Taxation Of Transfer Prices In Estonia As Of 1 January 2007

Introduction

Transfer prices mean the prices of goods and services between transactions with parent companies and subsidiaries or so-called associated companies. Although the Estonian Income Tax Act has included a basis for taxation of transfer prices already for years, this possibility has virtually not been used in Estonia until now.

Amendments of the regulation

As of 1 January 2007, amendments to the Income Tax Act became applicable which expand the possibilities for taxation of transfer prices.

Definition of related parties

Among other things, provisions of the Income Tax Act concerning the taxation of transfer prices are applicable irrespective of a person with whom an Estonian sole proprietor or legal person makes transactions. Before 1 January tax would be levied only from the transactions made by the sole proprietor or legal person with natural persons or non-resident. The aim of this amendment is to take into consideration the practice of the European Court of Justice. In its decision C-324/00 Lankhorst-Hohorst GmbH v Finanzamt Steinfurt the European Court of Justice said that the regulation which will make difference between the persons on the bases of their legal status while levying tax is violating the principle of freedom of establishment and principles of free movement of goods and services and therefore it is in conflict with the principles of common market.

In addition, provisions were incorporated in the Income Tax Act according to which a tax authority is granted the right to demand a resident legal person the additional data for determination of the market value in respect of transactions made with related parties and the structure and activities of the group to which a resident company belongs.

Transfer pricing methods and documentation requirements

Along with those amendments to the Income Tax Act, regulation No 53 of the Minister of Finance of 10 November 2006 "Methods for determination of the value of transactions made between related parties" entered into force on 1 January. The regulation sets out more detailed methods for determination of the market value and also established additional requirements for documentation of transfer prices. Such documentation requirements arise, among other things, from the "Code of Conduct on transfer pricing documentation for associated enterprises in the European Union", approved by the European Council on 20 June 2006.

The documentation requirements established by the...