Transfer pricing and a tax loss. When does the domestic exemption apply?

The CIT Act (Article 11n(1)(1)) provides for the so-called “domestic exemption,” i.e., the absence of an obligation to prepare transfer pricing documentation for entities that have not incurred a tax loss. This is a significant facilitation for business; however, making use of it requires meeting several stringent conditions.

Merely reporting a profit (or the absence of a loss) is not sufficient. The provision explicitly states that this preference may be applied exclusively to controlled transactions that jointly meet the following conditions:

Location: The transaction was concluded between related entities having their place of residence, registered office, or management in the territory of the Republic of Poland.No entity-based exemptions: None of the entities participating in the transaction benefits from the exemptions referred to in Article 6 and Article 17(1)(34) and (34a) of the CIT Act (e.g., zone exemptions).No tax loss: The entities participating in the controlled transaction did not incur a tax loss.

How should a tax loss be understood in the context of the domestic exemption?

The provisions of the CIT Act do not expressly specify a definition of a loss for the purposes of this exemption. However, an established line of interpretations provides the answer. According to it, the absence of an obligation to prepare documentation should be determined based on the loss from the source of income to which the transaction subject to this obligation is allocated.

This means that if the transaction relates to a specific basket of revenues, we examine the tax result only within that source. The occurrence of a loss from another source of income is irrelevant in this situation. It would be unjustified for a loss from a second, independent source to constitute a premise excluding the documentation exemption.

Analysis by example (Case Study)

Let us analyze this using a specific example:

Facts: Related entities X (lessor) and Y (lessee), having their registered offices in Poland, in 2024 carried out a lease transaction with a value exceeding PLN 2,000,000 net. None of the participants benefits from zone exemptions.

Entity Y: Did not incur a tax loss from any source.
Entity X: Reported a tax loss exclusively from the “capital gains” source.
Can the entities benefit from the domestic exemption in this situation?

YES. The entities may benefit from the exemption from preparing transfer pricing documentation.

The decisive factor is that none of the participants incurred a tax loss from the so-called “other source of income” (operational), to which the lease service is allocated. Incurring a loss on “capital gains” by entity X does not affect the possibility of applying the exemption for a transaction from the other basket of revenues.

The above position is confirmed in the latest individual interpretations, including:

dated 19 May 2025 (ref. 0111-KDIB1-1.4010.194.2025.2.BS),
dated 15 May 2025 (ref. 0111-KDIB1-3.4010.208.2025.2.JMS),
dated 10 January 2025 (ref. 0114-KDIP2-2.4010.629.2024.1.SJ).

Does the absence of a loss exempt from the obligation to apply arm’s length prices?

No. Making use of the domestic exemption is an exemption solely from the documentation obligation. It does not mean that the taxpayer may depart from applying arm’s length prices. This obligation arises directly from Article 11c(1) of the CIT Act.

What does this mean in practice? Even if you do not prepare documentation, you must set transfer prices (e.g., the amount of rent) on terms that would be adopted between unrelated entities. The mere fact of a capital relationship cannot affect the arm’s length nature of the determined price.

Does the domestic exemption exempt from TPR reporting?

No. The exemption from documentation (Local File) is not equivalent to the absence of reporting obligations.

Pursuant to Article 11n(1)(1) of the CIT Act, a taxpayer benefiting from the domestic exemption does not have to prepare documentation or comparative analyses, but is obliged to submit TPR information (transfer pricing information). This declaration must be prepared and submitted by the end of the 11th month following the end of the tax year.

Summary

The possibility of benefiting from the exemption from the obligation to prepare transfer pricing documentation is a significant privilege, but it requires precise verification. The key is the correct allocation of the transaction to the source of income and the analysis of the tax result within that specific source.

Do you need support? If you are not sure whether your company must prepare transfer pricing documentation, or you are wondering whether a loss from one of the sources blocks the domestic exemption – complete our form. Our team of experts will analyze your situation and help dispel any doubts.

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