Intra-group guarantees can significantly facilitate obtaining external debt financing or entering into contracts. This instrument is widely used but still raises questions relating to the transfer pricing.
Can a guarantee be provided free of charge?
According to the 2020 OECD Guidelines on Transfer Pricing for Financial Transactions, it is not justified in every case to determine remuneration for the provision of a guarantee.
For the valuation of the transaction, it is important to determine the economic benefit to the party receiving the guarantee that does not result from a passive connection with the group. If we are dealing with implicit support through group membership, then the guarantee fee will not be charged. Legal, financial or operational ties may mean that it would not be possible to leave the borrower without group support if he encounters financial difficulties, without at the same time lowering the group’s rating. Consequently, group members are financially interdependent regardless of any formal guarantee arrangements, so the guarantor’s economic risk may not change materially once it has issued the guarantee. In such circumstances, the entity covered by the guarantee does not benefit beyond the level of support resulting from the implicit support from other group members (paragraph 10.164 of the Guidelines).
Furthermore, paragraph 10.160 of the Guidelines indicates that “the analysis may indicate that the purported financial guarantee is not providing any benefit to the borrower but merely recognizing the benefit that the guaranteed party would have obtained in any case by being part of the MNE group. In such situations, based on facts and circumstances, an unrelated enterprise in comparable circumstances would be unwilling to pay for the provision of a financial guarantee, and the guarantor would be found as providing no more than an administrative service to the borrower”.
In conclusion, if the granting of a guarantee does not involve an economic benefit for the taxpayer (e.g. in the form of a lower interest rate or the possibility of entering into a transaction with a counterparty at all), there are arguments for not remunerating the guarantee. Each case should be analysed individually.
What are the risks of the free guarantee?
Unfortunately, as a rule, the tax authorities in Poland consider that a free-of-charge guarantee is not at arm’s length and it is necessary to recognize income from free benefits.
The above position was expressed in a tax ruling issued by the Director of National Fiscal Information on 20 February 2024 (No 0111-KDIB2-1.4010.603.2023.1.AS, which stated that if guarantees by group companies are made free of charge, they should give rise to revenue from gratuitous benefits. If they are made against payment, they should result in their recognition in the tax return, by reporting income (from the granting of the guarantees) and expenses (from the purchase of the guarantees) accordingly.
In conclusion, the absence of remuneration may give rise to a risk for the taxpayer (obtaining the guarantees) of income from the receipt of gratuitous benefits.
In order to minimise this risk, we recommend that the arguments for the non-remuneration of the guarantee are diligently prepared and described in detail in the Transfer Pricing Policy and in the group documentation (Master File).
Free guarantee means no TP obligations?
Although no remuneration is received for the guarantees, the obligation to review these transactions from a transfer pricing perspective remains.
The granting or obtaining of a guarantee is treated as a financial transaction. The documentation threshold for these transactions is PLN 10 million. It should be emphasised that pursuant to Article 11l(1)(3) of the CIT Act, the value of the transaction in the case of a guarantee corresponds to the guarantee sum.
Therefore, if the guarantee sum exceeds PLN 10 million, it is required to prepare local transfer pricing documentation (including transfer pricing analysis) and include this transaction in the TPR.