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Global transfer pricing guide

Transfer pricing - Estonia

30 Aug 2023

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Introduction to transfer pricing in Estonia
Transfer pricing rules
  • The arm’s length requirement is established in the Income Tax Act (section 8) and applies to a taxpayer’s transactions with resident as well as non-resident associated enterprises.
  • Regulation No. 53 of Ministry of Finance ‘Methods for determining the value of transactions conducted between associated persons’ provides the detailed legal framework for transfer pricing and documentation of transactions between related parties. The amended version of Regulation No. 53 was enforced 01.01.2022.
  • It is recommended to follow the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations upon applying this Regulation, inasmuch these guidelines do not conflict with the Regulation.
  • Documentation must be provided at the tax authority’s request within 60 days.
  • The difference between transaction value and arm’s length value is taxed with income tax (effective tax rate as at the time of this survey is 20/80), plus 0.06% interest per day calculated from the following day the tax obligation became due.
  • CbC reporting rules have been adopted.
OECD guidance
  • The Estonian tax authority recommends following the OECD Guidelines as long as it does not conflict with effective Estonian law.
Transfer pricing methods
  • Estonia accepts all standard transfer pricing methods: including the Comparable Uncontrolled Price, Resale Price, Cost Plus, Transactional Net Margin and Profit Split methods. In addition, the law allows for the use of alternative methods if the provided methods cannot be reliably applied due to the circumstances related to the transaction.
  • There is no specific hierarchy in applying transfer pricing methods. However, it is important to choose the most reliable method with relevant justification on the appropriateness of the selected method.
Self-assessment
  • The taxpayer is required to make disclosures (in monthly presented tax declarations) if it is known to the taxpayer that transaction value differs from the market value and shall pay income tax from the difference (effective tax rate as at the time of this survey is 20/80). General information on transactions with related parties must be disclosed together with the annual financial report prepared within six months from the end of the financial year.
Transfer pricing documentation
Preparation of transfer pricing documentation
  • Since 2017 the transfer pricing documentation is comprised of three parts: master file, local file and Country-by-country report.
  • The requirement for having documentation regarding TP expands to all persons transacting with intra-group companies.
  • The additional requirements for detailed documentation apply:
    • for resident credit institution, insurance undertaking and business association registered in a securities market
    • if one transaction party is a person situated in a low tax rate territory
    • for a resident business association having together with associated persons 250 or more employees, or turnover of €50 million or more, or having a consolidated balance sheet total of €43 million or more
    • for a non-resident being active in Estonia via a permanent establishment and having together with associated persons 250 or more employees, or turnover or €50 million or more, or having a consolidated balance sheet total of €43 million or more.
  • In 2017, the Estonian Parliament adopted legislation that introduced the CbC reporting obligation for multinational enterprises with consolidated revenue of over EUR 750 million.
Master and local file
  • Requirements for the master and local file follow OECD standards. 
  • Master file shall include the following information:
    • 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;
    • an overview of the business activities of the group and main drivers of business profit;
    • a description of the value chain of the group’s main products/services and overview of related foreign markets, an overview of the tasks performed, and risks taken within the framework of controlled transactions;
    • a description of service provision agreements within the group, incl cost allocation and transfer pricing principles;
    • an overview of the intangible assets belonging to the group, incl description of ownership, funding, management and development strategy, IP transfers, license fees and other agreements related to IP;
    • a description of group’s funding agreements, incl funding agreements with third parties, overview of group’s central funding function, transfer pricing policy of financing transactions;
    • a consolidated annual report;
    • a list of cost-sharing agreements and preliminary rulings concerning transfer prices.
  • Local file shall supplement the master file and shall include the following information:
    • a description of corporate structure of the group and organizational structure of the taxpayer;
    • a description of the business activities and strategy of the taxpayer, incl restructurings, transfer of IP;
    • an overview of main competitors;
    • a description and volumes 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, incl copies of existing agreements;
    • an explanation of the reasons for the choice of the transfer pricing method or methods and the manner of use thereof;
    • an 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, conclusions made about the arm’s length nature of the transactions;
    • an overview of relevant internal and external comparative data and references to sources of comparable transactions;
    • an annual report of the taxpayer.
  • The amount and level of detail of the TP document must be sufficient to prove the transfer price to the market value.
  • If documents have been prepared in a foreign language, the taxpayer can submit those documents. However, the tax administrator may assign a reasonable deadline for a translated version.
  • The taxpayer can submit additional documents besides the standard format, if those documents support the TP documentation.
Some risk factors for challenge

  • Certain types of transactions (e.g. financial transactions, payments for use of intellectual property, management services, transfer of company, agreements on sharing of expenses), location of a related party in a tax haven, high loan burden of a company, and deficient documentation and unwillingness to cooperate, signaling the lack of thought-out transfer pricing policy in the company.

  • The indicators of possible transfer pricing risks are generally large transaction volumes between related parties, regularity of such transactions, constant reporting of losses or significant variations in financial indicators compared to the average for comparable companies or economic sectors.

Penalties

  • The difference between transaction value and arm’s length value is taxed with income tax (effective tax rate as at the time of this survey is 20/80), plus 0.06% interest per day calculated from the following day the tax obligation became due.

  • The maximum administrative penalty for non-compliance is €3,200.

Economic analysis and how to demonstrate an arm’s length result
  • In very general terms, the transfer pricing process can be seen as comparability analysis. Comparability of a controlled transaction between related parties and comparable transaction between not related parties are influenced by a number of conditions and transactional circumstances. In accordance with subsection 3 (2) of Ministry of Finance regulation no. 53, when making decisions on comparability, all of the characteristics of a transaction, parties and environment that can have an influence on the transaction value are analysed. Above all, the following are compared:
    1. characteristics of the object of the transaction
    2. functions fulfilled in the context of the transaction that are identified in the course of analysis of activity
    3. transaction conditions
    4. economic conditions that influence fulfilment of the transaction
    5. business strategies of the parties to the transaction.
  • Estonia requires documentation of transfer prices to proceed from general requirements for documenting business transactions and the obligation of the detailed documentation in accordance with thorough requirements is mainly imposed on large corporate groups in Estonia – persons whose annual turnover for all related persons is at least 50 million euros and have 250 or more employees or a balance sheet volume of 43 million euros or more.

    However, all undertakings must in fact conduct transactions with related persons according to the arm’s length principle, and companies must be capable, if prompted by the tax authority, to substantiate the transactions based on the principles set forth in Minister of Finance regulation no. 53.
Advance Pricing Agreements (APAs), dispute avoidance and resolution

  • Estonian transfer pricing regulation does not have an advanced pricing agreement mechanism in place.

  • According to the Estonian tax authority taxpayers may request mutual agreement procedure (MAP) assistance under the terms of the relevant tax treaty and/or the EU Arbitration Convention (European Union Convention on the Elimination of Double Taxation in Connection with the Adjustment of Profits of Associated Enterprises, 90/463/EEC) in order to resolve international tax disputes. A MAP request can be made when a person considers that actions of one or both countries’ tax administrations result or will result in taxation not in accordance with the relevant tax treaty.

Exemptions
  • Although all companies transacting with related parties must keep relevant documents, based on the Minister of Finance regulation no. 53 companies are exempt from a full TP documentation requirement if they are not meeting the following criteria (together with related parties):
    • EUR 50 million annual sales or
    • EUR 43 million balance sheet or
    • 250 employees.
  • Apart from the formal transfer pricing documentation and general requirement to disclose the transactions with the related parties in the annual reports, there are no additional reporting requirements related to transfer pricing in relation to inter-company transactions.
  • In addition to formal transfer pricing documentation and general requirement to disclose the transactions with related parties in the annual reports, there is an obligation to report intra-company loans quarterly.
Related developments
Digital services tax
  • No digital service tax is currently enacted.
  • No near-future plans to enact a digital service tax.
Tax authorities and taxpayer behaviour
  • The latest focus has been on management and consultation service transactions concluded between related parties.
Regulatory changes
  • Transfer pricing developments are generally in line with international developments in the field.  The amended version of Regulation No. 53 was enforced 01.01.2022..
Changes in tax administration
  • As a result of DAC6 (tax intermediary directive) all cross-border arrangements that impact taxation, reporting financial accounts or identifying beneficial ownership must be reported to the tax authorities as of 31 August 2020. The reporting obligation lies mainly on tax advisers and concerns cross-border arrangements implemented as of 25 June 2018.

For further information on transfer pricing in Estonia please contact:

Kristjan Järve.png

Kristjan Järve
T +372 501 6531
E kristjan.jarve@ee.gt.com

Eve Lille
T +372 5323 4450
E Eve.Lille@ee.gt.com 

 

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