Transactions between dependent entities

    A new recording duty on transactions has been introduced for domestic dependent entities from January 2015, not only to transactions with foreign dependent entities.  It relates to not only the legal entities (LE), but also to the individual entrepreneurs (IE).

    The Income Tax Law defines who is considered to be dependent entity. Dependent  entity is

    –  a close relative or

    – an economically or personal related party or

    – another  related person.

    A close relative is a direct relative (eg. parents and children, grandparents and grandchildren), a sibling and a spouse.

    An economically or personal related party is a person who has a participation on the property, a control or leading of another person. An participation on the property and a control can have a direct or an indirect share or an indirectly inference share on capital or voting rights. Leadership is a relationship of members of statutory bodies (managers) or members of the supervisory bodies of a company to that company.

    An another connection means a business relationship established primarily for the purpose of reducing the tax base or increasing tax losses.

    All transactions which are among the dependent entities are called controlled transactions and have been documented by pricing method (transfer pricing). This includes business transactions (purchase, sale), provided services, loans and credits. The scope of the documentation is published in the guidelines MF/ 8120 / 2014-721.

    An abbreviated documentation is for IE and taxpayers who are micro entities. This documentation includes, among other things, a list of controlled transactions, transaction description (identification of counterparties, value of transactions).

    A full documentation is for a) taxpayers who accounted for under IFRS, b) taxpayers who conduct transactions with related parties from non-contracting state, c) taxpayers who apply tax administrator to validate the use of valuation methods and d) taxpayers who requested a modification the tax base according to the Income Tax Law § 17(6).

    Other taxpayers have a basic documentation. The range of the full  and the basic documentation is much greater than the abbreviated one. The taxpayer must submit documentation within 15 days after  it is requisted by the tax authority.


    A piece of advice:

    Taxpayers are obliged to keep documentation of controlled transactions between related parties, only if they are significant. Whether a transaction is significant or not depends on the decision of the taxpayer. This may be a percentage of sales, income, expenses ….