Publication date: May 27, 2025
arm’s length principle; the obligation to establish transfer prices on the same terms as unrelated entities would establish; market price in real property sector; asset approach; the income approach; the comparative approach.
The Act of 28 July 1983 on Polish inheritance and gift tax defines the market value of goods or services. It turns out that this value is determined based on average prices used in the trade of goods of the same type and kind, taking into account their location, condition and degree of wear and tear, as well as in the trade of property rights of the same type. In other words, it is the highest price at which the buyer is willing and able to acquire a given good, as well as the lowest that the seller can agree to.
The arm’s length principle, as defined in Article 11c of the Polish Corporate Income Tax Act, imposes on related entities the obligation to establish transfer prices on the same terms as unrelated entities would establish among themselves. This means that prices in transactions between related entities should correspond to market prices. However, if, as a result of the connections, conditions are established or imposed that differ from those that unrelated entities would establish, and this results in the taxpayer reporting lower income or higher loss than expected, the tax authority has the right to determine the taxpayer’s income or loss, disregarding the conditions resulting from these connections. When determining income or loss in such a situation, the authority takes into account the actual course and circumstances of the conclusion and implementation of the controlled transaction, as well as the conduct of the parties to the transaction.
If the tax authority finds that, under comparable conditions, unrelated entities, guided by economic rationality, would not have entered into a given controlled transaction or would have entered into another (so-called proper transaction), taking into account the conditions agreed between the related entities and the fact that these conditions make it impossible to determine the transfer price at a level to which unrelated entities would agree, the authority may determine the taxpayer’s income or loss excluding the controlled transaction or, if justified, taking into account the transaction proper to the controlled transaction.
The basis for applying this correction cannot be solely difficulties in verifying the transfer price by the tax authority or the lack of comparable transactions between unrelated entities in similar circumstances. In the event that the transactions are covered by an advance pricing agreement, investment agreement or tax agreement, the tax authority does not determine the tax liability or the amount of loss to the extent to which the taxpayer’s income or loss was determined in accordance with that agreement.
The Polish Act of 21 August 1997 on Real Estate Management, and more specifically Article 151, paragraph 1, indicates that the market value of real estate is the estimated amount that can be obtained for the real estate on the valuation date in a sale transaction concluded on market terms between the buyer and the seller. Factors such as:
A professional real estate valuation is performed by a real estate appraiser who takes into account all of the above factors as well as local and regional market trends. This valuation is the basis for determining the market value in tax and legal matters.
Methods and procedures for company valuation.
In the case of business valuation, asset, income and comparative methods are used.
– The asset approach to business valuation involves determining the value of a company based on the value of its assets less liabilities, also taking into account off-balance sheet liabilities. In practice, methods such as adjusted net asset value, replacement value or liquidation value are used here, which are based on the book value of the company’s assets and their adjustments.
– The income approach is based on the valuation of a company by discounting the forecasted future economic income, i.e. expected cash flows or profits, using an appropriate discount rate reflecting the cost of capital. The most commonly used method here is discounted cash flow, but discounted profit or dividend methods are also used.
– The comparative approach is based on the analysis of transaction prices of similar companies that were acquired on market terms. This approach uses financial multipliers such as price to earnings (P/E), price to book value (P/B), price to sales (P/S) or EBITDA, which refer to the key economic and financial parameters of the company, allowing for the estimation of its value based on comparisons with other entities with a similar business profile.
Value deviating from market value.
Market value is an estimated amount that can be obtained for real estate in a transaction concluded on market terms between parties acting prudently, independently and without coercion. If the price in the contract significantly deviates from the market value (e.g. a difference of more than a dozen percent), the tax office may call upon the parties to explain this discrepancy. In the case of very large deviations (e.g. over 33%), the office may commission a property appraiser to value the real estate, which will become the basis for determining the value of the transaction for tax purposes.
Selling real estate below market value is possible, but carries a risk of tax consequences – the tax office may question the undervalued price and impose additional taxes or penalties. In addition, there is a risk of an actio pauliana from creditors if selling at a price below market is considered to be to their detriment. An actio pauliana is defined by Article 527 of the Civil Code. It can be filed when, as a result of a legal act of the debtor performed to the detriment of creditors, a third party has obtained a financial benefit. In such a case, each of the creditors may request that this act be recognized as ineffective in relation to them, if the debtor acted with the knowledge of the detriment of creditors, and the third party knew about it or, with due diligence, could have learned about it.
The tax authority, in accordance with Article 19, paragraph 4 of the Polish Personal Income Tax Act, has the right to call upon the parties to the contract to change the value indicated in the real estate sales contract or to provide reasons justifying the provision of a price significantly different from the market value. If the parties do not respond or do not provide a rational justification for the underestimated price, the authority will determine the value of the transaction based on the market value (Article 19, paragraph 4 of the Personal Income Tax Act). Even if the buyer and seller acted “on familiar terms” or agreed to a lower price for other reasons (e.g. the technical condition of the property), the market value is what counts in the light of tax law.
In practice, the sale of real estate is subject to tax on civil law transactions, the rate of which is 2% of the value of the property, such as an apartment or a house. This means that the higher the value of the property, the more tax must be paid by the buyer. On the other hand, the seller may be afraid of having to pay income tax, especially if the property is sold before the expiry of five years from the end of the year in which it was acquired. Therefore, some sellers deliberately underestimate the value of the property in the contract to reduce the amount of income tax due. However, such action is risky, because the tax authorities may question the understated price and establish tax on the market value of the property.
Surprisingly and counterintuitively, the Voivodship Administrative Court in Gliwice in its judgment (I SA/Gl 1069/13) indicated that the transaction price of real estate may significantly deviate from the market value if there are no justified reasons for this. In this case, the tax authority found that the sale price of the share in the real estate was grossly underestimated in relation to the market value, which was confirmed by an analysis of transaction prices and valuation reports. The court emphasized that it is necessary to reliably determine the reasons for the price deviating from the market value, and the tax authority should demonstrate that the price deviates significantly from the market value without a justified reason before questioning the contractual price.
Similar statements can be found in the judgment of the Supreme Administrative Court of 2012 (I SA/Gd 845/10). The Supreme Administrative Court emphasized that questioning the sale price requires a thorough analysis of the contract and the factual circumstances. The price may differ from the market value if there are justified reasons, e.g. forced sale. The tax authority must prove that the taxpayer had real possibilities of obtaining a price higher than that specified in the contract.
Rules for correcting invoices in 2025
When making a sale, entrepreneurs are often forced to issue a correction invoice. The issue that causes problems is the time of its settlement. In terms of VAT, the decisive factor is whether the issuance of a correction invoice increases or decreases the tax liability to the office. In terms of income tax, however, the important issue is whether the issuance of a correction invoice is caused by an accounting error, another obvious mistake, or another economic event.
The principles for issuing corrective invoices are specified in Article 106 of the VAT Act. As it results from this provision, the taxpayer issues a corrective invoice if, after issuing the invoice:
A taxpayer issuing a correction invoice should bear in mind that it must contain more elements than a regular VAT invoice. It should contain:
In addition, in a situation where the correction affects the amount of the tax base or directly the amount of VAT due, the correction invoice should indicate the amount of the correction of the tax base or the amount of the correction of the VAT due, divided into amounts concerning individual tax rates and exempt sales. If the correction does not concern an increase or decrease, it should contain the correct content of the corrected items. If the tax base has increased, the correction of this base is made in the settlement for the period in which the reason for its increase occurred (Article 29a, paragraph 17 of the VAT Act).
– means a reduction in the tax base, e.g. when there is a return of goods, a price reduction granted later or an error is detected consisting in overstating the tax amount on the original invoice,
– settlement depends on the terms agreed between the seller and the buyer, as well as on the time of issuing the corrective invoice,
– the seller settles in the period in which the corrective invoice was issued or as agreed with the buyer,
– the buyer should correct the input tax in the month of receiving the corrective invoice, if the terms of the correction have been agreed,
– the seller recognises the correction invoice on the date of its issue, provided that he/she has documentation confirming that the terms of the correction have been agreed,
– in the absence of appropriate documentation, the seller of the invoice may include a correction in the JPK declaration only for the period in which it is collected.
This results from Article 29a, section 13 of the VAT Act.
– means an increase in the tax base and VAT, e.g. when, after the original invoice was issued, new circumstances arose causing an increase in the price or when errors were detected resulting in an understatement of the tax amount,
– must be settled in the settlement period in which the reason for increasing the tax base arose,
– if the correction results from original reasons (error), it should be settled “backwards”, i.e. for the period in which the original invoice was issued,
– if the reason for the correction is secondary (new circumstances), it is settled on an ongoing basis, during the period of its issue,
– on the buyer’s side, the correction increases the input tax to be deducted and should be included in the settlement for the period in which the buyer received the correction invoice, regardless of the reasons for its issuance.
– the buyer has the right to deduct VAT from the corrective invoice in the month of its receipt or within the next three months (or two quarters if the invoice is settled quarterly).
In the context of settling costs of obtaining income, throwing into costs means reducing the company’s income by the incurred costs of running the business, which affects the calculation of income on which the entrepreneur pays tax. Taxpayers settling according to the tax scale usually pay 12% tax on income up to the threshold of PLN 120,000, after which the rate increases to 32%. On the other hand, people using the flat tax pay 19% regardless of the amount of income. It is worth remembering that the tax office can check costs reported as costs of obtaining income, verifying their connection with the conducted business.
According to Article 86, Section 1 of the VAT Act, financial, catering or accommodation services and services that have not been performed cannot be deducted from VAT. If an entrepreneur uses such services, e.g. catering, he or she has no right to deduct VAT, but the entire gross amount paid can be included in the costs of obtaining income.
Article 15 of the CIT Act defines costs of obtaining income, and these are expenses incurred in order to obtain income from a source of income or to maintain or secure this source, excluding costs indicated in art. 16 sec. 1. These costs must be incurred by the taxpayer, be related to the conducted business activity, be non-refundable and properly documented. In the case of costs incurred in foreign currencies, their value is converted into zlotys at the average exchange rate of the National Bank of Poland from the last business day preceding the day on which the expense was incurred. Costs of obtaining income reduce the tax base and thus the amount of income on which tax is calculated.
A taxpayer who earns income other than from capital gains may deduct from the tax base, established in accordance with Article 18 of the CIT Act, costs incurred for research and development activities, referred to as eligible costs. The amount of this deduction may not exceed the amount of income earned from income other than capital gains in a given tax year.
Taxpayers using this relief are required to report in their tax return the eligible costs incurred that are deductible or constitute the basis for calculating the amount of the relief. In addition, according to the regulations, taxpayers conducting research and development activities must separate the costs related to this activity in their accounting records. Eligible costs are deductible only if they have not been returned to the taxpayer in any form or have not already been deducted from the income tax base.
The deduction of eligible costs is subject to limits that depend on the taxpayer’s status:
Eligible costs related to research and development activities include various expenses that must be directly related to the implementation of the research project. These include, among others:
Moreover, the Regulation of the Minister of Labor and Social Policy of December 23, 2014 specifies the principles for the reimbursement of additional costs incurred by employers employing disabled persons. The condition for granting the reimbursement of costs is the employment of a disabled person for at least 36 months. Eligible costs in this respect include documented expenses for the purchase of materials and performance of construction works related to the adaptation of premises to the needs of disabled persons, the purchase of fixed assets equipping work stations and the production of such fixed assets on one’s own, which enable a disabled employee to perform duties at a level comparable to an able-bodied employee. The value of these costs is reduced by the costs corresponding to the adaptation or equipment of work stations for able-bodied persons. Eligible costs also apply to the employment of supporting employees.
All these expenses must be properly documented and used for their intended purpose in order to be recognized as eligible costs within the framework of research and development activities. In this case, the Supreme Administrative Court has already issued a judgment on November 7, 2024 (reference number II FSK 179/22). It concerns the deduction of eligible costs from the tax base under the relief for research and development activities (R&D relief). The court accepted the possibility of using this relief also by tax capital groups. However, it emphasized that the key is the correct and compliant determination of eligible costs, as well as reliable verification of whether the expenses actually concern research and development activities and meet the statutory criteria. The Supreme Administrative Court dismissed the cassation appeal, which means that the tax authority rightly refused to recognize some costs as eligible because they did not meet the formal or substantive requirements applicable to the R&D relief.
It is also worth mentioning the judgment of the Voivodship Administrative Court in Bydgoszcz of September 19, 2023 (reference number I SA/Bd 229/23), in which the court clearly indicated that the moment of incurring an eligible cost is equivalent to the moment of payment (cash principle), and not to the moment of recording the fixed asset in the accounting records. This judgment clarifies that eligible costs are expenses actually incurred and documented. The court emphasized that there is no legal basis for the requirement that the eligible cost be recognized only after the fixed asset has been formally included in the taxpayer’s property records. The actual incurring of the expense, i.e. payment, is sufficient.
In accordance with art. 18d sec. 2 points 1 and 1a of the CIT Act, eligible costs are receivables incurred in a given month for the titles referred to in art. 12 sec. 1 of the Personal Income Tax Act of 26 July 1991, and contributions financed by the payer for these receivables specified in the Act of 13 October 1998 on the social insurance system, in such part in which the time allocated to the implementation of research and development activities remains in the employee’s total working time in a given month. In the content of art. 12 sec. 1 The Personal Income Tax Act lists the following sources of income: service relationship, employment relationship, outwork and cooperative employment relationship. At the same time, it is indicated that income from the above-mentioned sources includes all types of cash payments and the cash value of benefits in kind or their equivalents, regardless of the source of financing for these payments and benefits, and in particular:
Ineligible costs are primarily expenses incurred outside the project’s eligibility period. This category also includes costs that have not been properly documented or have been incurred in breach of the provisions of the Public Procurement Law. VAT, which can be recovered in accordance with the regulations, is also ineligible, as well as various types of financial penalties, fines, fines, fees and punitive interest. The costs of an external audit of the expenditure of funds for science are ineligible if the audit began before half of the planned project expenditure had been implemented.
In the case of leasing, non-eligible costs include tax, the financing party’s margin, refinancing interest, insurance fees and general costs.
In addition, certain components of employee remuneration and benefits are ineligible, such as jubilee bonuses, compensation for unused leave, contributions to group life insurance (if treated as employee income), subsidies for medical benefits, cash equivalents (e.g. reduced energy charges), co-financing from the Company Social Benefits Fund, benefits financed by the Social Insurance Institution (ZUS), remuneration for overtime work, costs of periodic and initial examinations, subsidies for glasses, motivational supplements (e.g. for knowledge of languages or non-smoking), food vouchers and contributions to the State Fund for Rehabilitation of Disabled Persons. The costs also cannot includeacquisition of land or the right of perpetual usufruct of land, with the exception of fees for perpetual usufruct of land, depreciation write-offs for passenger cars above the value of PLN 150,000, expenses for auto casco insurance of passenger cars in the part exceeding car insurance with a value of PLN 150,000, costs of repayment of loans, credits and other liabilities, interest costs arising from late repayment of budget and tax liabilities, representation costs.
The full list of expenses that do not qualify as costs of obtaining income can be found in Article 23 of the Personal Income Tax Act.
It is true that fuel and spare parts for the car can be included in the costs, but we must remember that:
– We will only deduct 100% of the costs if we use the car exclusively for business purposes and we are able to confirm this by keeping records of the kilometers traveled,
– 75% if we use a car that is a fixed asset of the company,
– only 20% of the costs will be included as income if we use a privately owned car for business purposes.
All non-eligible costs cannot be included as part or all of the required own contribution of the contractor or implementing partner.
What does the tax office most often check during a tax audit?
– Tax return compliance – tax offices check the correctness of submitted PIT, CIT and VAT returns to confirm that all revenues have been correctly reported and the costs of obtaining revenue are properly documented. Errors may result from mistakes, negligence or misunderstanding of the regulations.
– Transactions between related entities – especially in international companies, transfer prices are controlled to ensure that transactions take place on market terms and are not used to shift income or avoid taxes.
– VAT settlements – VAT is one of the main sources of budget revenues, which is why the office thoroughly verifies the correctness of settlements, documentation of intra-EU and international transactions and combats abuses such as VAT carousels or issuing empty invoices.
– Costs of obtaining income – the control concerns whether entrepreneurs deduct only justified and properly documented costs. Lack of evidence may result in correction of tax liabilities.
– Income from undisclosed sources – the office analyses possible income not reported in declarations, e.g. from activities in the grey zone, which may lead to the imposition of penalties and interest.
– Tax reliefs and exemptions – the correct use of reliefs, such as the R&D relief or IP Box, is checked. Incorrect use of reliefs may result in the need to repay the benefits with interest.
– Accounting books – constitute the basis for determining revenues, costs and the tax base.
– Personnel and payroll documentation – includes employment contracts, payrolls, ZUS reports, especially in the field of payroll tax settlements.
– Agreements and legal documents – lease, cooperation and credit agreements are analyzed, especially those concluded with related entities, to check their compliance with market principles.
– Cash reports and sales records – in retail companies, cash register reports and sales records are checked to exclude off-the-register sales and tax avoidance.