This issue's introduction Related-party transactions
Criteria for determining related-party relationships
Special Tax Adjustment Policy
If the price of a related-party transaction is lower than the fair market value, the tax bureau has the right to reassess the transaction price between related parties.
Decree No. 7 of 2021 further stipulates that when the profits declared by a taxpayer are significantly lower than those of other taxpayers in similar industries, or when a taxpayer has been in operation for more than 5 years and still declares unreasonable losses, it may be deemed to have engaged in tax evasion. Criteria for determining association
(1) A taxpayer directly or indirectly holds at least 25% of the shares of another taxpayer; two or more taxpayers are held at least 25% of the shares by the same taxpayer;
(2) A taxpayer controls other taxpayers, or two or more taxpayers are directly or indirectly controlled by the same taxpayer;
(3) Family relationships formed by blood relations or marriage.
In principle, the following reasons may give rise to an associated relationship:
(1) Ownership or shareholding factors;
(2) Influence through management or technology.
Family relationships can be divided into blood relatives and in-laws, including
(1) Vertical direct blood relatives: parents, sons or daughters;
(2) Horizontal direct blood relatives: brothers or sisters;
(3) Vertical direct in-laws: spouse's parents, step-sons or step-daughters;
(4) Horizontal direct in-laws: spouse's brothers and sisters.
At the same time, the following situations are also considered to be related parties:
(1) One party directly or indirectly controls the other party;
(2) Two or more parties are directly or indirectly controlled by the same party;
(3) The same party directly or indirectly participates in the management or operational decisions of two or more parties;
(4) Both parties are considered or declared to belong to the same group in terms of business or finance;
(5) One party publicly declares that it is related to the other party.
Article 35(2) of Government Regulation No. 55 of 2022 specifically stipulates that the following two situations fall within the scope of transaction parties with "special relationships":
(1) Related-party transactions;
(2) Transactions between parties without special relationships, but the transaction parties and transaction prices are determined by one or both related parties.
In addition, Government Regulation No. 55 of 2022 stipulates that "control" in a special relationship also includes one party controlling the other party or one party being controlled by the other party through management or use of technology.
The above provisions are consistent with the interpretation of Article 18(4)b of the Income Tax Law, where the term "control" is also considered to be achieved through management or through technology (even if there is an equity relationship between the parties to the transaction), as well as transactions between parties with a "special relationship" mentioned in Article 35(2) of Government Regulation No. 55 of 2022.
The Ministry of Finance Regulation No. 172 of 2023 clarifies the definition of related parties. Whether there is a state of affiliation and dependence between transaction parties depends on whether one or more parties jointly control other entities or whether one or more parties are not independent. In addition, the existence of a control relationship is determined based on the following circumstances:
(1) One party directly or indirectly controls or is controlled by the other party;
(2) Two or more parties are directly or indirectly under common control;
(3) One party controls or is controlled by the other party through management or technical application;
(4) The same person directly or indirectly has management or operational decision-making power in two or more companies;
(5) The companies are defined or self-disclosed as companies in the same group in terms of business or finance;
(6) One party declares that it has a special relationship with the other party.
Taxpayers need to carefully assess their relationship with their counterparties.
In view of this, since the issuance of Government Regulation No. 55 of 2022, the arm's length principle should also apply to transactions affected by related parties, including uncontrolled transactions where the transaction parties and transaction prices are determined by the related parties of one or both parties.
Related party transactions refer to transactions subject to transfer pricing rules, including related party transactions and uncontrolled transactions.
The next issue will continue to be exciting...