Does trading and transport activity genuinely preclude an investment support decision under the Polish Investment Zone?

I was recently in conversation with a client who operates a chain of retail stores, and in the course of working on one of their projects, I was in the process of obtaining an investment support decision for an investment involving the construction of a warehouse. This is a topic that frequently arises in the Polish Investment Zone context, though until relatively recently it was sometimes contested by some of the entities responsible for issuing investment support decisions – and it can still give rise to a degree of uncertainty.

During our conversation, the question arose as to whether a similar solution might make sense in their case as well. The client immediately assumed it would not. After all, trading activity is excluded from support under the Polish Investment Zone, so “this simply isn’t for us – though it would have been nice.” There was a palpable sense of disappointment at being formally outside the scope of the scheme.

And then came the inevitable “but.” Because while it is true that, as a matter of principle, retail trade is excluded from the Polish Investment Zone, the investment support decision does not concern the trading activity itself – it concerns a specific investment. And it is precisely at this point that the story takes an unexpected turn.

An exclusion that is not as watertight as it appears

The Act on Supporting New Investments and its implementing regulations exclude certain types of activity from support: transport, trade, the production of specific goods, and certain categories of services. The exclusions at the national and EU level – to which the relevant provision refers – are set out in §2 of the Regulation of 27 December 2022 on state aid granted to certain entrepreneurs for the implementation of new investments.

These are areas in respect of which no investment support decision may be obtained, because the legislature has taken the view that state aid should not be directed to them. And, as a general rule, it is not.

But here is where an interesting nuance emerges. An investment support decision is issued in respect of a new investment, and a new investment may concern not the core business activity itself, but an activity that supports it. If a trading company constructs a distribution centre, it is precisely that investment that forms the subject of the decision. The expenditures are incurred on logistics and warehouse infrastructure, and on increasing the capacity of the centre. The distribution centre itself is not a trading operation, and logistics and warehousing activity is not excluded from the support framework. And if the new investment leads to an increase in sales volume – which is difficult to imagine a distribution centre failing to achieve – the income attributable to it may benefit from a corporate income tax exemption.

The Minister of Finance confirmed this logic in the explanatory notes of 6 March 2020 on the method of determining income exempt from taxation under the Polish Investment Zone. Those notes contain a sentence worth committing to memory: “A new investment related to the increase of the production or service capacity of an enterprise may also concern not production or the provision of services as such, but activities that support production or the provision of services. If a new investment relating to a supporting activity leads to an increase in the volume of production or services, the income derived from that new investment is exempt from income tax.”

Trading companies, logistics operators, and other entities whose core activity is, as a general rule, excluded from support may therefore obtain investment support decisions in respect of precisely this component of their business structure. This is not a grey area — it is an interpretively confirmed mechanism.

And this is where the real issue arises

The difficulty is that a distribution centre built to serve a company’s own trading or transport operations does not, in itself, generate income. It is the company that earns – from trade, from product sales, from margin. The distribution centre is an element of infrastructure that enables those sales, increases their volume, and improves operational efficiency. But the revenue flows to the company, not to the centre.

And this gives rise to the question that is pivotal from a tax perspective: what portion of the company’s income is connected to this investment and may therefore benefit from the exemption?

This is not a question that admits of an intuitive answer. There is no straightforward key based on the square footage of the warehouse, the number of employees, or the revenue from a given location. What is needed is a mechanism that enables a reliable, defensible allocation of the portion of the overall result that corresponds to the activity covered by the decision. And that mechanism is transfer pricing.

Why transfer pricing, and not something simpler

The applicable provisions are relatively clear on this point. Article 17(6a) of the Corporate Income Tax Act requires the organisational separation of the activity conducted within the area specified in the investment support decision, and Article 17(6b) states expressly that the provisions on transfer pricing apply, mutatis mutandis, to the determination of the scale of the exemption. The arm’s length principle must be applied to transactions between the organisational unit conducting the activity covered by the decision and the remainder of the enterprise.

What does this mean in practice? The distribution centre and the trading activity are to be treated as two separate economic entities. The centre provides logistics and warehousing services to the rest of the company. The price of those services should be set as it would be between unrelated parties transacting on market terms. And it is precisely that price – and consequently the income of the centre on the service provider side – that determines the pool of income exempt from corporate income tax.

The Minister of Finance’s explanatory notes confirm this in two respects. First, they indicate that where a new investment does not independently generate revenue, the income attributable to it should be separated from the taxpayer’s overall income precisely in accordance with Article 17(6a) and (6b) of the Corporate Income Tax Act. Second, they specify that the arm’s length principle applies not only to transactions between the unit covered by the decision and the rest of the enterprise operating outside the relevant area, but also where both exempt and taxable activities are conducted simultaneously within the area covered by the decision.

What this actually means

This story illustrates something worth bearing in mind before one even begins to discuss transfer pricing in the context of Special Economic Zones and the Polish Investment Zone. Transfer pricing in this setting is not merely an ancillary element of the reporting process, a document one needs to have in place, or a compliance matter for the tax department to manage. It is the mechanism that, in the most literal sense, determines how much of the exemption the company is actually able to utilise.

If the price charged for logistics services is set too low, the centre’s income will be insufficient and part of the state aid will simply be forfeited. If it is set too high, the tax authority will challenge the arrangement as non-arm’s length – with the consequence that the right to utilise the available exemption will be denied. And there is no straightforward answer here, because the arm’s length price for logistics services is not a figure one reads from a table. It is the result of a functional analysis, a benchmarking exercise, and the appropriate selection of the transfer pricing method.

This is precisely why, in the context of Special Economic Zones and the Polish Investment Zone, the subject of transfer pricing should begin not with the question “do we have the documentation in place?”, but with the question: do we know how to determine the exempt income – and can that approach be defended?