Transfer pricing
When concluding a contract with a foreign counterparty, a business usually proceeds from commercial logic: it agrees on the price, terms, delivery volumes and other terms of cooperation. However, in certain transactions with non-residents, the price ceases to be exclusively a matter for the parties to the contract.
If the transaction meets the criteria established by the Tax Code of Ukraine, it may be recognized as controlled. In this case, the taxpayer must be prepared to justify that its terms correspond to those that independent market participants could agree on between themselves.
This is the “arm’s length” principle.
According to subparagraph 39.1.1 of Article 39 of the Tax Code of Ukraine (hereinafter referred to as the “TC of Ukraine”), a taxpayer participating in a controlled transaction must determine the amount of taxable profit in accordance with the “arm’s length” principle.
In practice, transfer pricing is not so much a question of whether a company has the right to sell goods to a non-resident at the agreed price, but rather a question of whether it will be able to properly justify such a price in the event of tax control.
What transactions are controlled?
Not every transaction with a foreign company is controlled.
According to subparagraph 39.2.1.1 of Article 39 of the Code of Ukraine, transactions with related parties – non-residents, foreign economic transactions through non-resident commission agents, transactions with non-residents from states or territories included in the relevant list of the Cabinet of Ministers of Ukraine, as well as with non-residents of certain organizational and legal forms, controlled under the conditions established by law, may include transactions between a non-resident and its permanent representative office in Ukraine. Transactions between a non-resident and its permanent representative office in Ukraine are regulated separately.
At the same time, from January 1, 2025, the rules for determining related parties have changed.
In particular, for one of the criteria for the affiliation of legal entities, the threshold for the possession of corporate rights is 25%. In addition, the legislation takes into account the criteria for economic affiliation.
This means that not only the formal ownership structure may be important. Under certain conditions, a significant economic dependence of a Ukrainian company on transactions with a single non-resident may also affect the determination of the relatedness of persons.
Therefore, when analyzing a transaction, it is not enough to check only the ownership structure of the counterparty – it is necessary to assess the nature of the relationship between the parties comprehensively.
When does a transaction become controlled?
For most controlled transactions, it is necessary to simultaneously take into account the value criteria established by the Tax Code of Ukraine.
In accordance with subparagraph 39.2.1.7 of Article 39 of the Tax Code of Ukraine, business transactions are recognized as controlled if the annual income of the taxpayer from any activity exceeds 150 million UAH excluding indirect taxes, and the volume of transactions with a specific counterparty exceeds 10 million UAH for the relevant tax year.
Separate rules apply to transactions between a non-resident and its permanent establishment in Ukraine.
Therefore, A significant amount of a contract with a non-resident does not in itself mean that the transaction is automatically controlled. It is necessary to simultaneously analyze the status of the counterparty, the nature of the relationship between the parties, the type of transaction and the value indicators established by law.
What does the arm’s length principle mean in practice?
The logic of the principle is that special relations between the parties to a controlled transaction should not lead to the establishment of conditions that differ from those that could exist between independent companies in comparable circumstances.
Therefore, the conditions of a controlled transaction are compared with the conditions of comparable uncontrolled transactions.
In accordance with subparagraph 39.2.2 of Article 39 of the Commercial Code of Ukraine, transactions are recognized as comparable if there are no significant differences between them that may affect the financial result, or if the impact of such differences can be eliminated by appropriate adjustment.
That is why it is not enough to find the same product on the market and simply compare two prices.
The result of the transaction may be influenced by the volume of delivery, characteristics and quality of the goods, terms and conditions of payment, delivery terms, geographical market, currency of settlements, distribution of functions and risks between the parties and other economically significant circumstances.
How is compliance with the “arm’s length” principle verified?
Subclause 39.3.1 of Article 39 of the Commercial Code of Ukraine provides for five main transfer pricing methods: comparative uncontrolled price, resale price, “costs plus”, net profit and profit allocation.
The method is chosen taking into account the circumstances of the specific transaction, the availability of reliable information and the ability to ensure proper comparability.
One of the most understandable in practice is the comparative uncontrolled price method. Its essence is to compare the price in a controlled transaction with prices in comparable transactions between independent parties.
For example, if a Ukrainian company purchases the same product simultaneously from a related and an independent foreign supplier on comparable terms, transactions with an independent counterparty can be used for analysis.
At the same time, the difference in price in itself does not indicate a violation of the arm’s length principle. It can be explained by different batch sizes, delivery terms, payment terms, product quality, or other economic factors.
The taxpayer’s task is not just to show the numbers, but to substantiate the economic logic of the relevant conditions.
Where to look for information for comparison?
The most obvious source may be the taxpayer’s own transactions with independent counterparties.
If a company sells a similar product to both related and independent buyers or purchases it from several suppliers, such transactions, provided they are properly comparable, can be used for analysis.
If there are no internal comparable transactions, external sources of information can be used: specialized information databases, stock exchange and quotation data, information on the activities of independent companies, and other information that meets the requirements of Article 39 of the Civil Code of Ukraine.
Special rules are established for transactions with raw materials. The list of such goods was approved by the Resolution of the Cabinet of Ministers of Ukraine dated 09.12.2020 No. 1221, and the features of the application of the comparative uncontrolled price method are provided for in subparagraph 39.3.3 of Article 39 of the Code of Commercial Procedure of Ukraine.
Therefore, the sources of information and the method of analysis should be chosen not formally, but in accordance with the features of a specific controlled transaction.
Transactions with non-residents from special lists
Special attention is required for transactions with non-residents registered in states or territories included in the relevant list of the Cabinet of Ministers of Ukraine, as well as with non-residents whose organizational and legal form is included in the special list.
The list of relevant organizational and legal forms was approved by the Resolution of the Cabinet of Ministers of Ukraine dated 04.07.2017 No. 480.
Since 2025, the legislation in this part has also undergone changes. In particular, for certain transactions with non-residents, the organizational and legal form of which is included in such a list, it is possible not to recognize the transaction as controlled on this basis, provided that the requirements established by the Tax Code of Ukraine are met and the non-resident’s tax residency is duly confirmed.
Therefore, when working with a foreign counterparty, it is advisable to check not only the country of its registration, but also the organizational and legal form and tax status.
Transfer pricing documentation
If a company carries out controlled transactions, preparation for a possible tax audit should not be postponed until the moment of receiving a request from the State Tax Service.
In accordance with subparagraph 39.4.3 of Article 39 of the Tax Code of Ukraine, taxpayers carrying out controlled transactions must prepare and store transfer pricing documentation for the relevant reporting period.
The requirements for its content are established by subparagraph 39.4.6 of the Article 39 PC of Ukraine.
The documentation should allow us to understand not only the price of the transaction, but also its economic essence: who performed the relevant functions, used the assets and bore the risks, why a specific transfer pricing method was chosen, which transactions or companies were used for comparison and how the relevant result was obtained.
At the request of the State Tax Service, transfer pricing documentation is submitted within 30 calendar days from the date of receipt of the request in accordance with subparagraph 39.4.4 of Article 39 of the Tax Code of Ukraine.
That is why recreating the economic logic of the transaction only a few years after its implementation is a risky strategy. It is advisable to form the necessary documents and justifications directly during the transactions.
Reporting on controlled transactions
Taxpayers who carried out controlled transactions during the reporting year must submit a Report on controlled transactions.
In accordance with subparagraph 39.4.2 of Article 39 of the Tax Code of Ukraine, such a report is submitted by October 1 of the year following the reporting year.
If the taxpayer is a member of an international group of companies and carries out controlled transactions, additional obligations may arise to submit a Notification of Participation in an International Group of Companies.
For international groups, the legislation also provides for a multi-level system of transfer documentation, which, under the conditions established by the Tax Code of Ukraine, may include global transfer pricing documentation (master file) and a report by country of the international group of companies (Country-by-Country Report).
Therefore, for a company that is part of an international group, the fulfillment of transfer pricing requirements is not always limited to the Report on Controlled Transactions.
Tax control over transfer pricing
Transfer pricing remains a separate area of tax control even during martial law.
The old rules on the general suspension of relevant inspections, which were applied at the beginning of a full-scale war, cannot be considered as a general exemption from the fulfillment of obligations in the field of transfer pricing today.
Inspections on compliance by taxpayers with the “arm’s length” principle are carried out in accordance with the Tax Code of Ukraine and the Procedure for conducting inspections on compliance by taxpayers with the “arm’s length” principle, approved by order of the Ministry of Finance of Ukraine dated 10.03.2016 No. 344.
For violation of reporting and documentation requirements on transfer pricing, the Tax Court of Ukraine provides for separate financial sanctions.
Therefore, the mere fact of martial law does not exempt the payer from the need to identify controlled transactions, submit statutory reporting and prepare documentation.
What to do if the State Tax Service requests documentation?
Receiving a request from the State Tax Service does not mean that the regulatory authority has already established a violation of the arm’s length principle.
However, the response to such a request should not be limited to sending contracts, invoices and primary documents.
It is necessary to show the economic logic of the transaction: explain the functions of the parties, the assets used and the risks assumed, the terms of delivery and payment, the characteristics of the product or service and the factors that influenced the price formation.
After that, the appropriate transfer pricing method is applied and an analysis of comparable transactions or financial indicators is carried out.
If the controlled and uncontrolled transactions have certain differences, It is important not only to state them, but also to determine whether they affect comparability and, if necessary, to make appropriate adjustments.
Conclusions
Transfer pricing does not begin from the moment a request is received from the tax authority. In fact, it begins when a business agrees on the terms of a significant transaction with a non-resident.
Even at this stage, it is worth checking whether the transaction can be controlled, whether the counterparty is a related party, whether its state or legal form is included in the relevant lists, and whether the value criteria established by the Tax Code of Ukraine are exceeded.
If the transaction is controlled, the next question is whether the company will be able to provide a documented explanation in a year or several years why the parties agreed on such terms.
The existence of a contract in itself does not provide such an answer. For transfer pricing, the economic essence of the transaction, its comparability with market conditions, and properly prepared justification are important.
Therefore, the safest approach is to analyze controlled transactions and form the necessary evidence base during their implementation, and not after receiving a request from the tax authority.
