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Proposal for transfer pricing directive

The European Commission has published a proposal for a transfer pricing directive to unify procedures for the application of EU transfer pricing rules regarding the definition of related parties and the setting of arm’s length prices.

In their tax administration, most member states apply, to some extent, transfer pricing rules contained in the OECD Transfer Pricing Guidelines ('OECD Guidelines'). However, the OECD Guidelines have a different status and significance in the legislations of individual member states. The new directive therefore aims to harmonise transfer pricing rules within the EU, probably in response to a series of defeats of the European Commission in European courts regarding state aid: the courts repeatedly rejected the EC's attempt for harmonised interpretation of transfer pricing rules.

The directive introduces several new rules:

  • obligation to implement the rules laid down in the Transfer Pricing Directive into national legislations and to interpret them in accordance with the OECD Guidelines, which are to become a legally binding regulation for the application of the arm's length principle in the EU
  • unification of the definition of a related party (associated enterprise) at a threshold for capital participation of 25 percent (some countries apply a threshold of 50 percent), which, among other things, will make it easier to use pan-European comparative studies for all groups in the EU carrying out the same activity
  • determination of the arm's-length range when setting prices based on comparable transactions
  • harmonised treatment of permanent establishments (the permanent establishment’s founder and the permanent establishment as separate entities)
  • introduction of a simplified procedure for adjustments to the tax base resulting from the assessment of an additional tax in another member state and from voluntary adjustments to the tax base (corresponding and compensating adjustments)
  • obligation of taxpayers to have documentation proving the compliance of intragroup transactions with the arm’s length principle. However, the current wording of the directive does not introduce the obligation to have standard transfer pricing documentation according to the OECD rules. The European Commission plans to soon specify the requirement and content of the documentation that companies must prepare.

The directive’s implementation may also have an impact on the use of safe harbour rules in the EU. In the Czech Republic, this may include, e.g., a restriction on the use of the simplified procedure for interest-free loans and borrowings. The EC proposes that the directive should apply from 1 January 2026.