If you own two Slovak limited companies (s.r.o.) that trade with each other – one renting premises to the other, lending it money or invoicing it for services – you are domestic related parties under the Income Tax Act and transfer-pricing rules apply to you. In practice this means the prices between your companies must match the market, and for more significant transactions you must be able to show how you arrived at them. This is not just a matter for multinational groups.
What does transfer pricing between your own companies mean?
Transfer pricing is setting prices in transactions between related parties so that they match the arm’s length principle – the prices unrelated companies would agree on the market. Many entrepreneurs believe this concerns only corporations with foreign subsidiaries. Since 2015, however, the rules also apply to purely domestic relationships, i.e. two Slovak companies with the same owner.
The purpose of the rule is simple: to prevent profit from being shifted, through artificial pricing, to where it is taxed more favourably – for example to a company reporting a loss or applying a reduced tax rate.
When are two s.r.o. related parties?
You are related parties when the companies are connected by ownership, personnel or other links. An ownership or personnel link arises with a direct or indirect holding of at least 25% of the share capital or voting rights, or where the same persons participate in the management or control of both companies.
Example: if you are the sole shareholder and director of two s.r.o., both are related parties to each other. The same applies if you own 100% of one company and 30% of another, or if close persons are the directors of both. It is not only about ownership – actual control and family links matter too.
Which transactions between your companies are controlled?
A controlled transaction is essentially any business or financial relationship between your companies. In practice this most often means:
- renting premises, machinery or a vehicle from one company to the other,
- a loan between the companies,
- invoicing services (accounting, marketing, management, IT) across the companies,
- selling goods or assets between the companies,
- sharing employees or licences.
For each of them the price must match the market. If one company invoices the other EUR 2,000 a month for management services, you should be able to defend that an independent company would pay a comparable amount for the same scope of work.
When does the documentation obligation arise?
Not every transaction triggers a documentation obligation. The decisive threshold is the significant controlled transaction. A transaction is significant when the value of taxable income or deductible expense from it exceeds EUR 10,000 in a tax period; for loans the threshold is a principal above EUR 50,000.
Below these thresholds the transaction is insignificant and no documentation obligation arises. Note, however, that even an insignificant transaction must be priced at market; you simply need not keep formal documentation. Moreover, documentation is not filed automatically with the tax return – you submit it only at the tax authority’s request, within 15 days. We cover the differences between the documentation types in our article on transfer pricing documentation and who must keep it.
Shortened or full documentation for domestic companies?
Good news for owners of two domestic s.r.o.: for purely domestic transactions, shortened documentation is usually sufficient. It takes the form of a structured template under the guidance of the Slovak Ministry of Finance and requires identification of the related parties, a description and value of the transactions, the method used and its justification.
Full or basic documentation is generally required for cross-border and high-volume transactions. For two Slovak companies the shortened form usually suffices – which does not mean you can underestimate it. The documentation must exist at the time the tax authority requests it; it cannot be written up afterwards.
When must you adjust the tax base?
For domestic related parties an important rule applies: you adjust (increase) the tax base only if an incorrect transfer price reduced your tax base or increased your tax loss. So if one company bought a service for more than the market price and thereby lowered its profit, it must increase its tax base by the difference.
To avoid taxing the same profit twice, the other company has the right to ask the tax authority for a corresponding adjustment – a matching reduction of its own tax base. Choosing the right pricing method, and possibly agreeing the approach with the tax authority in advance, can prevent this risk; we explain when it pays off in our text on advance pricing agreements.
What penalties apply and how to avoid them?
If you fail to submit the documentation when requested, you face a penalty of up to EUR 3,000, repeatedly for each failure. More painful still is when the tax authority assesses additional tax during an audit for incorrectly set prices: the penalty on the additional tax doubles if the transaction had no economic substance and its purpose was to circumvent or reduce the tax liability. You can avoid the doubling by paying the additional tax within the appeal period and not appealing the decision.
The defence is simple and cheap compared with the penalties: set market prices between your companies, keep at least shortened documentation for transactions above EUR 10,000 and update it regularly. If you are unsure which method is right for your situation, seek advice in advance rather than during an audit.
Do you own two or more s.r.o. and want the prices between them set without the risk of additional tax? We will prepare both your transfer-pricing documentation and your pricing setup.
FAQ
Does transfer pricing apply to two Slovak companies with no foreign element?
Yes. Since 2015 the transfer-pricing rules also apply to domestic related parties. If you own two Slovak s.r.o. with a holding of at least 25% or effectively control them, their mutual transactions must be priced at market. For significant transactions above EUR 10,000 you must keep transfer-pricing documentation, usually in shortened form.
From what amount must I keep transfer-pricing documentation?
The obligation arises for a significant controlled transaction, i.e. when the value of income or expense from it exceeds EUR 10,000 in a tax period. For loans the threshold is a principal above EUR 50,000. Below these amounts you need not keep documentation, but the price must still match the market.
Is shortened documentation enough for two domestic s.r.o.?
For purely domestic transactions between two Slovak companies, shortened documentation in the form of a structured template under the Slovak Ministry of Finance guidance is usually sufficient. Full or basic documentation is required mainly for cross-border and high-volume transactions. The key is that the documentation exists at the time of the tax authority’s request.