Transfer Pricing

Transfer pricing has become one of the most significant tax‑risk areas in recent years for both international groups and Estonian companies engaged in related‑party transactions. Further tightening of transfer pricing regulations and tax authority practices is expected, meaning that companies must review their intragroup transactions and documentation more thoroughly than before.

What Is Transfer Pricing and Why It Matters

Transfer pricing refers to the prices used in transactions between related parties. Related parties include, for example, parent and subsidiary companies, entities within the same corporate group, or any entities where control or significant influence exists.

Transfer pricing is important because it determines how profits are allocated across countries and entities. If related‑party transactions are not priced at arm’s‑length, profits may be shifted to low‑tax jurisdictions, creating significant tax risk.

In Estonia, transfer pricing is especially relevant because:

the MTA actively treats transfer pricing as a key tax‑risk area;
even domestic related‑party transactions may be subject to tax audit;
incorrect pricing can lead to additional corporate income tax, interest, and penalties.

OECD Transfer Pricing Guidelines in the Estonian Context

Estonia’s transfer pricing rules are largely based on the OECD Transfer Pricing Guidelines. Although the guidelines are not legislation themselves, the MTA (the Estonian Tax and Customs Board) relies on them extensively when conducting audits and resolving disputes.

The core principle of the OECD Guidelines is the arm’s‑length principle — related‑party transactions must be priced as if they had taken place between independent parties under similar circumstances.

For Estonian companies, this means:

the economic substance of a transaction is more important than its legal form;
functions performed, risks assumed, and assets used must be analysed;
the selected transfer pricing method must be justified and documented.

The application of OECD principles in Estonia is expected to become more systematic, with stricter expectations for documentation quality.

Documentation Requirements

The purpose of transfer pricing documentation is to demonstrate that related‑party transactions are conducted at arm’s‑length. While Estonian legislation does not prescribe a highly detailed documentation format, the MTA in practice expects documentation consistent with OECD standards.

Typical transfer pricing documentation includes:

a description of the group and the entity;
an overview of related‑party transactions;
functional and risk analysis;
explanation of the chosen transfer pricing method;
comparability analysis and conclusions.

It is important to emphasise that documentation must be prepared at the time transactions occur — not only when a tax audit begins. Missing or superficial documentation is increasingly likely to be treated as a separate compliance violation.

Typical Risks and Tax Authority Focus Areas

The MTA focuses particularly on related‑party transactions with a direct impact on taxable profit or profit distributions.

The most common risk areas include:

management and support service fees without clear substance;
interest rates on intragroup loans;
royalties and other payments for intangible assets;
persistent loss‑making in the Estonian entity;
inconsistent pricing across years.

More thematic transfer pricing audits and data‑driven risk analyses are expected, meaning that even small‑scale transactions may attract MTA scrutiny.

Examples of Common Related‑Party Transactions
Transfer pricing does not concern only large multinational groups. Some typical examples include:

Management services – strategic or administrative support provided by the parent company;
Intragroup loans – financing transactions between related companies;
Goods transactions – purchase and sale of goods within the group;
IT and support services – shared service centres;
Use of intellectual property – trademarks or software licences.

Each of these transactions requires a separate analysis and justification of why the applied price reflects arm’s‑length conditions.

Transfer pricing requirements are becoming clearer but also stricter. Companies that act proactively by updating their transfer pricing policies and documentation today significantly reduce future tax risks.

BDO provides comprehensive transfer pricing services, including risk assessment, preparation of documentation, and support in communication with the tax authority. If you want assurance that your related‑party transactions comply with current and upcoming requirements, contact us, and we will begin the transfer pricing analysis together.