Related parties under accounting regulations
Under accounting regulations, related parties are primarily connected with capital, organisational and control relationships between entities. Polish accounting regulations use concepts such as parent entity, subsidiary, jointly controlled entity, associate, subordinated entity and related entities.
In accounting practice, the key issue is whether an entity controls, jointly controls or exercises significant influence over another entity. This matters for the presentation of data in financial statements, notes, consolidation, consolidation eliminations, balance reconciliations and group reporting.
From an accounting perspective, it is important to properly identify settlements with related entities, control balances, confirm mutual receivables and liabilities and maintain consistent recognition of transactions in the books of individual companies.
Related parties under the CIT Act
For CIT purposes, the definition of related parties is broader and is particularly important for transfer pricing, tax documentation, TPR reporting and selected obligations related to withholding tax (WHT).
For CIT purposes, related parties may include entities where one has significant influence over another, entities under the influence of the same entity, entities linked by personal or family relationships, as well as partnerships and their partners.
Significant influence for CIT purposes may result, among other things, from a share in capital, voting rights, the right to participate in profit or the actual ability of an individual to influence key business decisions of an entity.
Therefore, in accounting services it is not enough to look only at the capital group structure understood for accounting purposes. It is also necessary to assess whether a relationship may be relevant from the CIT perspective, especially for transfer pricing, TPR, related-party settlements and withholding tax.
Our approach to intercompany settlements
Intercompany settlements should be consistent, documented and explainable. This applies both to simple sales invoices and to more complex transactions such as management fees, intragroup services, cost recharges, royalties, intragroup financing, loans, cash pooling, dividends and shared cost allocations.
In ongoing accounting services, we pay attention to whether the transaction is properly described, whether it relates to the correct period, whether it is based on an agreement or another arrangement, whether it has been correctly recognised on both sides and whether it creates additional tax obligations.
If we service two or more related entities, we can identify inconsistencies faster. For example, if one company recognises revenue from a service provided to a related party and the other should recognise the corresponding cost, we check whether the data is consistent. For loans, we verify whether principal, interest, schedules, accruals and settlements are consistent for both lender and borrower.
As a result, accounting is not merely a technical record of documents but a real control tool for group settlements.
Transfer pricing and transfer pricing documentation
Transactions between related parties should be carried out on arm’s length terms. This means that the price, margin, interest rate, remuneration or other transaction terms should correspond to what unrelated entities would agree between themselves.
In practice, particular attention is required for areas such as:
- intragroup services,
- loans and interest,
- royalties,
- recharges and cost allocations,
- goods transactions,
- settlements with headquarters or holding entities,
- transactions with entities from jurisdictions applying harmful tax competition,
- services whose actual performance must be documented.
For transfer pricing documentation, we cooperate with tax advisers. On our side, we can prepare accounting data, transaction summaries, balances, settlements, data for TPR reporting, information on flows and source documents.
A tax adviser may conduct an analysis of documentation obligations, prepare local transfer pricing documentation, a benchmarking analysis, a compliance analysis or recommendations regarding the arm’s length nature of the transaction.
This combination of accounting and tax advisory support is particularly important because transfer pricing documentation should not be detached from the books. Data presented in documentation, TPR, financial statements, JPK files and accounting books should be consistent.
Withholding tax (WHT)
Withholding tax, or WHT, may arise for selected payments such as dividends, interest, royalties and selected intangible services, for example advisory, accounting, legal, advertising, management or similar services.
For each payment potentially subject to WHT, it is necessary to determine whether tax should be withheld, whether an exemption can be applied, whether a reduced rate under a double tax treaty is available and what documents are required.
In order not to withhold tax or to apply a lower rate, the following are usually required, among other things:
- a valid tax residency certificate of the payment recipient,
- verification whether the recipient is the beneficial owner of the payment,
- analysis of the relevant double tax treaty,
- checking statutory exemption conditions, if they are to apply,
- due diligence by the payer,
- documents confirming the nature of the payment and actual performance of the service,
- verification of payment thresholds and the risk of the pay & refund mechanism.
At TOP Outsourcing, we help identify payments that may be subject to WHT, organise documentation, monitor tax residency certificates and indicate transactions requiring tax consultation.
For the assessment of the right to an exemption, application of a preferential rate, exemption opinions, WHT statements and refund applications, we cooperate with tax advisers.
The pay & refund mechanism
The pay & refund mechanism means that in certain cases withholding tax should first be collected at the standard rate, and only afterwards may the taxpayer apply for a refund of overpaid tax.
In practice, this topic is particularly important for larger passive payments, such as dividends, interest and royalties. Once the statutory payment threshold for one taxpayer is exceeded, additional conditions appear for applying an exemption or reduced rate without collecting tax.
Therefore, for such payments it is important to prepare documents in advance, verify the recipient’s status, analyse the beneficial owner condition, obtain a tax residency certificate, assess due diligence and decide whether it is possible to apply a preference at source, including management board statements confirming possession of complete documentation allowing an exemption or preferential rate, or whether it is safer to collect tax and let the taxpayer apply for a refund later.
In the case of a refund of overpaid withholding tax, we cooperate with tax advisers who may prepare or support the application process, tax arguments and documentation required by the authority.
How do we help clients?
At TOP Outsourcing, we support companies in ongoing control of related-party settlements, identification of transactions relevant for transfer pricing and recognition of payments that may be subject to withholding tax.
In particular, we help in areas such as:
- posting and reconciling intercompany transactions,
- controlling mutual invoices between related parties,
- reconciling loans, interest and intragroup settlements,
- preparing accounting data for transfer pricing documentation,
- preparing summaries for TPR reporting and tax analyses,
- identifying payments potentially subject to WHT,
- controlling tax residency certificates,
- supporting the completion of documents for tax advisers,
- providing source documents needed for tax analyses,
- cooperating with advisers on transfer pricing documentation and WHT refunds.
As a result, the client receives accounting services that not only post group transactions but also help identify tax and organisational risks on an ongoing basis.
Who is this service for?
Our support is aimed primarily at companies that carry out transactions with related parties, operate in a capital group, have intragroup financing, make dividend, interest, royalty or intangible service payments, or prepare data for transfer pricing documentation.
The service is particularly useful for companies that:
- have regular intercompany settlements,
- issue or receive invoices from related parties,
- use intragroup loans,
- settle interest, licences, management fees or cost recharges,
- need to prepare data for transfer pricing documentation,
- file TPR reports,
- make payments potentially subject to WHT,
- need to organise balances and settlements with the group.
Related-party settlements require consistency and good data organisation. It is therefore important for accounting to identify tax-relevant transactions from the beginning, control settlement consistency and support the client in completing documentation.
FAQ – related parties, transfer pricing and WHT
Frequently asked questions about related-party settlements, intercompany transactions, transfer pricing, TPR reporting, withholding tax, tax residency certificates and the pay & refund mechanism.
What are related parties?
Related parties are entities between which there are specific capital, personal, family, organisational relationships or actual influence over business decisions. The scope of the definition depends on whether the matter is analysed under accounting regulations or under the CIT Act.
How do related parties differ under accounting regulations and CIT?
For accounting purposes, related parties are primarily connected with a capital group, parent entities, subsidiaries, jointly controlled entities and associates. Under CIT, the definition is broader and is relevant, among other things, for transfer pricing and selected tax obligations. It includes capital, personal and family relationships, actual influence and specific relationships between companies and shareholders.
Does every related-party transaction require transfer pricing documentation?
Not every transaction with a related party automatically requires local transfer pricing documentation. The obligation depends, among other things, on the type and value of the transaction, the counterparty status, available exemptions and other statutory conditions. Even when formal documentation is not required, related-party transactions should be arm’s length and possible to justify.
Does TOP Outsourcing prepare transfer pricing documentation?
For transfer pricing documentation, we cooperate with tax advisers. On our side, we prepare accounting data, transaction summaries, balances, settlements, data for TPR reporting and information needed for the analysis. A tax adviser may prepare local transfer pricing documentation, a benchmarking analysis, a compliance analysis and tax recommendations.
How do you control settlements between companies in one group?
If we service more than one entity from the group, we look at transactions on both sides. We check whether an invoice in one company corresponds to a cost or settlement in the other, whether loans, interest, balances and payments are consistent, and whether discrepancies arise that could make monthly closing, year-end closing or group reporting more difficult.
What is withholding tax (WHT)?
Withholding tax, or WHT, is tax collected by the payer on selected payments. It may apply, among other things, to dividends, interest, royalties and selected intangible services. Before making a payment, it is necessary to check whether tax should be withheld, whether an exemption may apply or whether a reduced rate can be used.
What is needed to avoid WHT or apply a lower rate?
Most often, this requires a valid tax residency certificate of the payment recipient, analysis of the relevant double tax treaty, verification of beneficial owner status, documents confirming the nature of the service and due diligence by the payer. In more complex cases, we recommend consultation with a tax adviser.
What is the pay & refund mechanism?
The pay & refund mechanism means that in certain cases withholding tax is first collected at the standard rate, and only afterwards may the taxpayer apply for a refund of overpaid tax. This mechanism is particularly relevant for larger passive payments, such as dividends, interest and royalties.
Do you help recover overpaid WHT?
Yes. We support the client from the accounting and documentation side. We provide the set of documents that we have received and hold as part of accounting services, including payment data, source documents, transfer confirmations, tax residency certificates and accounting summaries. If we see that information required for the analysis or application is missing, we remind the client to complete it. For tax matters, we cooperate with tax advisers.
Organise related-party settlements and WHT.
Contact us and see how we can help organise settlements in your company.