New Requirements for Related Party Transactions

On April 24, the Cabinet of Ministers approved amendments to the law “On taxes and duties” prepared by the Ministry of Finance in relation to the legal requirements for transfer pricing documentation.

The new transfer pricing requirements are synchronized with activities carried out by the Organization for Economic Co-operation and Development (OECD), and the updated transfer pricing guidelines for taxpayers and tax administrations. After an approval from the parliament, the requirements will be applicable to related party transactions carried out in the financial year starting on or after 1 January 2018. Furthermore, in the context of the corporate income tax (CIT) reform, related party transactions are becoming increasingly important, and receive additional scrutiny from the tax authority. The main aspects of the new regulations are outlined below.

Along the requirement for Country-by-country report, which has already been included in the law “On taxes and duties” as of 2017, the documentation itself is split into two parts – Master file and Local file.

Master file

The purpose of the Master file is to provide general overview of the MNE group and its overall global operations. 

The contents of transfer pricing documentation will change for businesses which are a part of an MNE group – it will be necessary to prepare and submit a Master file, which includes:

  • an overview of the MNE group’s operations and main products / services;
  • an overview of the markets in which the MNE group operates;
  • information on the main intangible assets of the MNE group, as well as their source of financing.

Local file

The purpose of the Local file is to provide information on the taxpayer’s business and specific controlled transactions, including information on the transfer pricing method applied for determining the arm’s length price.

The Local file includes:

  • information on the organizational structure of the company;
  • description of the industry in which the company operates;
  • functional and economic analysis of the controlled transactions, as well as a comparison of transfer prices with accounting data.

Who will have to prepare the documentation in the new format and for which transactions

According to the new regulations, the transfer pricing documentation requirements apply to those Latvian taxpayers who carry out transactions with:

  1. related foreign entities;
  2. related natural persons (in accordance with Article 1, Paragraph 18 of the law “On taxes and duties”);
  3. entities or persons located in offshores;
  4. other related Latvian taxpayers, if the transaction takes place within a single supply chain with another related foreign company, or companies/persons located in offshores.

The new transfer pricing documentation requirements will no longer apply to taxpayers, who carry out transactions with companies that are exempt from CIT or employ CIT rebates.

Taking into account that changes have been made with regard to the thresholds for documenting controlled transactions, below we have indicated the new criteria for taxpayers that carry out transactions with related parties mentioned in points 1. - 3. above.

The actual preparation and submission of the documentation will be performed in 2019.

For transactions between two Latvian taxpayers who carry out transactions within a single supply chain with another related foreign company, or companies/persons located in offshores, the SRS can request to prepare and submit the Local file in full or certain parts of it within 90 days. The submission date can be prolonged by 30 days if the taxpayer submits a motivated request to the tax authorities. 


  • If the total sum for a controlled transaction does not exceed EUR 20’000, it can be considered as insignificant and information on it does not need to be included in the documentation;
  • An obligation to apply the arm’s length price with regard to conditional distribution of profits (in the meaning of CIT law) still applies to transactions carried out by two related Latvian taxpayers (with a shareholding above 50%).


Master file can be prepared in Latvian or English. In practice, the Master file for Latvian entities that are a part of an MNE group is prepared on a group level and is available in English only. Consequently, the tax administration has the right to request a translation of the whole document or certain parts of it to Latvian. The translation will have to be prepared within 1 month from the day of the request.

The working language for Local file remains unchanged (Latvian).


The new regulation includes a penalty of up to 1 percent (but no more than EUR 100,000) from the controlled transaction amount for which the documentation had to be prepared. It is intended that the penalty will apply in situations when the taxpayer does not comply with either the submission deadline or the content requirements due to which it becomes impossible to make sure that the arm’s length principle is followed.

Other aspects

  • In order to ensure that the functional and economic analysis is up-to-date, it has to be reviewed on a yearly basis. If the situation has not changed considerably, the documentation can be reviewed every three years (except for the included comparable financial data);
  • Transfer pricing adjustments trigger CIT obligations starting from 2018;
  • Transfer pricing adjustments can be made for the last five years (as opposed to the last three years, which was the case previously);
  • The SRS, in consultation and cooperation with the taxpayer, may offer to adjust transaction prices without formally initiating a tax audit;
  • It is possible to enter into an Advanced Pricing Agreement (APA) for the verification of the transaction price to the market price for the previous reporting years;
  • The search strategy for comparable data has to be justified using screenshots showing the date of the capture. Data downloaded from the database ought to be justified with a fixed download date.
  • The documentation has to be available electronically, which would allow for the search function to be available in the text.

This is the main information regarding the changes in transfer pricing documentation requirements. We will be happy to meet with you in order to discuss the impact of these changes on your business. Please contact our team to arrange for an appointment.

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