Even at the beginning of the year we can almost take for granted that transfer pricing rules will be a key topic in the lives of Hungarian companies in 2017. Issues affecting transfer prices are continually changing, even globally: multinational companies are constantly searching for pricing solutions that are welcomed by the experts of the local tax authorities of the given member states.
Without a detailed review of the legislative environment it is difficult to understand and interpret what these rules apply to exactly, and what should be considered. By answering some basic questions, this article provides some assistance regarding transfer pricing rules.
When can transfer pricing rules come into play?
In many cases it is not clear whether we are dealing with a transaction where the issue of transfer pricing arises at all. When two or more companies qualify as related parties and they conclude transactions, we need to review the development of transfer prices between them.
Important! Local transfer pricing rules exempt taxpayers from preparing transfer pricing documentation in many cases (e.g. based on the size of the enterprise or due to the low value of the transaction). However, this only means that the taxpayer does not have to prepare such documentation. Nevertheless, related party transactions have to be concluded at arm’s length price in order to avoid any tax base corrections at the end of the year at the latest.
What does a “related party” mean?
If we review a transaction for the purposes of corporate tax, the relevant definition will be found in the Act on Corporate Tax. Based on this, the following qualify as related parties:
- enterprises which have a (direct or indirect) majority interest in each other, or a third party that has such an interest in them; or
- a foreign company and its domestic permanent establishment(s) or the domestic establishment(s) and the persons where the issue of majority interests arises; or
- a domestic company and its foreign permanent establishment(s) or the foreign establishment(s) and the persons where the issue of majority interests arises; or
- the taxpayer and other persons if there is controlling influence over business and financial policy between the companies based on overlaps in the respective management teams.
Tip! Draw a simple chart of a company group in order to specify the companies that qualify related parties.
What does a “majority interest” mean?
The term “majority interest” is defined in the Civil Code. In a nutshell, this is when an individual or a legal entity has more than half of the voting rights or a controlling interest in a legal entity. Consequently, they have decision-making authority or can appoint or remove the persons who make the decisions.
Important! The direct or indirect ownership shares or voting rights of close relatives have to be counted together.
Based on the above it is easy to identify related party transactions, and the ones where pricing has to be reviewed can be designated.