’s tax documentation related to restructuring in terms of its compliance with applicable regulations.
