In the past few years, the transfer pricing topic has received more attention from the Estonian Tax and Customs Board (\u201cEMTA\u201c) than ever. Transactions made between related parties can create a tax risk the company did not take into account.<\/p>\n\n\n\n
Transfer pricing may sound as a fancy tax terminology, but in practice all companies belonging to a group and engaging in transactions with related parties should familiarise themselves with it.
Transfer pricing (\u201cTP\u201d) means that the price set for goods, services, intellectual property or financing between related parties should follow the arm\u2019s-length principle \u2013 meaning that they should be priced in the same terms as if the transactions were concluded between independent, unrelated parties.
Related parties are, among others, other entities belonging to the same group, as well as individuals that are member of the board or their own personal companies.<\/p>\n\n\n\n
Although the obligation to have your own written TP policies in place only applies to larger companies, the small or medium-size enterprises still need to follow the actual TP rules. The aim of the rules of TP is to prevent artificial profit shifting and ensure fair taxation at level of the correct company and in the country that the tax belongs to.<\/p>\n\n\n\n
TP rules are applicable to both domestic and cross-border transactions. Under the current corporate tax system, if a transaction between related parties do not follow the arms-length principle, then subsequent TP adjustments are treated as hidden profit distributions from the Estonian entity and is subject to Estonian corporate income tax.<\/p>\n\n\n\n
Although the TP rules were implemented in the Estonian tax legislation already in 2007 then up until recent years, audits and reviews of the implementation of the rules were rather modest. However, the times are changing. EMTA has started to pay more and more attention to the transactions between related parties and are using different automated systems to identify companies and transactions which could be in breach of tax laws. Audits initiated by the EMTA have grown in number and have already resulted in some significant rulings and given floor to court practices for this new tax topic.<\/p>\n\n\n\n
In the spring of 2025, EMTA made a tax ruling where a pharmaceutical company was obliged to pay more than 6 million euros tax to EMTA due to an alleged breach of the TP rules and concluding some ingenuine transactions.<\/p>\n\n\n\n
The Estonian based pharmaceutical company belonged to a larger group, and its parent entity was a Dutch company. EMTA assessed the transactions between the parent and the subsidiary and found that transactions concluded between these two in the years 2020 and 2021 were made below market terms and not at arms\u2019 length. As a result of the transaction more than 24 million euros was paid from the Estonian company to the Dutch parent entity.<\/p>\n\n\n\n
EMTA has noted that within the first six months of this year, close to 800 companies have been subject to EMTA\u2019s reviews and as a result of these reviews, one third of the reviewed companies have amended their tax returns and paid close to 24 million euros in additional corporate income tax.
Breach of tax regulations can be both accidental and intentional and for companies occur most often as part of restructurings, share capital payments, share buy-backs as well as straight forward breaches of TP rules.
For example, a breach could be when profits are transferred to a group account on favourable terms, or loans are granted to the parent company on favourable terms, or above market price is paid to the parent entity for different management services. It is not forbidden to buy or sell goods or services or grant loans to related parties, however the terms must always be at arm\u2019s length.<\/p>\n\n\n\n
EMTA has noted that they have identified some sectors with higher TP risks. Such sectors include: retail and wholesale as well as the manufacturing industry. As a result of EMTA\u2019s automated systems they have already identified around 100 companies that they will contact and assess their compliance with tax laws in the near future. One of EMTA\u2019s main focus is the Estonian corporate income tax and as TP is part of that, then companies operating in Estonia can expect more in-depth interest in this regard.<\/p>\n\n\n\n
In order to avoid possible troubles in the future and the obligation to pay late payment interest from previously incorrectly reported tax matters, we recommend making sure that any transactions done with related parties are made on market terms. Companies can continue to engage in trades with related parties, however it should not be used as a vehicle for hidden profit distributions.<\/p>\n\n\n\n
[1] https:\/\/www.aripaev.ee\/uudised\/2025\/04\/07\/maksuamet-nouab-tuntud-ravimifirmalt-miljoneid-eurosid-ma-pole-eestis-midagi-sellist-nainud<\/a><\/p>\n\n\n\n [2] https:\/\/www.aripaev.ee\/uudised\/2025\/07\/21\/maksuamet-kusib-ettevotetelt-30-miljonit-makse-juurde<\/a><\/p>\n\n\n\n [3] https:\/\/www.aripaev.ee\/uudised\/2025\/07\/21\/maksuamet-kusib-ettevotetelt-30-miljonit-makse-juurde<\/a><\/p>\n\n\n\n