Definition of Controlled Transaction

The concept of a controlled transaction, defined in Article 11a, Section 1, Point 6 of the Corporate Income Tax Act (and Article 23m, Section 1, Point 6 of the Personal Income Tax Act), presents taxpayers with significant interpretative challenges.

The statutory definition of controlled transactions characterizes them as “actions of an economic nature, identified based on the actual behavior of the parties, including the allocation of income to foreign branches, where the conditions have been established or imposed as a result of related-party relationships.” Many difficulties arise for taxpayers both in classifying specific events as transactions and in verifying all entities with which they conduct transactions that should be considered controlled transactions.

To resolve any doubts, guidance can be drawn from the General Interpretation issued by the Minister of Finance regarding the definition of a controlled transaction, dated December 29, 2021 (No. DCT1.8203.4.2020). The Interpretation provides a detailed explanation of the three components of the definition of a controlled transaction, namely:

• The occurrence of actions of an economic nature;

• Identification of actions based on the actual behavior of the parties;

• Establishment or imposition of terms as a result of related-party relationships.

The economic nature of actions is defined based on the fundamental characteristics constituting business activity: a profit-driven purpose, the existence of an organized structure, continuous operation, and an independent (self-sufficient) nature.

In describing actions of an economic nature, the Ministry of Finance emphasizes that the primary characteristic of such actions is the intent to make a profit—even if this objective is not ultimately achieved.

The Minister of Finance also clarifies that conducting business within an organized structure does not mean that controlled transactions are only those that are continuous or repetitive (e.g., seasonal). One-time transactions, such as the sale of a business or a part of it, contribution of assets, or an increase in share capital by shareholders, are also considered economic activities that may require tax documentation.

Additionally, the interpretation notes that an obligation to perform a service—such as entering into a preliminary agreement—does not constitute a transaction, as it lacks a definitive nature.

The Minister of Finance also addresses taxpayers’ doubts regarding the classification of dividend payments as economic activities under transfer pricing rules. The General Interpretation clearly states that the payment of dividends does not meet the criteria of an economic activity and therefore does not fall under transfer pricing regulations.

The actual behavior of the parties, upon which economic actions should be identified, is a broad concept that may include both actions and omissions. The key factor is the genuine nature of these actions, i.e., the existence of sound economic reasons, ensuring that the actions are not artificial or fictitious.

The establishment or imposition of transaction terms due to related-party relationships does not only refer to situations where related entities set the terms for their own transactions. A frequently overlooked area by companies when identifying documentation obligations involves situations where a transaction between unrelated entities (e.g., a company and its contractor) is conducted under terms established through central negotiations by the parent entity within a group with suppliers or customers. The entity setting the terms does not have to be a party to the transaction. If related-party relationships influenced the terms of the transaction, it will be treated as a controlled transaction by tax authorities, regardless of the fact that the direct counterparties are unrelated. Therefore, it is crucial for companies to pay attention to transactions where their parent entities participated in determining the terms and to examine them in the same way as transactions with related entities.

Should you have any questions or doubts regarding the identification of a controlled transaction, we encourage you to contact our experts.