Transfer Pricing

Starting from FY2025 it is not mandatory to submit neither Master nor Local file. Instead it is required to submit a controlled transaction report ("CTR"). 

CTR must be submitted if total related party transaction volume exceeds EUR 250'000. 

If you have any questions regarding the calculation of related-party transaction amounts or the preparation of CTR, please feel free to contact us.

Master file must be prepared if the total amount of related-party transactions exceeds EUR 20'000'000.

Local file must be prepared if the total amount of related-party transactions exceeds EUR 250'000.

If you have any questions regarding the calculation of related-party transaction amounts or the preparation of transfer pricing documentation, please feel free to contact us.

The cost of preparing transfer pricing documentation depends on the scope and complexity of the transactions involved.

For service transactions, a separate analysis must be conducted for each distinct service. This typically includes a functional analysis, selection of the appropriate transfer pricing method, cost base assessment, and a benchmarking study. The same approach applies to manufacturing and distribution activities, each requiring a stand-alone analysis.

In addition, financial transactions—such as loans, guarantees, and cash-pooling arrangements—also require separate and specialised analysis.

Since the level of work and complexity varies by transaction type, the fee for transfer pricing documentation is always tailored to the specific circumstances of each case.

Based on our experience, in most cases, the centrally prepared documentation is general and therefore non-compliant with the local regulations. 

Such documentations usually expose Latvian companies to the non-compliance fine of up to EUR 100,000. 

In most cases, the applied mark-up is tested by performing a benchmarking study, which analyses the specific profit level indicator for independent comparable companies. 

Following the OECD Transfer Pricing Guidelines, the most appropriate method for determining an arm's-length interest rate is to analyse either internal comparable data or external comparables, such as bonds. Typically, the analysis of external comparables involves a two-step process:

Determining the Borrower's Credit Rating: Assessing the creditworthiness of the borrowing entity, which may be influenced by group membership and other relevant factors. 

Conducting a Benchmarking Study: Identifying and analysing comparable bonds or other financial instruments with similar terms and conditions to establish a market-based interest rate. 

This approach ensures that the interest rate applied is consistent with what independent parties would agree upon under similar circumstances.

The CTR must be submitted by companies whose total amount of transactions with related parties during the reporting year exceeds EUR 250,000. This threshold excludes transactions with local related parties, unless such transactions are part of a single supply chain involving related foreign entities.

The new requirements apply to transactions carried out in the reporting year that starts in 2025. For companies with a calendar financial year, this means transactions in 2025, while for companies with a non-calendar financial year, it applies to the first reporting year that begins in 2025.

The Controlled Transactions Report must be submitted within 12 months after the end of the reporting year.

If the CTR is not submitted, is submitted after the deadline, or is materially incomplete, the tax authority has the right to impose a penalty of up to 1% of the controlled transaction amount, capped at EUR 100,000.

The CTR must be prepared and submitted in a structured data format via the State Revenue Service’s Electronic Declaration System (EDS). This means it is not submitted as a free-form document (e.g., PDF or Word), but must be completed using the designated form within the EDS system.

When determining the amount of controlled transactions, all transactions with related parties during the reporting year in both directions must be taken into account. This includes not only the provision and receipt of goods or services, but also financial transactions, guarantees, assignments, as well as transfers or licensing of intangible assets, etc.

In the case of financial transactions, not only interest payments should be considered, but also the loan principal (in the year it is granted). For credit lines and cash pooling arrangements, the closing balance of the period should also be taken into account.

The taxpayer may treat transactions as non-material and exclude them from the CTR if their value does not exceed EUR 90,000 during the reporting year.

The legislation does not explicitly regulate this situation; however, based on guidance provided by the tax authority, if no individual transaction exceeds EUR 90,000, the Controlled Transactions Report does not need to be prepared or submitted, even if the total amount of transactions exceeds EUR 250,000.

The CTR must include structured information on controlled transactions, including the type, direction, amount, and counterparty of the transaction, as well as information on the transfer pricing method applied, the tested party, the profit level indicator used, the applied result, the source of comparable data, and the arm’s length range.

Overall, the purpose of the CTR is to provide transparent information on how the transaction price has been determined and whether it is at arm’s length.

Although in such cases the transfer pricing analysis often focuses on the overall net result, without analysing the purchase of raw materials separately, according to paragraph 1.35 of the OECD Transfer Pricing Guidelines and based on guidance provided by the Tax authority, it is important within the CTR to delineate each transaction with the related party, i.e. to report separately both the purchase of raw materials and the sale of finished goods.

In practice it may be considered that the purchase of raw materials is, in substance, a cost recharge, and that the main transaction to be analysed is the provision of manufacturing services. In such cases, it is important to ensure that the chosen approach is applied consistently and is appropriately supported in the transfer pricing documentation.

Within the CTR, it is important to delineate each transaction with the respective related party, i.e. to report them as separate transactions for each counterparty. In practice, this means that each transaction may be reported separately in the CTR while applying the same arm’s length range and the same profit level indicator, where the transactions are economically analysed on an aggregated basis.

'The CTR should include the arm’s length range information that has been used and analysed in the local transfer pricing documentation. Accordingly, if quartiles are used in the benchmarking analysis, the 1st and 3rd quartiles should be reported in the CTR. If the range is determined based on the minimum and maximum values, then these minimum and maximum values should be disclosed.

In such cases the transaction type in the CTR may be indicated as “other”, with a free-text description of the transaction, while one of the five recognised transfer pricing methods must be selected. If a combination of methods is used, the primary method should be reported in the CTR.

The changes to transfer pricing requirements were introduced to ensure greater transparency and more structured information on transactions with related parties, as well as to enable the tax authority to more effectively identify transfer pricing risks. At the same time, this places greater emphasis on data quality and consistency between the CTR and the transfer pricing documentation.

Yes, transactions that are, in substance, cost recharges (pass-through costs) without a mark-up should also be included in the CTR, provided they qualify as controlled transactions and exceed EUR 90,000.