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Definition changed for related parties in 2015

Definition changed for related parties in 2015

In accordance with the Corporate income tax law (CITL), effective from January 1, 2015 companies will also be considered related parties where the management is the same and one company can substantially control the other’s financial and business decisions.

We think that generally all companies should be considered related parties where the management is the same, unless the companies can prove that there is no substancial control over financial and business decisions.

As a consequence of this new rule, these companies will have to use market prices for transactions with each other, or, if not, the corporate income tax base will have to be adjusted accordingly. Also, transfer price documentation might be required to be prepared for related party transactions.

Same regulations are effective for the law on Rules of Taxation therefore companies shall be paying attention to the reporting rules of this law.

The company shall report to the Tax Authority the name, seat and tax number of the related party company within 15 days if the companies make contract with each other. It also shall be reported within 15 days if the related party relationship ends.

New situations (assuming that the management is the same and there is substancial control over financial and business decisions):

–          Company and its shareholder holding 50% or less of shares/votes/control: before January 1, 2015 these companies were not classified as related parties, but now they are, and, derived from their shareholding agreement, related party relationship shall be reported until January 15, 2015.

–          Company and its customer/supplier/loan provider etc. having an ongoing relationship based on active agreement: related party relationship shall be reported until January 15, 2015.

–          Company and its customer/supplier/loan provider etc. not having an ongoing relationship and/or the contract is not active anymore (e.g. it was closed), reporting will be due when a new contract is made.

It is also important to mention that this change in CITL triggers an issue in relation to the local trading tax as its rules refer to CITL. Therefore these new related parties shall also be consolidated when calculating the base of the local trading tax.

The definition of related parties for accounting purposes has not changed so the consolidation rules remained the same. Definition changed for related parties 2015