For tax purposes, the tax authorities can adjust either taxable income or deductible expenses of the taxpayer if they can prove that respective price does not represent "usual" (i.e. market price). If a service fee is paid to a related entity, it is tax deductible only if there is documentary evidence that the fee was paid in respect of services actually rendered.
Transfer pricing rules apply to transactions between related entities and the taxpayer's transaction with entities that do not pay corporate profits tax or pay this tax at the rate below the standard rate (i.e. 25%).
Related entities include:
a legal person that exercises control over a taxpayer, is controlled by a taxpayer, or is under common control with a taxpayer;
an individual or a family member of that individual who exercises control over a taxpayer; and
a company official who is authorized to execute, in the name of the company, binding legal agreements or a family member of that official.
The exercise of control over a taxpayer means holding, directly or indirectly through a number of related entities, the largest participating interest (shares) in the charter fund of the taxpayer; control over the majority of votes in the governing body of such a taxpayer; or possessing participatory interests amounting to at least 20% of the charter fund of the taxpayer.
"Usual price" is defined as contractual price of goods or services, subject to the provisions of the law. Usual price is deemed to be fair market price, unless proven otherwise. Fair market price is the price at which the goods (services) are transferred to another person, provided that the seller is willing to transfer such goods (services), and the customer is willing to obtain them without any constraints, both parties are independent legally and de facto, possess sufficient information about such goods (services), as well as market prices for identical (or homogeneous) goods (services).
The usual price is determined based on comparable data for sales of identical or homogeneous goods (services) or public data on conditions of sale.
Where price for goods (services) is regulated by the state the usual price is the price established by the state (except for the case when state establishes minimum sale prices).
If the usual price cannot be determined based on the respective provisions of the Corporate Profits Tax Law, it is allowed to consider for justification of prices level the rules established by the National Accounting Standards and National Valuation Standards.
Where there are no transactions with identical (or homogeneous) goods (services), or where it is impossible to determine the price because the comparable information is absent or is not publicly available, the contractual price shall be deemed to be the usual price.
The burden of proof that the contractual price does not satisfy the usual price requirement is placed on the tax authorities.
