Transfer pricing: otherwise related persons and arm’s length price

The Supreme Administrative Court (SAC) has recently closed several cases dealing with the assessment of otherwise related persons - a concept from the area of transfer prices between group companies.

Referring to previous case law, in its judgment 2 Afs 148/2020-37 the SAC emphasised that in the application of the Income Tax Act provisions on otherwise related persons, the mere existence of a chain is crucial, and it is not necessary to examine the subjective aspect of the matter; it is thus sufficient that the taxpayer benefits from the chain by claiming the amount (in this case for advertising) as a tax-deductible expense.

The SAC further dealt with the definition of an arm’s length price. Referring to previous case law, the SAC stressed that this is the price applied between independent entities or, if no such data exists or is not available, a hypothetical estimate based on logical and rational considerations and economic experience. A price in a transaction that is comparable to the transaction under review shall be used; if the transaction under review exhibits different parameters than the transaction from which the price is taken, the arm’s length price must be adjusted accordingly.

The SAC also agreed with the arm’s length price to be determined as a price invoiced to other advertising agencies or end clients for the same or a similar supply; in this case, a range shall be determined and the price most advantageous for the taxpayer shall be used, which is in line with relevant case law. The SAC also agreed that the cost for which a golf tournament can be held says nothing about the arm’s length price of advertising at such a golf tournament.

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