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What is considered a related party transaction and Why are important?

In the day-to-day activity of a company there are operations of different nature, such as a loan, an acquisition, or a sale… These businesses can be catalogued as related-party transactions, with the consequent obligations before the tax administration. To avoid incurring in administrative infractions and their consequent penalties we are going to explain what related-party transactions are and what documentation we must provide to justify the prices of these transactions.

What are related-party transactions?

We can define related-party transactions as those commercial transactions that are carried out between individuals or legal entities that have some kind of relationship, whether family, participation or shareholding.

Who must document related-party transactions?

The Law itself specifies who must be considered as related persons or entities. Specifically, the regulations are contained in the Greek legislation (L.4172/2013, Article 2, Section g and POL 1142/2015). Related persons or entities are those that meet one of the following criteria:

  1. any person who owns directly or indirectly stocks, shares, or shareholding of thirty-three (33) percent or more, by value or by number, or profit rights or voting rights,
  2. two or more persons if one person owns directly or indirectly stocks, shares, voting rights or participation in the capital of at least thirty-three (33) percent, by value or by number, or profit rights or voting rights,
  3. any person with whom there is a direct or indirect relationship of substantial management dependency or control, or who has or could potentially have a decisive influence on another person, or where both persons have direct or indirect relationship of substantial management dependency or control with a third person or are potentially influenced by such third person.

How to document the value of the Related-Party transactions?

In order to justify the arm’s length nature of the related-party transactions, the parties to such business transaction must prepare or submit a series of documents evidencing the market value of the transactions at the time they were carried out. Specifically, there are three types of documents that must be prepared, depending on a series of factors:

  • Local and Master File: this is mandatory for all companies and permanent establishments that carry out related-party transactions and follows an internationally harmonized content, as long as they meet the following criteria:
    • The summary of intragroup transactions or transfer of business is more than €100.000 per fiscal year when the taxpayer’s turnover is below €5 mil. per fiscal year, or
    • The summary of intragroup transactions or transfer of business is more than €200.000 per fiscal year when the taxpayer’s turnover exceeds €5 mil. per fiscal year.

The taxpayer is obliged to keep the Local file and the Master file at his premises for the entire period for which there is a relevant obligation to keep the books and records of the respective fiscal year. The Local File and the Master file is not submitted. The TP Files are kept at the taxpayer’s premises and must be made available to the Tax Authorities within thirty (30) days upon the receipt of the relevant request. Please note that the Greek Tax Authorities accept the TP File only in Greek language.

If the taxpayers meet the above criteria, they are also obliged to submit a Summary Information Table electronically to the Tax Administration of the Ministry of Finance until the deadline of the submission of the Corporate Income Tax Return for the fiscal year under examination.

  • Country by Country Report: those groups whose parent company is resident in Greece and whose turnover exceeds 750 million euros must file the CbC report. The CbC Report is submitted until twelve (12) months after the fiscal year of the Group.

What is the valuation of operations?

The verification of the market value principle explicitly involves the comparison of transactions carried out with related parties with those between independent parties in comparable circumstances.

How are related-party transactions valued?

The Greek Tax legislation generally follows the OECD Guidelines with respect to the methods for valuing related-party transactions:

  • Comparable uncontrolled price method: This is the most commonly used method. It consists of comparing the price of the good or service of the intercompany transaction with the price of the same good or service in a transaction between independent parties but in similar circumstances. If necessary, adjustments should be made to obtain equivalence and thus consider the particularities of the related-party transaction.
  • Cost-plus method: This requires a more detailed calculation than the previous method. This method consists of adding to the acquisition value or production cost of the good or service the usual margin in similar transactions with independent customers or, failing this, the margin that independent individuals or entities apply to comparable transactions.
  • Resale price method: This method is recommended for marketing activities. It consists of subtracting from the selling price of a good or service the margin applied by the reseller itself in comparable transactions with independent entities. Alternatively, the margin that other independent entities apply to comparable transactions. Once this margin has been obtained, it must be applied to the related-party transaction.
  • Profit-split method: This method is recommended when the related party transactions are highly interrelated, and it is not possible to value them separately. It involves two different calculations, each one more complex than the other, to determine the total profit of the transaction and which part of the profit corresponds to each one. Therefore, it is only worth using it when high value intangible assets are involved.
  • Transactional net margin method: The objective is to obtain the price at which the related entities should value the transactions to determine a net market margin. This net margin would be calculated on costs, sales or the most appropriate amount depending on the characteristics of similar transactions carried out between independent parties. This method is quite similar to the cost-plus method and the resale price method.

TPS has a team of professionals specialized in related-party transactions and in the tax problems they may entail. If your company or firm needs help or clarification on compliance with reporting obligations and other transfer pricing documentation, do not hesitate to contact TPS.

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