Management teams of related companies are often unaware of all the obligations that transactions with such entities entail, i.e. they’re unaware of the tax risks that stem from these relationships. Recently, however, the issue of related parties has become a significant focal point for the Tax Administration, particularly in transfer pricing, i.e. the prices charged between said parties. Tax inspection related to transfer pricing has intensified, especially since the Tax Administration acquired and began using the Amadeus electronic database and trained its inspectors to be more efficient when inspecting transfer pricing practices. Transfer pricing is particularly important because the additional tax liabilities that can arise from improperly determined transfer prices far exceed any other tax risk associated with business operations.

Although transfer pricing rules primarily apply to transactions between related resident and non-resident entities, it is important to note that the provisions regarding transfer pricing also apply to domestic-related entities if one has a preferential tax status which includes paying corporate income tax at rates lower than the prescribed rate, being exempt from corporate tax, or having the right to carry over tax losses from previous tax periods to the current one. In other words, if a related company has incurred losses and/or has carried over tax losses, or is paying corporate tax at a lower rate (18% - 10%), a transfer pricing risk incurs, i.e. there is a chance of risk spillover.

The Act on Corporate Income Tax and its associated regulations do not specify the exact content of the documentation taxpayers must maintain and provide to the Tax Administration during a tax inspection to justify transfer pricing.

However, Article 13, paragraph 4 of the Act on Corporate Income Tax stipulates that business relationships between related parties will only be recognized if the taxpayer possesses and provides, at the Tax Administration's request, data and information regarding:

• related parties and their business relationships,
• methods used to determine comparable market prices (fees), and
• reasons for choosing specific methods.

This means that taxpayers must maintain documentation – a Transfer Pricing Study—to demonstrate compliance with the arm's length principle. We invite you to contact us without any hesitation so that we may assist you in preparing your Transfer Pricing Study.