Publication date: April 15, 2025
Exit fee is a fee for transferring assets, functions or risks between related entities. It can be understood as remuneration for the transfer of important functions, assets or risks. It is paid during business restructuring, either once or periodicall
On 30 January 2025 there has been issued important interpretation of the Director of the Polish National Revenue Information in respect of exit fee and tax consequences.
The case in the individual interpretation of the Director of the National Revenue Information of January 30, 2025 concerned a Polish limited liability company which, as part of the strategic decisions of the capital group, took over the production function from its German shareholder, covering the production of specific products (in this case, caps). As part of this restructuring, the company acquired a production line as fixed assets, but in addition undertook to pay the “exit fee” for taking over the production potential and the related potential to generate profits. This remuneration was determined on the basis of an independent analysis of the economic value of the transferred functions.
Exit-fee as a cost of obtaining income?
The company’s doubts concerned whether such an expense could be recognized as a cost of obtaining income, and if so, when it should be recognized in the tax accounting. The company argued that the remuneration was not part of the purchase price of fixed assets, but was economically justified and was used to generate income in the future by increasing production capacity. Therefore, it should have the right to recognize it as a cost of obtaining income other than directly related to revenue, i.e. a so-called indirect cost, settled once at the time of incurring – on the day the cost was recognized in the accounting records based on an invoice.
The Director of the Polish National Revenue Information agreed with the company’s position. The Director of the National Revenue Information considered that the “exit fee” met the conditions specified in art. 15 sec. 1 of the Polish CIT Act, and therefore was incurred in order to generate revenue, was rationally justified, was properly documented and was not excluded from tax costs under art. 16 sec. 1 of this Act. At the same time, the authority confirmed that the expense was not a direct cost, because it cannot be assigned to a specific revenue from a given product or sale, but is related to business activity in general and to future revenue potential. Therefore, it should be treated as an indirect cost, deductible on the date of its incurrence, in accordance with art. 15 sec. 4d and 4e of the Polish CIT Act.
The autonomy of tax law in relation to accounting principles was also clearly emphasized. The method of settling the exit fee in the books does not affect its tax classification. The exit fee was intended to compensate the Seller for the lost earning potential and to transfer to the Applicant the ability to generate profits.
In this case, the “Exit fee” is an equivalent for resigning from the production function and transferring it to another company from the capital group. The seller, who resigned from production, received a fee from the company (Applicant) for transferring the potential to generate profits and sales.
From the point of view of the application of the “exit fee”, it is used within the framework of intra-group restructuring of activities, especially in capital groups operating at the international level. Changing the functions, risks and assets between related entities is often associated with the need to pay remuneration so that the transaction is in accordance with the arm’s length principle, as referred to in Art. 11c of the Polish CIT Act and the provisions of the Regulation of the Minister of Finance of 21 December 2018 on transfer prices in the scope of corporate income tax (§16-18).
Calculation of exit-fee — reflecting market conditions — Fair Value
The Exit Fee calculation is based on the assumption that the transaction reflects market conditions. A key element of this calculation is the use of the concept of Fair Value. The Fair Value valuation assumes the perspective of two independent parties acting in good faith, without coercion, with equal access to information and operating in an open market. The analysis should consider how independent market participants would set the price in a given transaction.
Exit-fee subject to passive cost tax on shifted income? How to value exit-fee.
In practice, this may mean that the exit fee is treated as a passive cost that may be subject to taxation under the so-called tax on shifted income.
If the exit fee is subject to this tax, its rate is 19% of the tax base, and the obligation to show it in the tax return lies with the taxpayer. In this case, the tax should be shown in the CIT-8 declaration and the CIT/PD appendix (concerning income tax on shifted income).
Valuing a company in accordance with the guidelines of the Organisation for Economic Co-operation and Development (OECD) is a complex process that should be carried out by a professional company with the appropriate experience in this field. This type of analysis requires knowledge not only in the field of finance and accounting, but also law and economics. Valuation experts must take into account such elements as future cash flows, asset value, market condition and the risk associated with the company’s operations. To ensure transparency and reliability of the process, the valuation for exit fee purposes should be carried out by independent and competent entities.
Valuing a company in the context of an exit fee is a time-consuming process. According to the applicable regulations, if the fee exceeds the threshold of PLN 2 million, the company will be required to prepare transfer pricing documentation. This is an additional step aimed at ensuring compliance with regulations regarding intra-group transactions.
Discounted cash flow (DCF) method/ Royalty exemption method
Income and cost methods are mainly used to determine the exit fee. One of the most commonly used income methods is the discounted cash flow (DCF) method, which involves estimating the future cash flows generated by the company, which are then discounted to their present value. As a result, an estimated value of the fee is obtained.
In the case of valuing intangible assets such as know-how, a trademark or a patent, the royalty exemption method is used. This technique allows determining the value of these assets based on the potential savings that the company would achieve if it did not have to pay for licenses to use these resources.
However, when customer relationships are a key element of a company’s value, specialists may decide to use the multi-period excess earnings method (MPEEM), which allows for estimating value based on the long-term profit potential generated by these relationships.
In Polish law, there is no clearly defined exit fee payment threshold in the sense of a minimum amount above which this fee should be paid. However, in terms of documentation obligations, the exit fee in intra-group transactions may be associated with the requirement to prepare transfer pricing documentation if the value of this fee exceeds a certain transaction threshold.
In accordance with transfer pricing regulations, this obligation applies to transactions whose value exceeds PLN 2 million in the case of transactions involving services or trade in goods and PLN 10 million in the case of transactions involving fixed assets.
If the transaction related to the transfer of the production line (as well as the related exit fee) exceeds the transaction thresholds (PLN 2 million), the company will be required to prepare transfer pricing documentation to demonstrate that the transaction is conducted on market terms.
In turn, if the value of the transaction related to the exit fee exceeds the threshold of PLN 10 million, more detailed reporting may be necessary as part of broader intra-group documentation.
It is also worth adding that these provisions are applied within the framework of general transfer pricing principles, which means that each transaction between related entities, including those related to exit fee payments, may be subject to the obligation to prepare appropriate documents if they exceed the above thresholds.
If the exit fee value falls within this framework and also concerns the restructuring of the business in the capital group, In accordance with Articles 11a-11h of the CIT Act, related enterprises must conduct transactions on market terms, in accordance with the arm’s length principle. This documentation will have to include the valuation methodology (e.g. income or cost method) and confirmation that the transaction is conducted on market terms.
The provisions of the Corporate Income Tax Act (CIT) constitute the basis for the settlement of all transactions concerning the transfer of assets, including the production line.
According to Article 12, Section 1 of the Polish CIT Act, the company’s income is generated when assets (including a production line) are sold to another company. The exit fee in this case will be treated as income from operating activities (if it is directly related to operating activities, e.g. transfer of assets as part of restructuring).
In the case of transfer of a production line and the related exit fee, the costs of obtaining income must also be settled. According to Article 15 of the CIT Act, costs related to the transfer of assets, including depreciation and write-offs, may be recognized as costs of obtaining income. The value of the assets being sold (including the production line) should be recognized as a cost of obtaining income, and any differences between the sale price and the book value of the assets (the so-called profit or loss from the sale of assets) will be included in the tax settlement. Expenses related to the preparation of the transaction (e.g. fees related to the valuation of assets, advisory costs) may be recognized as costs of obtaining income, provided that they are directly related to the process of transferring the business (Article 15, paragraph 1).
When transfer pricing documentation is obligatory
If the transaction related to the exit fee exceeds PLN 2 million (transaction value), it is mandatory to prepare transfer pricing documentation that demonstrates that the fee is set in accordance with market conditions. This documentation should include, among others:
The value of the transferred assets (production line) should be determined taking into account the future cash flows generated by these assets, as well as other relevant factors, such as the risk associated with the activity, the state of the market or the potential to generate profits.
One valuation method for assets with future cash flows (such as production lines) is the DCF (discounted cash flow) method. It allows to determine the value of assets based on the projected cash flows that the assets will generate, discounted to their present value.
In the case of a production line, the valuation may include, among others:
In relation to the exit fee, the ruling of the Director of the National Revenue Information of 21 April 2021 (ref. 0111-KDIB1-2.4010.24.2021.3.DP) is also important. According to this ruling, the exit fee may be recognised as a cost of earning income because it is related to generating income as part of the transaction (in this case, the transfer of a production line as part of restructuring). It was also indicated that:
If the consideration for the withdrawal of the business (in this case the exit fee) exceeds the transaction thresholds, it may be subject to the so-called tax on transferred income, in accordance with the provisions of the CIT Act. The exit fee may be considered an expense related to the transfer of income to a related entity and be subject to taxation at the rate of 19% (CIT rate), if certain conditions are met.
After the transaction, the company should include the exit fee in the CIT-8 tax return and CIT/PD (if it concerns the tax on shifted income). The return should include:
The remuneration for the transfer of business in connection with the transfer of the production line should be accounted for and taxed in accordance with the provisions of the CIT Act. According to these provisions, the exit fee may be recognized as income, and the costs related to the transfer of assets (including depreciation of the production line) as costs of obtaining income. In addition, if the value of the transaction exceeds the transaction thresholds, it is necessary to prepare transfer pricing documentation and check whether the transaction meets the requirements for taxation of transferred income.
Determining the income and time of transaction
The basis for settling the remuneration for the withdrawal of the business and the exit fee in the context of corporate income tax (CIT) is to determine whether the transaction constitutes income and what the costs of obtaining income will be.
In accordance with the provisions of the CIT Act:
Exit fee or remuneration for the sale of a production line constitutes income at the time of the transaction (Article 12, Section 1 of the CIT Act). The income should be recorded at the time of the transaction, i.e. upon receipt of payment or conclusion of the agreement. Therefore, remuneration for the withdrawal of the business, treated as operating income, is subject to income tax.
The costs of obtaining income related to the exit fee may include the book value of the transferred assets (e.g. a production line), expenses related to the transaction, such as advisory costs, valuations, negotiations – provided that they are directly related to the company’s operations.
Pursuant to Article 15 of the CIT Act, costs related to the transfer of assets may be recognised as tax deductible costs, provided they are related to operating activities and were incurred for the purpose of earning income.
If, after the transaction, there is a profit from the sale of assets, it will be taxed at 19% CIT rate (standard CIT rate in Poland).
Profit from sale = income from the transaction (remuneration for transferring the production line) – cost of obtaining income (book value of assets, expenses related to the transaction).
According to Article 21, Section 1 of the CIT Act, if the exit fee is paid by an entity registered abroad (e.g. a German company) and passes through a Polish company, it will not be subject to withholding tax, because the exit fee is not considered income from consultancy services or income from other services that would be subject to such tax.
In the case of transfer of assets within a capital group, there may also be a need to pay income shifting tax, when the transfer of valuable assets involves the transfer of income to related entities, including abroad. If this happens, the tax is 19% of the tax base (Article 24b of the Polish CIT Act).
The settlement of the remuneration for the transfer of business and the exit fee should be carried out both for accounting and tax purposes, because accounting requires recording the income from the sale of the production line and the related costs of obtaining income, as well as taking into account any depreciation. However, for tax purposes, the remuneration for the transfer of assets (including the exit fee) is treated as income, which is subject to CIT, while the related costs may be included in the costs of obtaining income.
The consideration for the transfer of business (including exit fee) as part of the transfer of the production line should be accounted for in accounting and tax purposes, both in the context of revenues and costs of obtaining revenues. It is also important to ensure compliance with transfer pricing regulations, especially in the case of intra-group transactions.
International accounting standards
In accordance with international accounting standards IAS (International Accounting Standards) and IFRS (International Financial Reporting Standards), as well as the national regulation, which is the Accounting Act, the process of settling the remuneration for the transfer of a business (including the transfer of a production line) must take into account specific rules for recognizing revenues, costs and the impact on the financial result.
In the case of disposal of fixed assets, such as a production line, the accounting process depends on several important issues. In short, disposal of fixed assets involves the need to:
Revenue from the sale of fixed assets is recognized when the sale agreement is concluded and the consideration is received. In accordance with IAS 18 (International Accounting Standard 18 – “Revenue”), revenue is recognized when:
Costs of earning income related to the disposal of assets include all costs directly related to the transaction, as well as the book value of the assets that were disposed of. According to IAS 16 (International Accounting Standard 16 – “Property, plant and equipment”), the book value of the transferred assets should be recognized as an expense. Additionally, transaction-related costs, such as valuation costs, legal advice, negotiation of the sale agreement, may also be recognized as transaction costs if they are directly related to the transfer of assets.
The book value of assets is their original value (acquisition cost) less depreciation that they were subject to over their useful life. If the assets have been fully depreciated, their book value is zero.
The financial result from the sale of assets (so-called profit or loss on disposal) is calculated as the difference between the revenue obtained from the sale and the book value of the assets that were sold and the costs associated with the transaction.
The profit or loss from the sale must be shown in the income statement as part of the company’s operating result. A profit from the sale of fixed assets will increase the company’s financial result, while a loss will decrease it.
Polish Accounting Act
The Accounting Act in Poland regulates the details of the method of accounting for revenues and costs related to fixed assets, including the transfer of a production line. According to the provisions of the Act, the following principles should be applied:
According to art. 3 sec. 1 item 13 of the Accounting Act, revenues from the sale of fixed assets (e.g. a production line) should be recognized at the time of conclusion of the contract, and their amount is determined by the value of the received consideration. These revenues are included in the financial result as operating revenues.
According to Article 15 of the Accounting Act, the costs associated with obtaining revenue from the sale of fixed assets include all costs directly related to this transaction. The value of transferred assets should be reflected in the accounting records as a cost related to their sale.
If the production line was previously depreciated, the depreciation should be terminated upon disposal of the assets. The book value of the assets at the date of sale will include the depreciation deductions made up to that point. After the sale, the company will no longer continue to depreciate these assets.
In the case of disposal of fixed assets, such as a production line, the company should also ensure that the transaction is properly documented.
Documentation of transaction
According to IAS 10 (International Accounting Standard 10 – “Events after the balance sheet date”), each transaction that affects the financial statements should be properly documented.
All documents relating to the transaction should be stored in a manner that allows for control and audit.
In the case of transfer of assets within a capital group, the application of OECD guidelines on transfer pricing becomes crucial. OECD recommends that transactions between related entities should be carried out on market terms (the so-called arm’s length principle). This means that the value of the exit fee and other remuneration related to the transfer of assets should correspond to the market value of such transactions.
If certain transaction value thresholds are exceeded (e.g. PLN 2 million), companies should prepare transfer pricing documentation and demonstrate that the transaction was conducted on market terms.
If the transaction related to the transfer of the production line (as well as the related exit fee) exceeds the transaction thresholds (PLN 2 million), the company will be required to prepare transfer pricing documentation to demonstrate that the transaction is conducted on market terms.
Individual tax interpretations under Polish law
The Polish Act of 29 August 1997 – Tax Ordinance – finds significant application in the case of an individual interpretation regarding remuneration for the withdrawal of a business, issued by the Director of the National Revenue Information in January 2025. It regulates the principles of issuing such interpretations, specifying that the taxpayer may request an explanation of the tax consequences of a specific event (Article 14b). In the analyzed case, the company enquired whether the remuneration paid for taking over the production function can be recognized as a cost of obtaining income.
The Tax Ordinance also provides the so-called protective function of the interpretation – if the taxpayer complies with an individual interpretation, they will not suffer negative tax consequences, even if the interpretation changes later (Article 14k-14n). Additionally, the provisions of the Ordinance allow for appealing against an unfavourable interpretation to an administrative court (Article 14e). The Tax Ordinance provides procedural and protective support for the taxpayer, enables obtaining a binding interpretation and secures its application against possible tax consequences.