Transfer pricing (TP) for international business

Transfer pricing rules do not apply to all international transactions. To determine whether a company has transfer pricing obligations, consider the ownership structure, the countries where the counterparties are registered, the nature of the transactions, and their volume. In Ukraine, the criteria for controlled transactions are set out in Article 39 of the Tax Code. If a business operates through several companies, cooperates with non-residents, or is part of an international group of companies, it is advisable to conduct a preliminary risk assessment.

Controlled transactions may include transactions between related parties, dealings with certain categories of non-residents, and transactions with counterparties registered in low-tax jurisdictions. At the same time, cooperation with a foreign company does not automatically mean that transfer pricing rules apply. Each case should be assessed individually, taking into account the parties involved, the transaction volume, and the specific features of the corporate structure.

The existence of a common owner often indicates that companies are related parties. However, this fact alone does not automatically create an obligation to prepare transfer pricing documentation. The nature and value of the transactions, and the applicable legal criteria, are also important. For example, if a Ukrainian LLC provides services to an Estonian or Polish company owned by the same beneficial owner, it is advisable to assess separately whether such transactions fall within the scope of transfer pricing rules.

Yes. Transfer pricing issues arise quite frequently for IT and SaaS companies, especially when the business operates through an international group of companies. Typical examples include contract software development, the transfer of software or other intellectual property assets, royalty payments, and the provision of services between related companies located in different jurisdictions.

Yes. If a business operates through several companies in different countries, transfer pricing implications should be assessed separately.

For example, a Ukrainian team may develop or manufacture communication modules for UAVs, while an Estonian company procures components in China, works with foreign suppliers, or participates in sales activities. If the Ukrainian and Estonian companies have common ownership, transactions between them should be structured on market terms.

In such structures, it is important to clearly define which company is responsible for R&D, procurement, logistics, financing, sales, and risk management. Otherwise, questions may arise about why a significant portion of the profit remains with one company rather than another.

We will explore the structuring of MilTech and Defense Tech projects in more detail in a separate article.

The arm's length principle is the fundamental principle of transfer pricing. It requires that transactions between related companies be conducted under the same terms and conditions that would have been agreed between independent parties under comparable circumstances. Tax authorities use this principle to assess whether the prices and other terms of intercompany transactions reflect market conditions.

Failure to submit transfer pricing reports and documentation, or submitting them after the statutory deadlines, may result in financial penalties. The amount of the penalties depends on the type of violation and can be significant. For this reason, transfer pricing compliance should be planned in advance rather than postponed until a request from the tax authorities is received.

Yes. However, preparing transfer pricing documentation only after receiving a request significantly reduces the time available to gather information, perform an economic analysis, and prepare supporting evidence. Preparing documentation in advance is far more effective, as it helps minimize risks and better prepares the business for a potential tax audit.