Associated entities – Transfer prices

January 13, 20220


Within the course of dealing and mutual transactions conducted between legal entities, there is often a sale of products and services, as well as the provision of borrowings and loans between associated entities, which leaves some space to ask at which prices the previously mentioned transactions are performed. Due to the possibility of manipulation for the purpose of tax avoidance, the Corporate Profit Tax Law stipulates that all companies shall make a transfer pricing study when doing business with associated legal entities.

According to the Article 59 of the Corporate Profit Tax Law:

A person associated with a taxpayer shall be understood as a natural or legal person in whose relations with the taxpayer, there is a possibility of exercising control over or exerting considerable influence on business decisions, but, associated persons shall also be understood as legal entities between which there is a possibility of exercising control over or exerting considerable influence on business decisions – possession of at least 25% of shares or interests, i.e. votes in the controlling bodies.

The legislator has determined that the associated entities shall be understood as associative relations based on:

  1. capital
  2. executive position
  3. kinship relations
  4. with one or more companies headquartered on the territory of a separate jurisdiction, alleged “tax haven”.


            Association Based on Capital


When it comes to the first association level, any individual or legal entity that owns 25% of a company share capital, or more, and, at the same time, owns 25% of the capital of another company or more, this is considered to be association based on capital. In a situation where these two or more similar companies do business together i.e. realize revenue based on the sale of goods and services to each other, they shall submit a transfer pricing report. In reality, it happens that a legal or natural person is the founder of more than one legal entities and if those legal entities do business together, they are under the obligation to prepare a transfer pricing study.

In those cases when a legal entity is a founder in the form of a parent company that founded one or more domestic and foreign companies or opened a branch, the company collaboration is also subject to the analysis checking if those companies were doing business at market prices and if there is the obligation to prepare a transfer pricing study accordingly.


            Association Based on Executive Positions


In a situation where a company manager has all authorities i.e. self-represents that company and has the right to make decisions, sign contracts, make and collect payments, and if the manager is not the founder of the company, according to the Law, that manager is considered to be a person with 25% of equity interest, which means that in this case, the obligation to prepare a transfer pricing study exists.

If a person is a company director as well as a manager in another company (which is not prohibited by the Law) or if that person is the owner or co-owner of another legal entity, and if these two legal entities do business together, they are under the obligation to prepare a transfer pricing study because these are also associated legal entities.


            Association Based on Kinship Relations


Association based on kinship relations is one of the forms of association, which is the most commonly encountered in practice. This association for includes all the important family members: spouses, children, adopted children, their spouses, children of the adopted children, spouse’s parents, cousins and their spouses, common-law spouses, their children and other relatives.

This means that both immediate and extended families are included. If any of the listed relatives is the owner, co-owner or the director of a company, or an entrepreneur, and if they have a business relationship with their relative’s company, it is necessary to determine if you were and at which prices doing business together i.e. apart from the tax balance, it is necessary to submit a transfer pricing report.


            Association with the Companies in “Tax Haven Countries”


This level of association is the easiest to detect. The thing is that obligations and collection of receivables from the legal entities, which are registered i.e. headquartered or even only have an office in one of the 60 countries in the jurisdiction with a preferential tax system arise while doing business. If you conducted transactions with companies in such a region, regardless of whether the structure is based on kinship relations, capital or executive position, you are under the obligation to prepare a transfer pricing study.





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