The Finance Minister has issued a public tax ruling dated 29 December 2021 on the definition of a controlled transaction. Nearly eight months after the end of the consultations, the Finance Ministry surprised taxpayers by publishing a public ruling on 31 December 2021 (on-line publication date). And it literally was a surprise as, according to the ruling, even transactions with unrelated parties may qualify as controlled transactions to be reported in transfer pricing documentation.

The ruling refers to the statutory definition in Article 11a(1)(6) of the Corporate Income Tax Act of 15 February 1992 and Article 23m(1)(6) of the Personal Income Tax Act of 25 July 1991 (the “CIT Act” and the “PIT Act”, respectively, or together the “Acts”). The definition in both Acts is that a controlled transaction means operations of a business nature, including the attribution of income to a permanent establishment, that are identified on the basis of genuine conduct of the parties and whose terms have been determined or imposed due to associations.

Thus, a controlled transaction includes events which:

  • are operations of a business nature; and
  • are identified on the basis of genuine conduct of the parties; and
  • have been determined or imposed due to associations.

Below we present the key points of the public ruling and explain what kinds of transactions are considered not to be controlled transactions.

Operations of a business nature

  • The term “operations of a business nature” should interpreted by reference to the wider concept of “business activity”. Fundamentally, an activity is business activity if it is conducted:
    • for gain,
    • as part of an organised structure.
    • on a continuous basis, and
    • independently (autonomously).
  • An operation of a business nature does not always require there to be some business activity. But it generally does need to have the above-mentioned features constituting a business activity.

Genuine conduct of the parties

  • The nature of the operations should be derived from genuine (actual) conduct of the parties. This is particularly important where the course of the transaction is not in line with the underlying contract or there is no underlying contract.
  • Whether or not conduct is genuine should be considered primarily by reference to the existence of valid commercial reasons for the given course of conduct.

The terms of the operations have been determined or imposed due to associations

  • The existence of intercompany associations is not in itself determinative of a controlled transaction. The terms of the business operations must be determined or imposed due to such associations.
  • The words “determined or imposed due to associations” do not mean a requirement that the transaction must be carried out directly by related parties. What they do mean is that associations must affect the terms of the operations. It is therefore not impossible that the terms of a transaction may be determined or imposed by an associated enterprise that is not a direct party to the transaction. One example may include a situation where the price has been negotiated centrally between associated enterprises and an unrelated supplier. In such a case, the terms have not been determined with the third (unrelated) party directly but have been centrally negotiated on behalf of group companies by the principal or an entity appointed to negotiate centrally for a selected group of entities.
  • Transaction terms may be said to be imposed on group entities also where they are unilaterally determined by group headquarters on behalf of an associated enterprise or group of associated enterprises, with the headquarters not necessarily having to be a direct party to the transaction.

Events that according to the ruling are not controlled transactions

The ruling also gives examples of transactions that would not be controlled transactions: payment of dividend, distribution of profit to members/partners by an unincorporated company/partnership, additional equity contributions under Articles 177-179 of the Code of Commercial Companies and Partnerships.

If these issues pertain to your business and you are interested in our assistance, please contact us.

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