Transfer pricing and documentation for related parties

Transfer pricing concerns companies that do business with related parties, that is, with connected companies or persons. The aim of these income tax rules is to make such parties charge each other prices as independent entities would, rather than artificially shifting profit to where the tax burden is lower. The topic is not limited to large multinational corporations; it also affects smaller groups of connected companies and entrepreneurs. If you trade within your own group, these rules probably apply to you as well.

What related parties are

Related parties are persons connected through ownership, through personnel links or in some other way, for example a parent company and its subsidiary, sister companies or companies with the same ultimate owner. Transactions between such persons are subject to special income tax rules that must be observed. The connection does not have to be direct; it can also be indirect, for example through the same person being involved in the management of several companies. That is why it is important to start by correctly identifying which entities you are actually related to.

The arm’s length principle

The foundation of all transfer pricing is what is known as the arm’s length principle. It means that prices agreed between related parties should correspond to the prices that mutually independent, unconnected parties would agree on the open market under comparable conditions.

• Sale of goods between connected companies
• Provision of services within the group
• Loans and licence fees between related parties

Why it matters

If prices between related parties are not set at market level, the tax administrator may adjust the tax base and assess additional income tax, together with any penalty. That is why it is extremely important for a company to be able to prove at any time that its intra-group prices correspond to normal market conditions.

Transfer pricing documentation

The main tool for demonstrating compliance with the arm’s length principle is transfer pricing documentation. Its scope varies with the size of the company and the nature and volume of its transactions, ranging from simplified to extensive full documentation.

• A description of the related parties and the transactions carried out
• The method chosen for determining the transfer price
• A comparability analysis against dealings between independent parties

How to proceed

It is advisable to start by identifying all transactions with related parties, then to choose a suitable pricing method and to keep adding to and updating the documentation as you go. Check the scope of your specific obligations for the period in question, because it depends on the type, volume and cross-border nature of your transactions. The documentation is best prepared continuously, not retrospectively under the pressure of a request from the tax administrator. Documentation that is prepared in advance and kept up to date comes across as more credible and saves you time and stress.

When to bring in an expert

Transfer pricing is one of the more demanding areas of income tax and requires specialist knowledge. For cross-border transactions or a larger volume of trade within the group, professional help is practically indispensable if you want to avoid additional tax assessments and needless disputes with the tax administrator. An expert will help you choose the right pricing method and prepare the documentation to the required extent. As a result, you can be confident that your intra-group prices will stand up to an audit.

Related articles: Tax return when you have income from abroad, Taxation of cryptocurrencies in Slovakia: what you need to know, Taxation of income from renting out property.

Frequently asked questions

Who does transfer pricing apply to?

Companies that carry out transactions with related parties, that is, with connected companies or persons. Their prices must comply with the arm’s length principle.

Do I need transfer pricing documentation?

In most cases, yes, but its scope ranges from simplified to extensive depending on the size of the company and the type of transactions. Check the specific scope for the period in question.