Transfer pricing documentation requirements in Croatia

1. In your jurisdiction, are taxpayers obliged to maintain transfer pricing documentation? Does this obligation apply to all taxpayers, or only to certain categories (e.g. taxpayers with turnover or assets exceeding a particular threshold)?

Under the Corporate Profit Tax (“CPT”) Law, business relations between associated persons are only recognised for tax purposes if the taxpayer has, and provides, information about the associated persons and its business relations with those persons, the methods used to determine comparable market prices, and the reasons for selecting a particular method. In that sense, taxpayers are obliged to maintain transfer pricing (“TP”) documentation.

This obligation applies to all taxpayers and all intragroup transactions, no thresholds are applicable.

2. What is the content of the documentation that must be prepared?

The Croatian tax legislation does not prescribe the exact format of the transfer pricing documentation required.

While the CPT Law makes general provision as to which transfer pricing methods can be used, the CPT Regulations give more detail as to what the taxpayer must do in order to establish / document whether a transaction was performed at arm’s length, specifically:

  • Collect information about the group, the position of the taxpayer within the group and the analysis of intragroup transactions, i.e. general information which may be the same for other members of the group, as well as specific information relating to the taxpayer;
  • Identify the chosen TP method, describe the data, methods and analyses conducted to determine transfer prices and explain why the particular method was chosen;
  • Compile documentation as to the assumptions and estimates adopted in determining transfer prices (in relation to comparability, functional analysis and risk analysis);
  • Compile and document all calculations performed in applying the chosen transfer pricing method, in relation to the taxpayer in question and the comparable taxpayers;
  • Appropriately update any documentation from previous years that is relied upon in respect of the current year, showing any adjustments which are necessary to reflect material changes of circumstances;
  • Compile documentation that demonstrates the basis, or otherwise supports or is mentioned in the analysis of transfer prices.

In practice, in respect of the transfer pricing documentation requirements, the Croatian tax authorities follow the OECD guidelines. Therefore, the transfer pricing documentation compiled should include, at a minimum, the following:

  • On the group level (master file):
    • History and activities of the group – legal, functional, financial, management and organisational structure;
    • Economic role of the affiliated companies within the group;
    • Intellectual property.
  • On the level of the subject / local company (country-specific file):
    • Activities / functions of the company and market;
    • Functional analysis;
    • Usage of intellectual property based on contractual relationships;
    • Financing of the company.
  • Analysis of transactions between related parties
    • Functional analysis of the transactions (definition of functions, risks, economic and financial conditions of the contracts);
    • Analysis of transactions with non-related parties;
    • Analysis of turnover and margin for each transaction;
    • Analysis of transfer pricing methods, with an explanation of the method applied;
    • Documents proving that the selected method reflects the arms’ length principle.

a) Which transactions must be documented (all transactions with associated enterprises, or only those which exceed a particular threshold)?

Under Croatian tax legislation all transactions between associated persons must be documented; no thresholds are applicable.

b) What is the definition of “associated enterprises” for the purposes of this requirement?

Under Croatian corporate tax legislation, resident and non-resident persons are regarded as associated:
Where one of them directly or indirectly participates in the management, control or capital of the other;
Where the same persons participate, directly or indirectly, in their management, control or capital.

Note, however, that the transfer pricing rules also apply to intragroup transactions between resident companies if one of them:
Is subject to corporate profit tax at a rate below the standard rate, or is exempt from corporate profit tax; or
Has tax losses carried forward.

c) For EU countries, is the content of the documentation similar to that described in the EU Code of Conduct on transfer pricing documentation for associated enterprises (“EU TPD”)? If not, are taxpayers entitled to choose between the local requirements and the EU TPD?

N / A – Croatia is not yet an EU Member Country. Membership is expected as of 1 July 2013.

d) Do taxpayers which are not established in your jurisdiction need to undertake to provide any specific information upon request? Can your tax authorities require the taxpayer in your jurisdiction to provide information which is located in another state?

The tax authorities can require the taxpayer to submit all business books, records, business documentation or other documents held by the taxpayer or any other person in possession of required documentation, keeping in mind the principle of efficiency under which the tax audit should be restricted to essential facts that could increase or decrease tax liability.

Additionally, under international cooperation agreements, the tax authorities may request the relevant information from the authorities in other jurisdictions.

e) If comparable studies are to be provided, do the tax authorities generally accept regional benchmark studies (e.g. pan-European benchmark studies)?

Generally, the tax authorities accept regional benchmark studies.

f) What language(s) are to be used by taxpayers in submitting the transfer pricing documentation?

The documentation should be submitted in the Croatian language. However, if the taxpayer submits documents in a foreign language, the tax authorities will set a deadline for the taxpayer to submit verified Croatian translations.

3. What is the deadline or timescale for providing transfer pricing documentation to the tax authorities (is it to be provided for example upon filing of the tax returns, at the beginning of a tax audit, or on the specific request of the tax authorities)?

The CPT legislation does not prescribe any specific deadline for submitting transfer pricing documentation. There is no legal obligation to submit transfer pricing documentation together with the regular tax returns. Transfer pricing documentation should be kept and maintained by the taxpayer, ready to be delivered to tax authorities upon request (usually in the course of tax audit).

No specific penalties are prescribed in respect of transfer pricing documentation. Generally, the taxpayer is subject to penalties in the range of HRK 5,000 – 500,000 (approximately EUR 670 – 67,000) if it:

  • Does not keep business books and other records in accordance with the mode of taxation or does not ensure that information is available, legible and credible;
  • Does not respond to a request made by the tax authorities;
  • Does not deliver the requested business books, records and other documentation to the tax authorities.

In the same circumstances, the responsible person of the taxpayer is subject to a penalty in the range of HRK 2,000 – 100,000 (approximately EUR 270 – 27,000).

5. Does the absence or incompleteness of documentation reverse the burden of the proof as regards the arm’s length character of the transactions?

Generally, the burden of proof is borne:

  • In relation to facts establishing a tax liability, by the tax authority;
  • In relation to facts reducing or eliminating a tax liability, by the taxpayer.

In practice, if the transfer price is challenged / reassessed (which may be for various reasons, including the absence or incompleteness of transfer pricing documentation), the tax authorities must thoroughly justify and document their calculation of the market price and the transfer pricing adjustment, to avoid undermining the taxpayer’s right to an efficient appeal.

The imposition of document-related penalties does not prevent the taxpayer from initiating a mutual agreement procedure under an applicable tax treaty.