Transfer Pricing

What Is Transfer Pricing?

Transfer prices are the amounts agreed in transactions between related parties: sales of goods, provision of services, assignment of intangibles, loans, or any other economic transaction between entities in the same group or between a shareholder and their company. The governing principle is the arm’s length principle: the agreed price must be the one that independent parties would have agreed under normal market conditions.

In Spain, the regulation is found in Article 18 of the Corporate Income Tax Law (LIS) and in the Corporate Income Tax Regulations (Articles 13 to 16 of the RIS), fully aligned with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

Related-Party Transactions That Must Be Priced at Market Value

• Transactions between an entity and its shareholders or partners with a stake equal to or greater than 25%
• Transactions between an entity and its directors or board members
• Transactions between entities within the same group (parent companies, subsidiaries, sister companies)
• Transactions between a Spanish entity and entities in zero-tax jurisdictions or tax havens

Recognised Valuation Methods

Primary methods (preferred):

• Comparable uncontrolled price (CUP): comparison with market prices in similar transactions between independent parties
• Resale price method (RPM): the price at which the product is resold to a third party, less the market gross margin
• Cost plus method (CPM): the supplier’s production cost plus the market profit margin

Profit-based methods (supplementary):

• Transactional net margin method (TNMM)
• Profit split method

Documentation Requirements

Companies with related-party transactions exceeding EUR 250,000 per year with the same counterparty must maintain specific documentation (master file and local file in OECD terminology) justifying that the prices applied are at market value. For groups with turnover exceeding EUR 750 million, the Country-by-Country Report (CbCR) is mandatory.

Penalties for Non-Compliance

Penalties for incorrectly priced or undocumented related-party transactions are severe: between 15% and 25% of the difference between the declared value and the market value determined by the Tax Authority, with a minimum of EUR 3,000 or EUR 15,000 depending on the type of infringement.

Relevance for Businesses

Transfer pricing is one of the highest-risk tax areas for business groups and companies with significant shareholders. A well-documented transfer pricing policy not only mitigates the risk of penalties but also allows the group’s tax structure to be optimised in a sustainable and defensible manner against any AEAT inspection.