It is widely accepted that the proper implementation of transfer pricing regulation is subject to a clear and unambiguous definition of “affiliated” undertakings.
In Greece “affiliated” undertakings are defined in many ways, mainly from a corporate law point of view (Codified Law 2190/1920, article 42e, for the purposes of unified balance sheets) but also for tax purposes and in particular in the framework of transfer pricing regulations. The latter definition has been recently modified by virtue of Law 4170/2013, which amended article 39 of the Income Tax Code entitled “Adjustment of Profits Invoiced between Affiliated Undertakings”.
Prior to the aforementioned amendment, “affiliated” undertakings were defined according to the said article 39 as follows:
“Two or more undertakings are considered affiliated when one is materially, directly or indirectly, dependent upon the other from a managerial or financial point of view or controlled by the other, especially because of the participation of one in the capital or management of the other or because of the participation of the same persons in the capital or the management of both entities, as well as when such undertakings have the above rights or power of influence in one of the affiliated undertakings”.
Law 4170/2013 added a paragraph to the above article 39 of the Income Tax Code, which is meant to clarify the meaning of “affiliated” undertakings and which reads as follows:
“More specifically the following undertakings are considered as “affiliated”:
- When one participates in the other by -directly or indirectly- owning equity, shares or any other participation rights of at least thirty-three percent (33%) in terms of value or number, or is entitled to profits or votes in the other entity.
- When they are related to any other undertaking that directly or indirectly owns stock, shares, voting rights or any other participation rights of at least thirty-three percent (33%) in terms of value or number or is entitled to profits or votes in one of the affiliated undertakings.
- When they are related to any other entity with which a material direct or indirect managerial dependence or control exists or any other entity that exercises or is capable of exercising decisive influence in relation to an undertaking’s process of decision making or when both entities control or directly or indirectly materially influence or are capable of influencing a third entity from a managerial point of view”.
The aforementioned amendment to the definition of affiliated undertakings, as included in article 39 of the Greek Income Tax Code, provides an objective criterion for the judgment of whether two or more undertakings fall under the definition of affiliated ones by conditioning the capacity of “affiliated” on the participation of at least 33% of one entity in the capital of another. At the same time, though, it significantly expands the range of entities that can be characterized as affiliated, even in cases when, despite the participation of one entity in the capital of the other with a percentage of at least 33%, it is uncontested that the participating entity does not exercise control or management over the other.
On the other hand, the introduction of the condition of “dominant” power of influence attributes a flavor of relativity to the definition of “affiliated” undertakings that will most likely be subject to interpretation impeding the smooth implementation of transfer pricing rules.
In light of the above, it can be validly argued that the recent amendment to the definition of “affiliated” undertakings will rather create more problems than the ones it is intended to solve.
Athens, July 25, 2013
Avramopoulos & Partners
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