Family and capital ties on the basis of VAT

Service-Tax

The provisions of the VAT Act do not prohibit transactions in the case of entities related to each other by family or capital relationships. However, in such a situation, it is possible to determine the tax base - on the basis of a decision of the tax authority - irrespective of the price agreed between the parties. Find out how family and equity ties affect tax.

Family, capital and other ties

Joke. 32 sec. 1 of the VAT Act, it follows that we deal with related entities if there is a family relationship between the buyer and the supplier of goods or the provider of management, supervisory or control. These relationships also exist when any of the above-mentioned persons combines management, supervisory or control functions at contractors and when the remuneration is:

  • lower than the market value, and the buyer of the goods or services does not have, in accordance with Art. 86, 86a, 88 and article. 90 and with the regulations issued on the basis of art. 92 sec. 3 full right to reduce the amount of tax due by the amount of input tax,

  • lower than the market value, and the supplier of goods or service provider does not, in accordance with Art. 86, 86a, 88 and article. 90 and with the regulations issued on the basis of art. 92 sec. 3 full right to reduce the amount of tax due by the amount of input tax, and the supply of goods or services is tax-exempt,

  • higher than the market value, and the delivering goods or service provider does not, pursuant to Art. 86, 86a, 88 and article. 90 and with the regulations issued on the basis of art. 92 sec. 3 of the full right to reduce the amount of tax due by the amount of input tax

- in such a situation, the tax authority determines the tax base in accordance with the market value, if it turns out that this relationship influenced the determination of the remuneration for the supply of goods or services.

Capital ties are understood to mean a situation in which one of the persons or one of the counterparties has the right to vote amounting to at least 5% of all voting rights or is directly or indirectly entitled to such right.

On the other hand, family ties are understood as marriage and kinship or affinity up to the second degree.

Sale of goods to an employee at a preferential price

As indicated, the tax authority will estimate the sale only if it concludes that the relationship resulting from the employment relationship had an influence on the determination of the price. Thus, it should be considered that the sale of goods to an employee at a preferential price may result in its assessment by the Tax Office.

Such a position was confirmed by the Minister of Finance in a letter of September 18, 2014, file ref. PT8 / 033/86/539 / PSG / 14 / RD84700, in which we can read:

"(...) in a situation where the Applicant sells the benefits that are the subject of the application for the benefit of employees / contractors - at prices lower than market prices, then, depending on the situation, Art. 32 sec. 1 point 1 of the VAT Act (in the case of the supply of goods or the provision of taxable services) or art. 32 sec. 1 point 2 of the VAT Act (in the case of the supply of goods or the provision of services exempt from tax), as all the conditions set out in these provisions will be met (...) ”.

Example 1.

The company that produces bicycles provides for employees discounts when buying them. They can buy a bike for 10% of its value. In the company's rebate offer, the largest discount is 5% of the value when buying a larger quantity. Consequently, the tax authority can estimate the sale at market value because if the buyer were not an employee, it would not have received such a large discount.

Sale for PLN 1

It often happens that taxpayers provide for various types of promotional campaigns that allow you to buy at a significant discount or for the proverbial PLN. In such a situation, as long as there are no connections and the program is aimed at all entities, the tax authority has no basis to estimate the tax base. This position is also confirmed by the tax authorities, an example of which is the letter of the Director of the Tax Chamber in Poznań of December 22, 2012, file ref. 3063-ILPP1-2.4512.133.2016.1.MR, where we can read:

“(…) In this respect, the Applicant does not provide for any subjective restrictions and the group of entities participating in the Program is potentially unlimited.There are no other connections referred to in art. 32 sec. 2 of the Value Added Tax Act. (...)

For the sale of Bonuses at a promotional price including a special discount and amounting to PLN 1.23 gross, which the Applicant will make as part of the loyalty program organized by him for the benefit of his customers participating in this Program, the taxable amount for goods and services tax will be for the Applicant each time ( ie for each sale) the amount due for the sale, i.e. the price including the discount granted, reduced by the amount of the tax due, i.e. the amount of PLN 1.00 (...) ”.

Relationships and Bad Debt Relief

In the case of unreliable contractors, the provisions of the VAT Act contain regulations that allow to eliminate the negative effects of transactions concluded with them. The VAT Act provides for the institution of the so-called bad debt relief. On the one hand, it provides for the taxpayer's right to correct the tax due in the case of receivables written off as uncollectible, and on the other hand, it imposes an obligation on the buyer to make an appropriate correction of the input tax from unpaid invoices.

However, the provisions on the application of output tax adjustment rules to bad debts do not apply where there are family capital links between the creditor and the debtor.

Only in a situation where the relationships did not affect the determination of the remuneration between the parties, there are no obstacles to take advantage of the bad debt relief. Such a position was confirmed by the Director of the Tax Chamber in Poznań in a letter of October 26, 2015, file ref. ILPP1 / 4512-1-593 / 15-2 / TK, in which we can read:

"(...) It is noted that in the present case, as indicated by the Applicant, these links did not affect the value of the remuneration agreed between the parties, its amount corresponded to the market value.

Considering the above-mentioned legal provisions and the presented description of the case, it should be stated that since the relationship between the Applicant and the General Contractor in the case under consideration had no impact on the value of the remuneration agreed between the parties (its amount corresponded to the market value), the Applicant is entitled to correct the tax due based on Article. 89a of the Act, if all the conditions referred to in Art. 89a paragraph. 2 and sec. 3 of the Act (...) ”.