Landmark Royalty and Transfer Pricing Case
In March 2025, the Supreme Administrative Court of Poland decided the case “Poland vs. Fertilizer Licence S.A.” (Exp. II FSK 916/22), setting a milestone regarding the treatment of licensing agreements and the power of the tax administration to reclassify them.
Background
Fertilizer S.A., a Polish fertilizer manufacturer, transferred the legal ownership of its trademarks to its subsidiary “B” and then entered into a licensing agreement to continue using them, resulting in paying significant royalties. Conversely, the Polish tax authority considered that “B” only performed an administrative function and recharacterized the contract as a trademark management service, thus limiting the deductibility of the payments.
Trial Court Decision
Although the trial court upheld the tax authority’s position, the Regional Administrative Court ruled that under the legal framework in force during the audited period (2013-2014), it was not legally feasible to reclassify a lawfully valid transaction. The current rule only empowered the authorities to adjust income if it demonstrated that the prices among related parties were not under the market standards nor changed the nature of the agreement.
Technical Transfer Pricing Criteria
The court noted that the assessment should focus on whether the royalties were at the Arm’s Length Principle, applying recognized methods such as the comparable uncontrolled price, the cost plus, or the resale price. It rejected the retroactive application of the 2017 OECD Guidelines as not having legal force in the period in question nor being officially translated into Polish.
Final Decision of the Supreme Court
On March 19, 2025, the Supreme Administrative Court upheld the regional court decision and rejected the appeals for cassation by the company and the tax administration. It thus ordered a correct valuation of the royalty payments based on appropriate Transfer Pricing methods without disregarding the validity of the original licensing agreement.
Reflection and Recommendations
This ruling is a crucial milestone on the limits of the tax administration in reinterpreting related party transactions, reaffirming the importance of structuring transactions correctly and having a technical Transfer Pricing analysis, especially in intangible contracts.
Does Your Company Transfer Intangibles or Pay Intra-Group Royalties?
At TPC Group, we have a specialized team to assist in structuring and defending your Transfer Pricing policies under the current legislation. Contact us today to ensure the fiscal stability of your international operations.
Source: tpcases.com