Transfer Pricing

What is Transfer Pricing?

In essence, transfer pricing refers to the documentation and financial reporting of business transactions between associated enterprises. Transfer prices are the prices charged for goods, services, or intangible property sold between related parties, as well as interest rates on intercompany loans and credits. In professional practice, these are known as controlled transactions.

Definition of Related Parties (Associated Enterprises)

According to Article 59 of the Corporate Income Tax Law (aligned with EU standards), related parties are defined based on the level of influence:

A related party is any individual or legal entity that has the potential to exercise control or significant influence over the taxpayer’s business decisions. This is specifically identified when there is a holding of at least 25% of shares, stakes, or voting rights in management bodies.

Under EU-aligned legal frameworks, connectivity is analyzed through four primary lenses:

Capital: Direct or indirect ownership exceeding 25%.
Management & Control: Situations where the same individuals or entities hold executive positions (e.g., Board of Directors, CEO) in multiple companies.
Kinship/Family Ties: When an individual (or family) acts as a founder or shareholder in several entities that conduct business together.
Non-Cooperative Jurisdictions: Business dealings with entities registered in "special tax jurisdictions" or "tax havens" (often identified by the EU list of non-cooperative jurisdictions).

Do You Require a Transfer Pricing Study?

If your company engages in transactions with related parties—whether through ownership, joint ventures, or shared management—you are likely required to comply with transfer pricing regulations.

Ukoliko sprovodite transakcije između tih povezanih stranaIf you conduct transactions between these related parties, determining a fair and accurate compensation for such services or transactions is essential. Otherwise, over-taxation may occur, causing operational difficulties. Conversely, under-pricing may lead to under-reporting of taxes. Specifically, companies can reduce their tax base by conducting business with related parties at prices different from market rates—and this is precisely the part of the report that is most important to Tax Authorities.

Key transactions subject to analysis:

Sale and distribution of raw materials, goods, and finished products.
Intra-group services (Management, IT, HR).
Marketing and branding royalties.
Strategic consulting.
Capital investments and financial instruments.
Intercompany loans (Interes-bearing or interest-free).
etc...

The Objective: The "Arm’s Length Principle"

The primary goal of a transfer pricing study is to verify that transactions are conducted in accordance with the Arm’s Length Principle. This international standard, championed by the OECD and the EU, dictates that prices between related parties must be the same as those that would have been agreed upon by independent parties under similar circumstances.

Effective transfer pricing documentation prevents Profit Shifting and ensures that taxes are paid where the actual economic activity and value creation take place.

Filing Deadlines

The Transfer Pricing Study must be submitted alongside the annual Corporate Income Tax (CIT) return. In most jurisdictions following this framework, the deadline is 180 days (or 6 months) following the end of the fiscal year.

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