Transfer pricing

General legal framework

• The obligation to comply with the arm’s length principle in transactions between related parties is established in § 8 of the Income Tax Act. The transfer price regulation applies to the taxpayer's transactions both with Estonian related party companies as well as in the case of cross-border transactions (e.g. a transaction with a group subsidiary abroad).
• Regulation No. 53 of the Ministry of Finance of 10 November 2006 “Methods for Determining the Value of Related Party Transactions” provides a detailed legal framework for the determination and documentation of transfer pricing and related party transactions.
• When applying Regulation No. 53 of the Ministry of Finance, it is recommended to follow the OECD Transfer Pricing Guidelines, insomuch these guidelines do not conflict with the Regulation.
• At the request of the tax authority, the transfer pricing documentation must be submitted to the Tax and Customs Board within 60 days.
• The difference between the price of a related party transaction (transfer price) and the value of similar transactions between unrelated parties (market value of the transaction) is subject to income tax at the rate of 20/80, plus 0.06% interest per day, calculated from the day following the tax liability.
• The regulation on the submission of a large group country report (CbC report) has been valid in Estonia since 2017.

Transfer pricing methods

• Estonia accepts all standard transfer pricing methods: comparable uncontrolled price method, resale price method, cost plus method, transactional net margin method and the transactional profit split method. In addition, the law allows the use of alternative methods if the above methods cannot be reliably applied due to the circumstances of the transaction.

Self-assessment

• The taxpayer is required to disclose (in monthly tax returns) if the taxpayer is aware that the price of the transaction with a related party differs from its market value, and to pay income tax on the difference between the transfer price and the market price (tax rate 20/80). General information on related party transactions must be disclosed in the annual report, which is prepared within six months of the end of the company's financial year.

Obligation to prepare documentation

• The transfer pricing documentation consists of three parts: a master file, a local file, and a country-specific report (CbC report).
• The obligation for preparing a detailed transfer pricing documentation (master file and local country file) extends to the following persons:
  • a resident credit institution, an insurance company, and a listed company;
  • if one of the parties to the transaction is a person located in a low-tax territory;
  • a resident company with 250 or more employees, including related parties, or with a turnover of related parties of 50 million euros or more in the pre-transaction financial year or with a consolidated balance sheet total of 43 million euros or more;
  • a non-resident who operates in Estonia through a permanent establishment and has 250 or more employees, including related parties, or whose turnover in the financial year before the transaction with related parties was 50 million euros or more or whose consolidated balance sheet total was 43 million euros or more.
• If the above requirements are not met, the taxpayer must document transactions with related parties in accordance with the usual requirements for documenting business transactions but must still be able to demonstrate that the transfer price corresponds to the market value.
• At the request of the tax authority, the transfer pricing documentation must be submitted to the Tax and Customs Board within 60 days.
• In 2017, the Estonian Parliament approved a law establishing a Country-by-Country Reporting (CbCR) obligation for multinational companies with a consolidated income of more than 750 million euros.

Content of transfer pricing documentation

• Taxpayers who are subject to the requirement to prepare detailed transfer pricing documentation must submit documents to the tax authority upon request, which are divided as follows:
  • documents concerning the international group which form the master file;
  • documents concerning a legal person resident in Estonia or a non-resident operating in Estonia through a permanent establishment and transactions entered into by them, which constitute country-specific documents.
• Pursuant to Regulation No. 53 of the Ministry of Finance of 10 November 2006, the master file may be prepared separately for each branch of business of the group and must contain the following information:
  • an overview of the business activities of the group, which also describes the changes that have taken place in the business strategy compared to the previous financial year;
  •  a description of the ownership relations within the group (scheme of parent companies, subsidiaries, and associated companies) and an overview of the activities of the members of the group, changes in the structure of the group and the activities of the members during the previous financial year;
  • general information on associated undertakings participating in controlled transactions and controlled transactions - the type of transactions (tangible or intangible assets, services) and the values ​​of the transactions;
  • an overview of the tasks performed, and risks taken within the framework of controlled transactions and changes that have taken place compared to the previous financial year;
  • an overview of the intangible assets belonging to the group;
  • a description of the policy for determining the market value of the group's transfer prices;
  • a list of cost-sharing agreements and preliminary rulings concerning transfer prices.
• The country specific documents shall supplement the master file and shall contain the following information:
  • a description of the activities of the taxpayer, which also reflects changes in the business strategy compared to the previous financial year;
  • a description of the controlled transactions performed by the taxpayer - the volume of sales of goods and services provided, the volume of leased assets, income from the use and transfer of intangible assets, interest received and paid on loans, changes in trading conditions and changes in existing agreements;
  • analysis of controlled transactions and comparable transactions - description of assets and services, activity analysis, transaction conditions, economic conditions, business strategies, adjustments made to the data of the comparable transaction;
  • an explanation of the reasons for the choice of the transfer pricing method or methods and the manner of use thereof;
  • if possible, relevant internal and external comparative data and references to sources of comparable transactions.
• The requirements of the Estonian master and country-specific document largely comply with OECD standards, although the regulation of the current regulation does not reflect all OECD recommendations and guidelines adopted in the 2017 guidance material.
• The number and level of detail of the required documents must be appropriate to the circumstances of the specific transaction and the price of the transaction and must be sufficient to demonstrate that the transfer price corresponds to the market value.
• If the documents are prepared in a foreign language, the taxpayer may submit the documents in the foreign language to the tax authority. However, the tax authority may require the translation of documents into Estonian, setting a reasonable term for the submission of the translation.
• In addition to the prepared transfer price documentation, the taxpayer also has the right to submit additional documents if they prove that the transfer price corresponds to the market value.

High risk transactions

• The tax authorities' transfer pricing control resource is expected to be directed to where the state is at high risk of losing tax revenue. Indicators of the occurrence of such risk are usually, for example, large transaction volumes of related parties, regularity of transactions, continuous reporting of the company's losses or significant differences in financial indicators compared to the average of comparable companies or industry.
• Also, certain types of transactions (e.g. financial transactions, payments for the use of intellectual property, management services, business transfers, cost sharing agreements), related party location in low tax jurisdictions, high corporate debt burden, as well as insufficient taxpayer transfer pricing documentation and cooperation organization.

Tax liability and fines

• The difference between the price of a related party transaction (transfer price) and the value of similar transactions between unrelated parties (market value of the transaction) is subject to income tax at the rate of 20/80, plus 0.06% interest per day, calculated from the day following the tax liability.
• A fine of 3,200 euros can be imposed on a legal person for failure to submit documentation by the deadline. A taxpayer may also be punished in criminal proceedings with a fine of up to 16 million euros for submitting false information.

• In Estonia there is no possibility to enter into a preliminary transfer price agreement with the tax authority (Advanced Pricing Arrangements).
• If the transfer price differs from the market value and the tax authority uses the market value when determining income tax, double taxation of related parties occurs. Double taxation can be eliminated if the tax authority adjusts the profits of the other party to the transaction accordingly.
• An application for the elimination of double taxation must be made within three years of the first notification of an activity which results in or may result in double taxation.
• An international double taxation elimination procedure is initiated by a tax authority under the Convention on the Elimination of Double Taxation in Respect of Adjustments to Profits of Associated Taxes of a Member State of the European Union or with a third country tax authority if Estonia has concluded an international agreement.

• The Tax Information Exchange Directive (EU) 2018/822 (the so-called DAC6 Directive) introduced an obligation to notify the tax authorities of cross-border schemes that allow for aggressive tax planning, concealment of the beneficial owner or complicate the exchange of information on bank accounts. Schemes must be notified by persons who have developed them in the course of their business or who have participated in their development.

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