Transfer Pricing Alert (11/02/2010)
Transfer Pricing: guidance on reporting obligations for non-arm’s length transactions
The Belgian Accounting Standards Board (BASB) issued standard 2010-1 on 28 January 2010 to provide additional guidance on the reporting obligations relating to non-arm’s length transactions with related parties. The reporting obligation, introduced in the Royal Decree of 10 August 2009 (published in the Official Gazette of 24 August 2009), requires certain corporations to furnish information on their off-balance sheet arrangements and to report material non-arm’s length transactions with related parties in the annexes to their annual accounts (see Tax Alert of 7 October 2009).
Scope of application
As from 1 September 2008, corporations must report material non-arm’s length transactions with related parties in their annual accounts. The type of transactions that must be reported depends on the nature of the corporation. An extensive reporting obligation applies to:
- companies listed on a stock exchange;
- companies whose shares are traded on a Multilateral Trading Facility;
- companies that meet more than one of the criteria to be considered a large group under article 16, §1 of the Belgian Companies Code.
These corporations must report the amounts involved in qualifying transactions, the nature of the relationship with the related parties and any other information needed to ensure an accurate view of the company’s financial position.
There is an exemption from the reporting requirement for transactions between group members when the subsidiaries involved are wholly owned by members of the group. Using examples, the BASB guidance clarifies that this exemption applies to all non-arm’s length transactions between all group companies involved, e.g. transactions between the majority shareholder, minority shareholders and the subsidiaries. According to the BASB standard, the exemption also applies if the management of the corporation can demonstrate that the participation held by non-group members is negligible (e.g. 1%).
Public limited corporations that do not meet any of the above criteria are subject to less stringent reporting requirements: they only have to report direct and indirect transactions between the company and its major shareholders and between the company and its leadership (e.g. members of the board).
The reporting requirement only applies to “material” transactions. A transaction is material if its omission or misstatement could influence the economic decisions that users make on the basis of the financial statements. It is up to the management of the corporation to determine whether this is the case.
Non-arm’s length conditions
According to the language in the Royal Decree, the reporting obligation applies to transactions that are not carried out under normal market conditions. The BASB confirms that the reporting obligation is aimed at non-arm’s length transactions. The BASB notes that the context of the transaction must be taken into account to determine whether a transaction is at arm’s length and emphasizes that the management of the corporation is responsible for this decision.
The obligations imposed by the Royal Decree imply that qualifying corporations should be able to demonstrate to their statutory auditors that they were not involved in any “material” non-arm’s length transactions. Affected corporations should sufficiently document transactions with related parties, because the executives responsible for and involved in the financial accounts may be held liable for non-compliance with this obligation.